Insurance risk is the risk of a change in value due to deviations between actual and expected insurance costs. This means the risk that actual outcome deviates from the expected outcome due to, for example, a higher claims frequency, larger average claims costs, one or more major claims or higher outcome of insurance costs compared with estimated provisions.
Insurance risk primarily comprises premium and reserve level risk and disaster risk.
The Group defines insurance risk as the single largest risk group in the insurance operations.
Premium and disaster risk
Premium risk is the risk of losses due to incorrect pricing, risk concentration, taking out wrong or insufficient reinsurance or a random fluctuation in the claims frequency and/or claims amount. The risk in the portfolio of the Group’s insurance operations is well-balanced and mainly comprises a large number of insurance with low, individual risks. It is deemed less probable that one and the same event would entail a claim from a large number of insurance policies since the insurance policy is well-diversified and disaster risk is deemed to be low. Concentration risk in the overall portfolio is also considered to be low since the Group’s insurance portfolio is highly diversified in terms of both products and geography.
The Group manages and limits premium and disaster risk by the Board issuing policies regulating, for example, maximum retention and a framework for premium pricing. The Group carries out regular detailed reviews of premium pricing and continuously assesses the profitability of established insurance arrangements and changes in tariffs and premiums levels. To further limit premium and disaster risk, reinsurance has been taken out in the risk portfolios with a higher risk exposure to major and chain-reaction claims. Reinsurers are selected based on factors including expertise and financial position and comply with the policies established by the board of the insurance company. The Group continuously reviews the entire reinsurance programme to ensure that all risks are covered as required.
Reserve level risks
Reserve level risk refers to the risk of variations in the time and amount of claims payments. Provision for unearned premiums is intended to cover the expected claims and operating costs for the remaining term of valid insurance contracts. Technical provisions are the total of unearned premiums and unexpired risks, claims outstanding and the equalisation reserve. Technical provisions always include a certain element of uncertainty since provisions include an estimate. The uncertainty of technical provisions is usually higher for new portfolios for which complete settlement statistics are not yet available and for portfolios in which final adjustment of claims takes place following a long period of time. For the insurance operations, this means that reserve level risks are higher for newer areas of insurance in industrial injury policies and in the travel segment.
The Group manages and limits reserve level risk by having the Board issue policies. Actuarial assumptions are based on historic claims and exposures known on the closing date. The models used are well-established actuarial models such as Chain Ladder or other Loss Development Factor models and the outcome corresponds to a provision that covers the expected future payments for all claims incurred, even claims that have not yet been reported.
Provision for unearned premiums are calculated individually for each insurance contract. A straight-line (pro rata) earnings model is used for
insurance risks with a term of 12 months or less. A provision for unexpired risks is made if the provision for unearned premiums is deemed to be insufficient to cover the insurance company’s liabilities for the remaining terms of valid insurance contracts