RBS 2009 Annual Report Download - page 171

Business review
Risk, capital and liquidity management
169RBS Group Annual Report and Accounts 2009
Insurance risk*
All the disclosures in this section are unaudited and indicated with an
asterisk (*). The Group is exposed to insurance risk directly through its
general insurance and life insurance businesses.
Insurance risk arises through fluctuations in the timing, frequency and/or
severity of insured events, relative to the expectations at the time of
underwriting. Insurance risk is managed in four distinct ways:
•Underwriting and pricing risk management: is managed through the
use of underwriting guidelines which detail the class, nature and
type of business that may be accepted, pricing policies by product
line and brand and centralised control of wordings and any
subsequent changes;
•Claims risk management: is handled using a range of automated
controls and manual processes;
•Reserving risk management: is applied to ensure that sufficient funds
have been retained to handle and pay claims as the amounts fall
due, both in relation to those claims which have already occurred or
will occur in future periods of insurance. Reserving risk is managed
through detailed analysis of historical and industry claims data and
robust control procedures around reserving models; and
•Reinsurance risk management: is used to protect against adverse
claims experience on business which exceeds internal risk appetite.
The Group uses various types of reinsurance to transfer risk that is
outside the Group’s risk appetite, including individual risk excess of
loss reinsurance, catastrophe excess of loss reinsurance and quota
share reinsurance.
Overall, insurance risk is predictable over time, given the large volumes
of data. However, uncertainty does exist, especially around predictions
such as the variations in weather for example. Risk is minimised through
the application of documented insurance risk policies, coupled with risk
governance frameworks and the purchase of reinsurance.
General insurance business
RBS Insurance underwrites retail and SME insurance with a focus on
high volume, relatively straightforward products. The key insurance risks
are as follows:
•Motor insurance contracts (private and commercial): claims
experience varies due to a range of factors, including age, gender
and driving experience together with the type of vehicle and location;
•Property insurance contracts (residential and commercial): the major
causes of claims for property insurance are weather (flood, storm),
theft, fire, subsidence and various types of accidental damage; and
•Other commercial insurance contracts: risk arises from business
interruption and loss arising from the negligence of the insured
(liability insurance).
Most general insurance contracts are written on an annual basis, which
means that the Group’s liability extends for a twelve month period, after
which the Group is entitled to decline to renew the policy or can impose
renewal terms by amending the premium, terms and conditions.
An analysis of gross and net insurance claims can be found in the
financial statements (see page 310).
Life assurance business
The Group’s three regulated life companies, National Westminster Life
Assurance Limited, Royal Scottish Assurance plc and Direct Line Life
Insurance Company Limited underwrite life insurance products within
the UK retail insurance market. The key assurance risks are as follows:
•Term assurance contracts: mortality claims experience varies due to
a range of factors, including age, gender and smoker status. The key
factors that increase the level of claims are disease pandemics and
adverse lifestyle changes; and
•Critical illness insurance contracts: morbidity claims experience
varies due to a range of factors, including age, gender and past
medical history. The key factors that can increase the level of claims
are adverse lifestyle changes and improvements in medical
diagnosis methods.
These are long-term contracts with long-term business provisions that
are calculated in accordance with the UK accounting standard FRS 27
‘Life Assurance’.
Estimations (assumptions) including future mortality, morbidity,
persistency and levels of expenses are made in calculating reserves.
The Group uses standard mortality and morbidity tables appropriate to
the type of contract being written. These are adjusted as appropriate to
reflect historical experience and future expectations. Sample mortality
rates, expressed as deaths per million per annum, for term assurance
products (age 40) are:
2009 2008
Mortality (per million) per annum per annum
Male non-smoker 674 723
Male smoker 1,542 1,590
Female non-smoker 497 568
Female smoker 1,136 1,277
* unaudited