a. Insurance risk

Introduction

The Group accepts insurance risk in a range of classes of business through Lloyd’s Syndicate 2001’s four separate underwriting businesses and Amlin Bermuda. The bias of the portfolio is towards short-tail property and accident risk but liability coverage is also underwritten.

In the underwriting of insurance or reinsurance policies the Group’s underwriters use their skill, knowledge and data on past claims experience to evaluate the likely claims cost and therefore the premium which should be sufficient (across a portfolio of risks) to cover claims costs, expenses and to produce a profit. However due to the nature of insurance risk there is no guarantee that the premiums charged will be sufficient to cover claims costs. This shortfall may be caused by insufficient premium being charged or result from an unexpectedly high level of claims.

A number of controls are deployed to limit the amount of insurance exposure underwritten. Each year a business plan is prepared and agreed which is used to monitor the amount of premium income to be written in total and for each class of business. Progress to this plan is monitored during the year. The Group also operates under a line guide which determines the maximum liability per policy which can be written for each class and for each underwriter. These can be exceeded in exceptional circumstances but only with the approval of senior management. Apart from the UK and some of the international comprehensive motor liability portfolio, which has unlimited liability, all policies have a per loss limit which caps the size of any individual claims. For larger sum insured risks reinsurance coverage may be purchased. The Group is also exposed to catastrophe losses which may impact many risks in a single event and again reinsurance is purchased to limit the impact of loss aggregation from such events. Click here to see these reinsurance arrangements.

Insurance liabilities are written through individual risk acceptances, reinsurance treaties or through facilities whereby Amlin is bound by other underwriting entities. Binding authority arrangements delegate underwriting authority to agents acting as coverholders who use their judgement to write risks on our behalf under clear authority levels.

The insurance liabilities underwritten by the Group are reviewed on an individual risk or contract basis and through review of portfolio performance. All claims arising are reserved upon notification. Each quarter the entire portfolio of business is subject to a reserving process whereby levels of paid and outstanding (advised but not paid) claims are reviewed. Potential future claims are assessed with a provision for incurred but not reported (IBNR) claims being made. This provision is subject to review by senior executives and an independent internal actuarial assessment is carried out by the in-house actuarial team to determine the adequacy of the provision. Whilst a detailed and disciplined exercise is carried out to provide for claims notified, it is possible that these could exceed the reserves carried. Furthermore there is increased uncertainty in establishing an accurate provision for claims which have been incurred but not reported and there is a possibility that claims may arise which in aggregate exceed the reserve provision established. This is partly mitigated by the reserving policy adopted by the Group which is to carry reserves with a margin over the actuarial best estimate.

The review of claims arising may result in underwriters adjusting pricing levels to cater for an unexpectedly higher trend of claims advices or payments. However, this may not be possible in a competitive market and underwriters may respond either by accepting business with lower expected profit margins or declining to renew and thus reducing income. Also, there is a portfolio of risk already underwritten which cannot be re-priced until renewal at the end of the policy period.

Sections 1 to 4 describe the business and the risks of Amlin’s syndicate operations. Amlin Bermuda is described in section 5.

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