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7.1 INSTALACIONES O AREAS DE SERCOLPACK LTDA
The assumptions used in the estimation of insurance assets and liabilities are intended to result in provisions which are sufficient to cover any liabilities arising out of insurance contracts, so far as they can be reasonably foreseen.
2.17.1. Non-life insurance contracts
Provision is made at the balance sheet date for the expected ultimate cost of settlement of all claims incurred in respect of events up to that date, whether reported or not, together with related claims handling expenses, less amounts already paid.
The provision for claims is not discounted for the time value of money.
The sources of data used as inputs for the assumptions are typically obtained from internal analysis by ČPS, a.s., or from companies within the parent Group.
Where in early years there is insufficient information to make a reliable estimate of claims development, prudent assumptions are used. The estimation of claims incurred but not reported (“IBNR”) is generally subject to a greater degree of uncertainty than estimates of claims already notified, for which more information is available. IBNR claims may often not be apparent until many years after the occurrence of the event giving rise to the claim.
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Notes to the Financial StatementsČeská poisťovňa – Slovensko, akciová spoločnosť | Annual Report | 2007
Each reported claim is assessed on a separate case-by-case basis with due regard to the claim circumstances, information available from loss adjusters and historical evidence of the size of similar claims. Case estimates are reviewed regularly and are updated as and when new information arises.
Difficulties in estimating the provision varies by class of business due to a number of reasons including: • Differences in the terms and conditions of the insurance contracts;
• Differences in the complexity of claims; • The severity of individual claims;
• Differences in the time between an event occurrence and reporting the claim.
Liability claims will typically display bigger variation between initial estimates and the actual outcome because there is a greater degree of difficulty in estimating the IBNR provisions. For other classes of business, claims are typically reported reasonably soon after the claim event, and hence tend to display lower levels of variability.
The cost of outstanding claims and the IBNR provisions are estimated using a range of statistical methods. Such methods extrapolate the development of paid and incurred claims, average cost per claims and ultimate claim numbers for each accident year based upon observed development from earlier years and expected loss ratios.
The key statistical methods used include:
• Chain ladder methods, which use historical data to estimate paid and incurred balance sheet data as proportions of the ultimate claim cost;
• Expected loss ratio methods, which use the Company’s expectation of the loss ratio for a line of business; and
• Benchmarking methods, which use the experience of comparable lines, information from companies in the Group or obtained from the market (if available) to estimate the cost of claims of a new insurance line.
The Company used the above methods consistently in both reporting periods.
Different methods could be used for particular insurance lines if these would lead to more reliable estimates.
Large claims are generally assessed separately and are measured on a case-by-case basis in order to lower the possible distorting effects on statistical data.
To the extent that these methods use historical claims development information, they assume that the historical claims development pattern will occur again in the future. There are reasons why this may not be the case, which, insofar as they can be identified, have been allowed for by modifying the methods. Such reasons include:
• Economic, legal, political and social trends;
• Changes in the mix of insurance contracts enter into; • The impact of large losses.
IBNR and RBNS provisions are initially estimated at a gross level and a separate calculation is carried out to estimate the size of reinsurance recoveries. ČPS, a.s. has concluded a range of reinsurance contracts that should serve to decrease the risk from the claims incurred. ČPS, a.s. considers the credit rating of the individual reinsurer in the initial measurement of the reinsurance asset.
Assumptions
The biggest effect on the liability adequacy test of provisions arising from non-life insurance (excluding MTPL) results from expected loss ratios for the most recent accident years. The expected loss ratio is the ratio of expected claims to premiums.
The following table sets out the expected loss ratios (including changes in provision):
2007 2006
Accident (including accident riders) 15.80% 19.37%
Property 16.27% 6.72%
Motor hull 65.50% 63.43%
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Notes to the Financial StatementsČeská poisťovňa – Slovensko, akciová spoločnosť | Annual Report | 2007
2.17.2 Claims arising out of motor third party liability insurance (MTPL)
In the motor insurance line, ČPS, a.s. provides both motor third party liability insurance and motor hull insurance. Motor third party liability insurance provides an indemnity for property claims and bodily injuries both in the Slovak Republic and abroad within the international Green card system.
