The frequency and severity of claims can be affected by several factors. The different factors will depend on the products, or lines of business (LOB) considered.
An increase in the frequency of claims can be due to seasonal effects and more sustainable effects. During the winter season snow and cold weather will cause an increase in the frequency of claims in Motor insurance. In Property insurance cold winter will cause an increase in the frequency of claims due to frozen water pipes and increased use of electrical power and open fire places for heating of the houses. More permanent shifts in the level of frequency of claims may occur due to e.g. change of customer behaviour and new types of claims. The effect on the profitability of a permanent change in the level of the frequency of claims will be high. In Motor insurance in Norway, for example, an increase of one percentage point in the level of the frequency of claims will increase the loss ratio by approximately four percentage points. The severity of claims is affected by several factors. In some LOBs, with relatively few claims, the severity may be heavily influenced by large claims. The number of incurred large claims during a year varies significantly from one year to another. This is typically for the commercial market. In most LOBs the underlying develop- ment of the severity of claims is influenced by inflation.
Growth in severity of claims may be driven by the development of consumer price index (CPI), salary increases, social inflation and the price for material and services purchased with claims settle- ment. In Property insurance the inflation will consist of CPI and an increase in building costs, which in the past has been slightly higher than CPI. For accident and health the insurance policies are divided into two main groups, one with fixed sum insured and
and Denmark. The regulation for this LOB is quite different in these countries. In Norway Workers’ Compensation covers both accident and diseases, while in Denmark diseases are covered by a governmental body. The compensation in Norway is exclusively restricted to lump sums, while in Denmark the compensation is both lump sums and annuity payments. Annuity payments are calculated according to assumptions about mortality, interest rate and retirement age. For bodily injuries the severity of claims is also influenced by court awards, which tend to increase the com- pensation more than the general inflation. This is also a significant factor, due to the long period typically required to settle these cases.
Gjensidige manages these risks mainly through close supervision of the development for each LOB, underwriting guidelines and proactive claims handling. The monthly supervision of the results for each LOB contains an overview of both premium and loss development. If there is an adverse development of the profit- ability, sufficient measures will be put in force. This includes neces- sary premium increases to ensure that the profitability is within the accepted level.
The analysis of the profitability can be tracked further to different groups of customers and portfolios. The underwriting guidelines attempts to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and location of the risks. Underwriting limits are in place to enforce appropriate risk selection criteria and to ensure that accepted risks are within the limits of the reinsurance contracts.
Premiums, deductibles and elements in the conditions may be changed at the yearly renewal of policies. Insurance companies have the right to reject the payment of a fraudulent claim. Gjensidige has the right not to renew individual policies in cases of insurance fraud, and in some instances legislation or policy condi- tions give the company the right to terminate or not to renew individual policies in cases where special reasons indicate that such termination is reasonable. In cases where a claim has been paid, Gjensidige is entitled to pursue any third parties liable for the damage, for payment of some or all costs (recourse claim). The underwriting policy and guidelines in all companies are within the Group’s approved risk level.
The claims handling procedures also include a clear strategy and routines for purchasing goods and services in an optimal manner. The routines are to use purchase agreements to ensure the quality of our benefits to our customers and to reduce the inflation risk.
Concentration of insurance risk
The Gjensidige Group still has its concentration in the Norwegian general insurance market, with operations in other Nordic coun- tries and the Baltic.
