RBS 2010 Annual Report Download - page 201

All the disclosures in this section (pages 199 to 203) are unaudited and
are marked with an asterisk (*).
Insurance risk*
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:
xunderwriting 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;
xclaims risk management is handled using a range of automated
controls and manual processes;
xreserving 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 the detailed analysis of historical and industry claims data
and robust control procedures around reserving models; and
xreinsurance 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.
The Group underwrites retail and SME insurance with a focus on high
volume, relatively straightforward products. The key insurance risks are
as follows:
xmotor 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;
xproperty 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
xother 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 notes
on the financial statements (see page 347).
Operational risk*
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems, or from external events.
Operational risk is an integral and unavoidable part of the Group’s
business as it is inherent in the processes it operates in to provide
services to customers and generate profit for shareholders. An objective
of operational risk management is not to remove operational risk
altogether, but to manage the risk to an acceptable level, taking into
account the cost of minimising the risk as against the resultant reduction
in exposure. Strategies to manage operational risk include avoidance,
transfer, acceptance and mitigation by controls.
Group Policy Framework (GPF)
The GPF supports a consistent approach to how we do business and
helps everyone understand their individual and collective responsibilities.
It is a core component of the Group’s Risk Appetite Framework; it
supports the risk appetite setting process, and also underpins the control
environment.
Work to design, implement and embed an enhanced GPF has continued
throughout 2010 and will extend into 2011. The Group’s plans for ongoing
development of GPF will support increased consistency in risk appetite
setting across all risk types faced by the Group, including alignment to
the Group’s strategic business and risk objectives. The Group will use
relevant external reference points such as peers and rating agencies to
challenge and verify the content of the Policy Standards making up GPF.
Appropriate and effectively implemented Policy Standards are a
fundamental component of GPF and support attainment and
maintenance of an ‘upper quartile’ control framework as compared
against the Group’s relevant peer set.
The GPF requires consideration and agreement through Group
governance of the level of risk appetite we have and how this is justifiable
in the context of our strategic objectives.
There will be ongoing reassessment of risks, risk appetite and controls
within the GPF and where appropriate, potential issues will be identified
and addressed to ensure the Group moves in line with the set objectives
and remains constantly aligned with the ‘upper quartile’ objective and
market practice at all times.
*unaudited
199RBS Group 2010
Business review
Risk and balance sheet management