Under the terms of the motor third party liability insurance it is possible to conclude either standard terms of insurance (Bonus – Štandard) or terms with extended insurance cover (Poistenie bonus plus). Standard terms provide insurance cover up to SKK 20 million for property claims and SKK 20 million for bodily injuries. Terms with extended insurance cover provide insurance cover up to SKK 60 million for property claims and SKK 60 million for bodily injuries.
Property claims covered by motor third party liability insurance and claims covered by motor hull insurance are generally reported and settled shortly after the claim occurrence. Claim settlement process for bodily injury claims usually requires a longer period, as the assessment of the claim is more complex. Bodily injury claims can be settled by either a single lump sum payment or by annuity payments.
The amount of claim payment for bodily injuries and related loss of income is calculated in accordance with the Act. no. 461/2003 on social security.
If there are no claims the premium is decreased due to lower insurance risk.
Assumptions
The main assumptions used to estimate IBNR provision are:
• Inflation is not significantly changing over time and its development is implicitly considered in the “link ratios” used to estimate the ultimate claim costs.
• We assume that the future claims development pattern will be similar as in the past and therefore we can use the chain-ladder method. • Development coefficients behave exponentially. In case of claims related to bodily injury the coefficients are not lower than 1.
• The Company assumes that development coefficients for claims related to property claims can be lower than 1.
The IBNR provision for property claims and bodily injuries in 2007 amounted in total to SKK 152,229 thousand, out of which IBNR for property claims was SKK 17,581 thousand and for bodily injuries SKK 134,648 thousand.
The total IBNR provision in 2006 amounted to SKK 224,757 thousand, out of which IBNR for property claims was in amount of SKK 36,799 thousand and for bodily injuries SKK 187,958 thousand.
2.17.3. Risks related to MTPL insurance
Due to the nature of MTPL insurance, this line has a longer period between claim occurrence and its reporting.
MTPL insurance cover contains a high degree of uncertainty and a wide spread of possible claim amounts that is not symmetric to its mean estimate value.
The Company considered the following situations, which could result in large losses from significant litigations or legal risks, or where litigations and legal risks could have an impact on a significant part of the portfolio of contracts:
• cancellation of claim limits for bodily injuries;
• increase of points value for pain and suffering assessments; • decrease of discount rate for bodily injuries.
2.17.4. Life insurance
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Notes to the Financial StatementsČeská poisťovňa – Slovensko, akciová spoločnosť | Annual Report | 2007 The basic assumptions influencing the value of provisions are below:
Mortality
Different products use different mortality tables. For liability adequacy test (further “LAT”) Slovak population tables are used, obtained in 2004 from Inštitút informatiky a štatistiky (the Institute of informatics and statistics). These population tables capture expected mortality based on statistical analysis. Based on analysis of the life insurance portfolio, mortality used in the LAT is derived from mortality in the Slovak population tables from 2004 adjusted to 45–50% based on the age of the insurance contract.
For calculation of statutory provisions and premium rates for particular life insurance products Slovak mortality tables from 2000 and 2004 are used; mortality tables of Česká pojišťovna 1985 and mortality tables from 1991, 1994 and 1999 are used in calculating products of the acquired QBE portfolio.
Guaranteed interest rate
Provisions and premium rates for life insurance products are calculated using guaranteed interest rates in a range 2.4–6%.
The Company used in its liability adequacy test a risk-free rate to discount particular cash flows and to assess the provisions. The interest rate of one year forwards for the calendar years 2008 – 2025 is used for the risk-free rate in the range 4.36–5.3%.
Lapse rates
Analysis of lapse rates is performed regularly for the whole life insurance portfolio, grouped to different product groups, distribution channels; and is split based on the term of the insurance contracts. Lapse rate is one of the most significant assumptions for the liability adequacy test.