NOK million written 2013 Per cent of total written 2012 Per cent of total General insurance Private 8,013.8 35.4 % 7,669.0 37.0 % General insurance Commercial 7,416.5 32.7 % 7,096.0 34.2 % General insurance Nordic 3,505.0 15.5 % 3,144.8 15.2 % General insurance Baltics 532.7 2.4 % 473.0 2.3 % Pension and savings 3,030.8 13.4 % 2,194.5 10.6 % Corporate Center-
/reinsurance 163.4 0.7 % 176.5 0.9 %
Total 22,662.2 100.0 % 20,753.8 100.0 %
Total Gjensidige
Forsikring ASA 18,964.7 83.7 % 17,608.8 84.8 %
Table 3a – Gross premiums written per line of business, Gjensidige Group NOK million Gross premiums written 2013 Per cent of total Gross premiums written 2012 Per cent of total
Accident and health - workers'
compensation
1,169.0 5.2 % 1,068.3 5.1 % Accident and health -
others/default 2,755.7 12.2 % 2,740.8 13.2 % Motor, third party
liability 2,991.8 13.2 % 2,717.3 13.1 % Motor, other classes 3,536.7 15.6 % 3,659.6 17.6 % Marine, aviation and
transport 253.4 1.1 % 254.4 1.2 % Fire and other
damage to property 7,699.1 34.0 % 6,772.4 32.6 % Third-party liability 546.2 2.4 % 495.9 2.4 % Other general
insurance 679.5 3.0 % 850.5 4.1 % Pension and savings 3,030.8 13.4 % 2,194.5 10.6 %
Total 22,662.2 100.0 % 20,753.8 100.0 %
Table 3b – Gross premiums written per line of business, Gjensidige Forsikring ASA
NOK million Gross premiums written 2013 Per cent of total Gross premiums written 2012 Per cent of total
Accident and health -
workers' compensation 1,162.2 6.1 % 693.3 3.9 % Accident and health -
others/default 2,542.5 13.4 % 2,538.3 14.4 % Motor, third party
liability 2,686.1 14.2 % 2,445.6 13.9 % Motor, other classes 3,183.4 16.8 % 3,313.8 18.8 % Marine, aviation and
transport 251.0 1.3 % 251.9 1.4 % Fire and other damage
to property 7,160.8 37.8 % 6,245.0 35.5 % Third-party liability 510.0 2.7 % 463.2 2.6 % Other general
insurance 1,468.7 7.7 % 1,657.7 9.4 %
Total 18,964.7 100.0 % 17,608.8 100.0 %
Other concentration risk is mainly aggregation of fire risks and within Workers’ Compensation. These risks are assessed by ana- lysing historical events, studying the insurance values exposed,
exposure to natural perils is limited through Gjensidige’s compul- sory membership in the Norwegian Natural perils pool. Insurance risk is deemed to be moderate with the reinsurance cover the Group has in place.
Subsidiaries are reinsured by Gjensidige Forsikring ASA and the subsidiaries’ reinsurance exposure is included in the outwards reinsurance programme for the Group.
Sources of uncertainty in the estimation of future claims payments
Gjensidige is liable for insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term, and claims are paid according to the policy conditions valid at the time of occurrence. As a result, claims are settled over a long period of time, and there is an element of the claims provision that relates to incurred but not reported claims (IBNR).
There are several variables that affect the amount and timing of cash flows from the insurance contracts. These variables mainly relate to the characteristics of the different types of risks covered and the applied risk management procedures. The compensation paid is according to the terms specified in the insurance contract. Compensation for claims with respect of bodily injuries are calcu- lated as the present value of lost earnings, rehabilitation expenses and other expenses that the injured party will incur as a result of the accident or disease. In most cases in Norway, and also in the other countries where Gjensidige operates, personal injury claims are paid as a lump-sum. An exception from this is Workers’ Com- pensation claims in Denmark, where claims may be paid as annu- ity payments. The calculations for those claims will include infor- mation about the severity of the loss, mortality rates, the number of years until retirement age and assumptions about future social welfare inflation. Mortality rates are from tables approved by the supervisory authorities.
The estimated cost of claims includes expenses to be incurred in settling claims, net of the expected recourse amount and other recoveries. Gjensidige takes all reasonable steps to ensure that it has appropriate information regarding its claims exposure. How- ever, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liabilities established. The liabilities in the financial state- ments related to these contracts comprise a provision for IBNR, a provision for reported claims not yet paid (RBNS) and a provision for unexpired risks at the balance sheet date (provision for un- earned premiums). The amount for bodily injury claims is influ- enced by the level of court awards, particularly to the develop- ment of legal precedence on matters of contract and tort. Liability insurance contracts are also subject to the emergence of new types of latent claims, but no allowance is included for this at the balance sheet date.
