The insurance risk may be divided into the underwriting risk and provision risk. The underwriting risk relates to the pricing of insurance contracts and the inherent uncertainty associated with them. Correct estimation of the scope and frequency of insurance claims, so that insurance premiums cover the cost of anticipated claims, is the factor of greatest importance to profitability. However, the claims cost may deviate from expectations because, for example, an individual major claim or claims event occurs. In order to minimize the underwriting risk, If adheres to detailed underwriting guidelines that ensure the correct assessment and quantification of underwritten risks, regulate insurance amounts and define the type of risks that may be accepted.
Insurance premiums are received in advance and claims are paid in arrears, which means that a larger part of the premiums needs to be reserved for future claims payments (technical provisions ). Technical provisions are posted that correspond to estimates of future claims payments. Since it is extremely difficult to exactly estimate final claims costs, the claims provision could prove to be insufficient. The risk that the technical provisions are insufficient is known as the provision risk.
Investment operations are another important part of an insurance company’s business. Market risks, such as changes in interest rates, share prices or exchange rates, could have an impact on If ’s earnings. Most of If ’s investment assets derive from the capital reserved to cover future claims payments. To ensure that the assets cover the future claims payments resulting from concluded insurance contracts, the investment assets are matched against insurance liabilities (the technical provisions), mainly on the basis of currency and duration. This means that an insurance contract
A decisive factor determining the risk an insurance company can assume is the amount of capital the company can maintain as a buffer to meet its risks, meaning how much solvency capital the company has.
denominated in, for example, Euro is matched against the corresponding amount invested in Euro.
If works actively to control and limit risks in order to achieve balanced exposure in relation to If ’s total solvency capital. A Dynamic Financial Analysis, DFA, model is used to analyze and quantify the accumulated risk. This is conducted by means of statistical simulations, whereby the probability of various outcomes for insurance operations and investment operations are obtained.
Condensed income statement Premiums earned, net of reinsurance 34,426 32,764 34,392 32,789 30,271
Investment return and other items 2,708 849 1,078 -2 401 683
Other assets, prepayments and accrued income 5,066 4,296 4,286 4,807 6,347
Total shareholders’ equity, provisions and liabilities 112,879 101,472 95,532 96,283 94,493
Other key data 1) Since January 1, 2005, If has been applying International Financial Reporting Standards (IFRS). All figures pertaining to 2004 have been recalculated in accordance with these principles, while the figures for other years remain unchanged and are reported in accordance with the previously applied principles.
2) Unaudited pro forma figures for the comparative year 2001, including Sampo’s property and casualty insurance operations. 3) Calculations are based on principles used internally within If for the valuation of investment management operations.
shareholders’ equity, provisions and liabilities on december �1, msek Shareholders’ equity
Allocated investment return transferred to the technical account Return on average technical provisions, after deducting the capital employed in insurance operations in the form of, for example, premium receivables, less reinsurance deposits and other assets plus half of the technical result before allocated interest for the year. The allocated investment return is based on risk-free interest.
Cedent Direct insurance company that reinsures a part of its direct business with a reinsurer. Claims frequency The observed relationship during a specific period between the number of claims arising within a certain category of insurance (a certain insurance portfolio) and the number of insurance policies within the same category (the portfolio). Does not include major claims.
Claims ratio Claims incurred in relation to premiums earned, expressed as a percentage. Combined ratio Claims incurred and operating expenses in relation to premiums earned, expressed as a percentage. Cost of insurance operations Sum total of operating expenses and claims costs. Cost ratio Claim handling costs and operating expenses from insurance operations in relation to net premiums earned expressed as a percentage. Deductible Part of the claims amount that the insured must account for himself, in accordance with the insurance terms, and which is thus deducted from insurance compensation. Special deductibles exist in certain types of insurance, whereby a distinction is made between compulsory and voluntary deductibles. The latter leads to a reduction in the premium.