First year lapse rates range from 6 to 42%. Out of the policies that are in force at the beginning of the second year lapses are 4–19%, in the 3rd year 3–14%, and for remaining years the lapse rates are from 2 to 11% (depending on payment frequency and product). For calculation of the net provision the lapse rate is not taken into account.
Administrative expenses and inflation
For the liability adequacy test, an analysis of administrative expenses is performed, on the basis that inflation will develop consistently with its expected trend, while an appropriate safety margin is applied. Assumptions are set to cover the actual administrative expenses of the Company.
Calculated expenses (in premium)
Administrative expenses 0.1–4.5% of sum insured or 5–6% of premiums
Collection cost 1.3–10% of premiums
Cost relating to annuity payments 2–11% of annual pension
Actual unit cost based on cost analysis for the year 2007
Administrative expenses SKK 42.05 per contract in the portfolio
Claims settlement cost SKK 86.67 per settlement or SKK 29.23 per contract
Collection cost SKK 6.72 per collection
Cost relating to annuity payments SKK 15.75 per pension payment
Advertising of existing products 0.85% of premiums written
Administrative expenses – Headquarters 7.24% of premiums written
The level of cost inflation used in the liability adequacy test is 3.63%–3.32% from 2008.
Impact of change in assumptions
The impact of changes in assumptions and other relevant changes on the amount of premium deficiency provision as a result of the liability adequacy test represents a decrease in amount of SKK 70,408 thousand compared to 2006.
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Notes to the Financial StatementsČeská poisťovňa – Slovensko, akciová spoločnosť | Annual Report | 2007 Summary of changes in premium deficiency provision for 2006–2007.
In thousands of SKK Premium deficiency provision
Balance as at 31 December 2006 121,751
Change of models 1,671
Year-to-year change in portfolio (10,672)
Change in costs (34,675)
Change in risk-free yield curve (18,539)
Change in % of expected mortality (2,947)
Change in lapse rates (4,849)
Change in loss development (397)
Balance as at 31 December 2007 51,343
In 2007, the Company made changes in the model that led to optimization of processes and more accurate calculations. Due to the introduction of joint life into products of insurance of children, the number of required models decreased, which led to more effective administration and calculation processes. A quantification of the unearned premium on a monthly basis was replaced by a daily basis, which equals to the carrying amount of UPR. The change in model, with assumptions unchanged from 2006, led to an increase in premium deficiency provision by SKK 1,671 thousand.
The change of costs comprises change of costs and the cost model, cost inflation and commissions. The largest contribution to the decrease of the deficiency provision by SKK 34,675 thousand represented a more accurate methodology of unit costs calculation. The claim settlement costs were calculated exactly based on the cost centre “claim settlement” in 2007, whilst in 2006 they were calculated based on the number of employees responsible for claim settlement from the personnel and administrative expenses excluding sales and marketing costs. The unit costs of claim settlement of life insurance and accident riders decreased significantly. Annual claim settlement costs of life coverage decreased from SKK 416.01 to SKK 86.67 and of the accidental rider from SKK 141.19 to SKK 29.23. This change led to an increase of headquarters administrative costs from 6.46% to 7.24%. Maintenance costs decreased from SKK 47.9 to SKK 42.05. Marketing costs relating to the existing portfolio increased from 0.77% to 0.85%. Collection costs changed from SKK 7.23 to SKK 6.72 and costs relating to payment of pensions from SKK 9.75 to SKK 15.75. Cost inflation which underwent a year-to-year decrease of approximately 0.35% also contributed to the decrease in the deficiency provision.
The risk-free interest rate represents an assumption, to which the result of the liability adequacy test is very sensitive. Its increase over a period from 2008 to 2025 by approximately 0.73% compared to 2006 resulted in a decrease in the premium deficiency provision by SKK 18,539 thousand.
Based on analysis of the life insurance portfolio mortality, the Company calculated a lower expected mortality in 2007 compared to 2006. In 2006, the Company used expected mortality amounting to 60–70% of the population mortality tables (SR 2004), whilst in 2007 the percentage has decreased to 45–50% based on the year of the insurance contract duration. The change in the expected mortality resulted in a decrease in the premium deficiency provision by SKK 2,947 thousand.
