Insurance riskThis is the risk of loss arising from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities. Due to the cyclical nature of insurance business, there is a risk that future earnings are lower or more volatile than expected with fluctuations in capacity, competition and the frequency and severity of losses, as a result of both man-made and natural disasters.
Insurance risk is sub-divided into several categories which include underwriting risk, reinsurance risk and reserving risk.
Underwriting risk
This is the risk arising from fluctuations in the frequency and severity of financial losses incurred as a result of the acceptance of the insurance portfolio of business.
Underwriting risk is managed by agreeing the Syndicate’s appetite annually through the RAF and the business plan, which sets out targets for volumes, pricing, line sizes and retention by class of business. Volume and price performance is monitored against the Syndicate’s business plan monthly, and all of the components of the insurance result and risk appetite quarterly. The RMT conduct an annual review of the business plan.
Catastrophe modelling software is used to model maximum probable losses from catastrophe-exposed business and as part of the Realistic Disaster Scenario process. The Syndicate has adopted a cyber aggregate monitoring tool to manage the growing exposures in this area.
A significant proportion of the Syndicate’s business is written through delegated authorities. A dedicated Delegated Authority team provides operational and regulatory oversight of the Syndicate’s coverholders and third-party administrators, carrying out annual due diligence, an ongoing schedule of audits and management of regulatory requirements.
As an underwriter of complex and specialist insurance business, ensuring compliance with licensing and other regulatory requirements is a priority for the Board. This is overseen by the Product and Underwriting Governance Committee (PUGC). The PUGC also oversees adherence to internal standards for delegated authority arrangements.
Reinsurance risk
This is the risk that reinsurance purchased to protect the gross account does not respond as intended due to, inter alia, mismatch with gross losses; poorly worded contracts; reinsurer counterparty risk; or exhaustion of reinsurance limits. The risk is heightened if there is a lack of reinsurance or retrocession availability in the market.
Reinsurance is used to protect capital against underwriting risk volatility, either as a result of large catastrophes or from the severity of losses on individual policies.
To mitigate this risk, there is a process in place to monitor early warning of exposures outside of tolerance thresholds, with post-placement reviews undertaken and reported to the Underwriting Committee.
Reserving risk
This is the risk that reserves held on the balance sheet will be inadequate to meet the net amount payable when insurance liabilities crystallise and is exacerbated due to the inherent uncertainty of knowing the ultimate timing and quantum of liabilities incurred.
Claims provisions represent estimates, based on both the underwriters’ and claim managers’ informed knowledge and judgement and on the Internal Reserving Actuary’s statistical projections, of the expectation of the ultimate settlement and administration costs of claims incurred. A variety of estimation techniques are used, generally based upon statistical analyses of historical loss development patterns, to assist in the establishment of appropriate claims reserves.
In addition, the estimates are subject to independent review by external actuaries, who sign an annual Statement of Actuarial Opinion on the sufficiency of the reserves for the Syndicate. The Syndicate’s policy is to reserve on a consistent basis with a reasonable margin for prudence.
Market risk
This is the risk that arises from fluctuations in values of, or income from, assets, interest rates or exchange rates.
Assets are held as a result of underwriting activities either in premium trust funds or as capital support. On-going investment strategy, investment objectives and the management of risks arising from investments are agreed by the Investment Committee in line with the Prudent Person Principle, as outlined under Solvency UK.
The Syndicate monitors its cash-flow on a daily basis and reviews its cash-flow forecasts, foreign currency exposures and asset-liability matching regularly.