Direct insurance Insurance business that relates to contracts concluded between insurers and insured. The insurance company is directly responsible in relation to the insured. Direct return Operating surplus from land and buildings, dividends from shares and participations and interest income. Expense ratio Ratio between operating expenses and premiums earned expressed as a percentage. Gross premiums written Total premiums received during the financial year or taken up as a receivable at the end of the year. In contrast to net premiums earned, premiums written are not capitalized; i.e. they are unaffected by opening and closing provisions for unearned premiums. Insurance margin Technical result excluding other technical income and expenses in relation to net premiums earned, expressed as a percentage. Compare with Technical result. Investment assets Assets that resemble a capital investment, including real estate and securities, as well as all investments in group and associated companies. Investment return Net of following income and costs: interest income/ expense, dividend on shares and participations, surplus/deficits from own properties, all realized and unrealized changes in fair value of real estate, shares and participations, interest-bearing securities and exchange -rate gains/losses.
Net premiums written Gross premiums written less ceded reinsurance premiums. Operating expenses in insurance operations Expenses related to the acquisition or renewal of insurance contracts plus corporate administration costs. Operating result Profit/loss before appropriations and taxes. Premiums earned That portion of gross premiums written that pertains to the fiscal year, meaning premiums written adjusted for changes in the provision for unearned premiums. Prior-year claims result Profit or loss that arises when claims originating from a prior year are either finally settled or revalued. Property and casualty insurance Collective term for property insurance, liability insurance and reinsurance. Property insurance involves the type of insurance that covers the economic value of one or several objects (such as movable property in a home, car, boat, factory building or warehouse). Other types of property and casualty insurance mainly cover various interests (such as business interruption insurance or liability insurance), where only a specific economic interest is covered, not the economic value of one or several objects. Provision for unexpired risks Provision to cover anticipated claims costs and operating expenses for policies in force at the accounting date and up to their next due date. Provision for unearned premiums Liability item in the balance sheet corresponding to the portion of premiums written that, in the financial accounts, pertains to forthcoming years. Compare: premiums earned. Provision for claims outstanding Liability item in the balance sheet consisting of the estimated value of claims incurred but not yet paid and the expected operating expenses for the settlement of the claims. Regulatory capital base Reported shareholders’ equity after proposed dividend less intangible assets plus untaxed reserves, subordinated loans and deferred tax liabilities. The capital base must satisfy the solvency requirement. See solvency requirement.
Reinsurance A method of distributing risks whereby an insurance company purchases coverage for a part of its liability based on insurance or reinsurance contracts, so-called ceded reinsurance. Reinsurance accepted pertains to the business one insurance company accepts from other insurance companies in the form of reinsurance. Retention The highest insured or claims amount relating to the same risk that an insurer retains for its own account, without reinsurance. Return on equity Result for the year less taxes paid in relation to average shareholders’ equity. Risk ratio Ratio between insurance claims, excluding claims-adjustment costs, and premiums earned, expressed as a percentage. Risk selection The insurer’s selection of the type of risks to be included in his portfolio. Risk selection is of major importance to an insurance company, in part because it facilitates, to the extent possible, a balanced business, which normally has a favorable impact on operating results. Solvency capital Shareholders’ equity less deferred tax assets plus untaxed reserves, subordinated loans and deferred tax liability.
Solvency ratio Key ratio representing the relative size of solvency capital. The solvency ratio is calculated as solvency capital in relation to net premiums written, excluding portfolio premiums. Compare with solvency capital. Solvency requirement (solvency margin) The lowest permissible capital required for insurance operations from the viewpoint of the supervisory authorities. The requirement is based on the historical claims outcome or gross premiums written, whichever is higher.
Underwriting result Item in the technical accounts comprising premiums earned less claims and operating costs.
Underwriting Includes the risk assessment and pricing conducted when insurance contracts are drawn up. In accounting contexts, the term is also used more broadly to designate the operations of an insurance company that do not have the character of asset management.
Maria Ervasti (cover, If P&C Insurance), Evelyn Karming (page 15) | Printing: Libris, Helsinki 2006 | Sampo plc, registered domicile Helsinki, business ID 0142213-3
The information in this folder is based on If P&C Insurance