The methodology for lapse rates quantification was not changed compared to 2006. The value of future lapses was set up in 2006 with gradual decrease to approximately 2%. Since for lapse rates in later years of policy duration no historical experience is available in 2007 the Company used the last known values. As such an estimate involves higher uncertainty in the trend, safety margin was introduced. The overall impact of the change in lapse assumptions resulted in a decrease of the premium deficiency provision by SKK 4,849 thousand. Currently, ČPS, a.s. has a very low loss ratio in the accident riders. In 2006, the loss ratio was set to 20–28% and the Company expected its gradual increase in the 6-year period to 40–44%. In 2007, the loss ratio was set to 30–40% for all modeled periods. This change caused a decrease of the premium deficiency provision by SKK 397 thousand.
2.17.5. Sensitivity analysis
Life insurance
For life insurance contracts, the Company performed an analysis of the sensitivity of liabilities as a part of the liability adequacy test. The best estimate assumptions were adjusted by risks and uncertainties (market value margin – MVM) in the liability adequacy test. MVMs represent an unfavourable development of assumptions and the application of MVMs results in increased amount of liabilities. This analysis was prepared for a change in one variable with other assumptions remaining constant. The table below shows the impact of the application of MVM on the premium deficiency provision as at 31 December 2007 (with one variable changing and other assumptions remaining constant).
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Notes to the Financial StatementsČeská poisťovňa – Slovensko, akciová spoločnosť | Annual Report | 2007 Overview of sensitivity of premium deficiency provision to particular assumptions:
In thousands of SKK Premium deficiency provision
Provision without MVM as at 31 December 2007 23,851
10% increase in loss development of accident riders 659
Decrease by 0.25 basis points in risk-free interest rate for the purpose of discounting 7,927
10% increase in serious illnesses and disability 719
Increase in expenses and expense inflation by 10% 5,339
Increase (decrease) in lapses without surrender option by 25% –
Increase (decrease) in lapses with surrender option by 10% 2,974
Decrease in lapse rates in annuities products by decrease of risk-free rate by 1.15 basis points 8,299
Increase in mortality by 10% except for annuities and decrease of mortality by 25% in case of annuities 499
Increase by 0.25 basis points in risk free interest rate for the purpose of DPF modelling 92
Interaction effect of the above 984
Provision with MVM as at 31 December 2007 51,343
Premium deficiency provision without MVM would amount to SKK 23,851 thousand. Adding a 10% margin to the loss development of accident riders would result in an increase in the premium deficiency provision by SKK 659 thousand to SKK 24,510 thousand. The risk-free interest rate has the most significant impact on the premium deficiency provision. That becomes obvious when including MVM to risk-free interest for the purpose of discounting, when the amount of provision increases by SKK 7,927 thousand and MVM with aim to decrease lapses of annuity products, where the provision increased by SKK 8,299 thousand. The premium deficiency provision is calculated after the application of all MVMs and would amount to SKK 51,343 thousand as at 31 December 2007.
Sensitivity analysis in non-life insurance
The Company performed sensitivity analysis during the liability adequacy test for non-life insurance. The analysis was prepared by change in one variable whilst the other assumptions remained unchanged. The DAC remained recoverable also when increasing the administration costs by 170%, or the loss ratio by 24%.
The most significant impact on the amount of provisions in non-life insurance have the assumptions used in calculation of MTPL IBNR. The effect of change in tail factor on the amount of MTPL IBNR.
In thousands of SKK IBNR PZP Impact
Carrying amount of provision 152,229 100.00 %
Tail factor -5% 148,308 97.42%
Tail factor 5% 156,150 102.58%
Tail factor -5pb 132,623 87.12%
Tail factor 5pb 171,834 112.88%
The Company does not consider the impact of changes in assumptions in other non-life IBNRs for significant.