The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified (RBNS), where information about the claim is available. There may be cases where certain claims may not be apparent to the insured until many years after the event that gave rise to the claims.
In estimating the liability for the cost of reported claims not yet paid, Gjensidige considers any information available from claims reports, loss adjusters, medical certificates and information about the costs of settling claims with similar characteristics in previous periods. All claims are assessed on a case-by-case basis by a claims handler. Claims with potential for distortive effects of their development are handled separately and projected to their ulti- mate by an additional provision (e.g. bodily injury claims in Motor insurance). Where possible, Gjensidige adopts multiple techniques to estimate the required level of provision. This provides a greater
development of each accident year. The development of the estimate of ultimate claim cost for claims incurred in a given year is presented in tables 6a and b. This gives an indication of the accuracy of Gjensidige’s estimation techniques for claims pay- ments.
Insurance contracts are often classified as risks that are short-tail and risks that are long-tail. Short-tail risk is characterized by that the period between the occurrences, reporting and final settle- ment of claims is short. Long-tail risk is the opposite. The period between the occurrence, reporting and settlement of claims is long. In Property and Motor insurance (excluding bodily injury claims) the claims are reported soon after occurrence, while for Accident and health insurance the claims may be reported several years after the occurrence and settled several years after they were reported. The provisions for IBNR for short-tail risks are rela- tively small, while for long-tail risks the provisions for IBNR may constitute a substantial part of the total loss provision. The duration (average time between the date of loss until the claim is finally settled) differs significantly between the types of risk considered. Long duration will increase the company’s expo- sure to inflation. In Motor insurance, physical damage, the dura- tion is less than one year, while in Motor bodily injury claims the average duration is almost eight years. In Property insurance the average duration is one to two years, in Workers’ Compensation in Norway the average duration is six years. In Group life insurance the duration differs significantly between death and disability coverage. Workers’ Compensation in Denmark has a particularly long duration due to the annuity part. For the other line of busi- nesses (LOBs) in Gjensidige’s Nordic branches and subsidiaries the duration is in line with the similar LOBs in Norway. In the Baltic the duration is significantly shorter due to few bodily injury claims.
Figure 5 – Average duration per insurance product
Process used to decide on assumptions
The risks associated with insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis.
Gjensidige uses standard actuarial models based on statistical information.
The provisions related to reported claims are assessed individually by a claims-handler and registered into the claims system. The development of provisions for notified claims is supervised by the claims managers. In case of adverse development necessary efforts are put in force.
Calculation of claims provisions are based on empirical data, where the basis is the development of claims cost over time. This includes development both for reported claims (RBNS provisions) and incurred, but not reported claims (IBNR provisions). Based on experience and the development of the portfolio statistical models are prepared to calculate the claims provisions. The fit of the model is measured by looking at the deviation between earlier post-reported claims and those estimated by the model.
mate the proportions of the paid and incurred to date of the ultimate claim costs.
• Expected loss ratio methods (e.g. Bornhuetter-Ferguson),
which use Gjensidige’s expectation of the loss ratio for a line of business in the estimation of future claims pay- ments.
• Methods where “Chain ladder” and “Expected loss ratio”
methods are used in combination. One advantage in the use of these methods is that more weight can be given to experience data when the run-off development of the ac- tual claim year has become more stable.
The methods used will depend on the LOBs and the time period of data available. To the extent that these methods use historical claims development information, they assume that the historical claims development pattern will occur 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 model parame- ters.
Such reasons include
• Economical, legal and social trends and social inflation
(e.g. a shift in court awards)
• Changes in the mix of insurance contracts incepted
• The impact of large losses
IBNR provisions and provisions for outstanding claims are initially estimated at a gross level, and a separate calculation is carried out to estimate the size of reinsurance recoveries. Gjensidige purchases almost exclusively excess of loss reinsurance contracts with sufficiently high retentions for only relatively few, large claims to be recoverable.
The actuarial function in Gjensidige is centralised, and the actu- aries in the Gjensidige Group working with technical provisions meet regularly, as a part of keeping a high professional level. Gjensidige has regular processes where external actuarial firms calculate best estimates of the technical provisions. This is done to get a second opinion of the level of the provision from independ- ent, recognized actuarial firms. The deviation between the internal and external estimates of the claims provisions has been within normal range for calculations of this type.
Sensitivity analysis – underwriting risk
Underwriting risk is the risk that an insurer does not charge premi- ums appropriate for the insurance contracts. The pricing processes for the different insurance products involve estimates of future frequency and severity of claims, based on statistics from internal and external sources. Even if the underwriting criteria are ade- quate and the premium calculations are performed on a good statistical basis, the claims cost may deviate from the expected level, due to large claims, natural catastrophes etc.
Gjensidige Forsikring ASA and its subsidiaries have detailed under- writing guidelines, intended to ensure good quality in the assess- ment and quantification of insured risks, define risk types and limits for sums insured that may be accepted, thus ensure control of the risk exposure in the insurance portfolio.
Table 4 below shows the impact on profit or loss for the year, and thereby on equity at year-end, of changes in Combined Ratio (CR). Tax impact is not included in the calculations. CR is the key measure of profitability in the general insurance business. The calculations show the effect of a change of one per cent in CR for each segment. An increase in CR can be caused by an increase in the loss frequency and/or an increase in the severity. In some LOBs there is a risk that the loss frequency and the severity of claims are correlated so that an increase in the underlying insurance risk may affect both the frequency and severity of claims.
0 2 4 6 8 10
Marine, aviation and transport Property, Commercial Property, Private Group Life, Disability Group Life, Death Accident Liability Workers Compensation (DK) Workers Compensation (NO) Motor, BI Motor, PD
Change in CR (1 %- point)
General insurance Private 78.0 81.3 General insurance Commercial 70.2 54.1 General insurance Nordic 33.3 36.3 General insurance Baltics 5.1 4.4
Pension and savings 9.0 6.8
Corporate Centre/reinsurance 0.8 1.9
Total 196.4 184.8
Total Gjensidige Forsikring ASA 180.7 169.2
Change in loss frequency (1 %-point)
General insurance Private Norway 562.3 604.8 General insurance Commercial Norway 1,328.6 1,097.3
Total general insurance Norway 1,890.9 1,702.1
Change in severity of claims (+10 %)
General insurance Private Norway 528.3 522.9 General insurance Commercial Norway 520.8 391.8
Total general insurance Norway 1,049.0 914.7
Changes in the composition of the insurance portfolio will also have impact on changes in the frequency and severity of claims. In times when there are changes in the composition of the insur- ance portfolio, the effect of changes in the frequency and severity of claims will be influenced by the percentage share of the differ- ent insurance product types in the total portfolio.
Sensitivity analysis – provision risk
The estimation of technical provisions for an insurance portfolio represents an approximation of future cash flow for the claims payments, and there will always be an element of uncertainty in such calculations. Provision risks relate to this kind of uncertainty. The uncertainty depends on the nature of the risk. Risk with a
known. In cases when a judgement is not yet final and legally binding, the effect on the loss provision is based on a probability weighted estimate of the possible outcomes.
Inflation is an underlying risk in most insurance products. The effect will be different, depending on the characteristics of each product and the terms and conditions that apply for the claims settlement. For LOBs with nominal long-tailed provisions the effect of a one percentage point increase in inflation will be sig- nificant, proportional to the average duration (in number of years).
Interest risk is a significant risk factor associated with Workers’ Compensation business in Denmark. This risk is an expression for loss/profit due to changes in market rates. There is both interest and inflation risk associated with the liabilities (technical provi- sions). The risk is hedged by use of interest and inflation swaps. The sensitivity analysis shows the effect of a change in inflation rate of one percentage point on the claim provision. The calcula- tions do not include the effect of inflation swap.
Table 5 – Sensitivity analysis claims provision
Change in inflation (+/- 1 %-point)