amounts of provisions for claims incurred but not reported (IBNR) or where outcomes
and risks are unusually difficult to assess, e.g. for asbestos-related claims. [IFRS 4.IG45].
It may also be useful to disclose sufficient information about the broad classes identified
to permit a reconciliation to relevant line items on the statement of financial position.
[IFRS 4.IG46].
Information about the nature and extent of risks arising from insurance contracts will
be more useful if it highlights any relationship between classes of insurance contracts
(and between insurance contracts and other items, such as financial instruments) that
can affect those risks. If the effect of any relationship would not be apparent from
disclosures required by IFRS 4, additional disclosure might be useful. [IFRS 4.IG47].
A more detailed analysis of risk disclosures made by insurers is discussed below.
11.2.1
Objectives, policies and processes for managing insurance contract
risks
As noted at 11.2 above, IFRS 4 requires an insurer to disclose its objectives, policies and
processes for managing risks arising from insurance contracts and the methods used to
manage those risks. [IFRS 4.39(a)].
Such disclosure provides an additional perspective that complements information about
contracts outstanding at a particular time and might include information about:
(a) the structure and organisation of the entity’s risk management function(s),
including a discussion of independence and accountability;
(b) the scope and nature of its risk reporting or measurement systems, such as internal
risk measurement models, sensitivity analyses, scenario analysis, and stress testing,
and how these are integrated into the entity’s operating activities. Useful disclosure
might include a summary description of the approach used, associated assumptions
and parameters (including confidence intervals, computation frequencies and
historical observation periods) and strengths and limitations of the approach;
(c) the processes for accepting, measuring, monitoring and controlling insurance risks
and the entity’s underwriting strategy to ensure that there are appropriate risk
classification and premium levels;
Insurance contracts (IFRS 4) 4395
(d) the extent to which insurance risks are assessed and managed on an entity-wide basis;
(e) the methods employed to limit or transfer insurance risk exposures and avoid
undue concentrations of risk, such as retention limits, inclusion of options in
contracts, and reinsurance;
(f) asset and liability management (ALM) techniques; and
(g) the processes for managing, monitoring and controlling commitments received (or
given) to accept (or contribute) additional debt or equity capital when specified
events occur.
It might be useful to provide disclosures both for individual types of risks insured and
overall. They might include a combination of narrative descriptions and specific
quantified data, as appropriate to the nature of the contracts and their relative
significance to the insurer. [IFRS 4.IG48].
The following extract from AMP provides an example of disclosures concerning the
management of life insurance risks.
Extract 51.25: AMP Limited (2016)
Notes to the financial statements [extract]
for the year ended 31 December 2016
4.4. Life insurance contracts – risk [extract]
(a) Life insurance risk
AMP Life and NMLA life insurance entities issue contracts that transfer significant insurance risk from the
policyholder, covering death, disability or longevity of the insured, often in conjunction with the provision of wealth
management products.
The products carrying insurance risk are designed to ensure that policy wording and promotional materials are clear,
unambiguous and do not leave AMP Life and NMLA open to claims from causes that were not anticipated. The
variability inherent in insurance risk, including concentration risk, is managed by having a large geographically
diverse portfolio of individual risks, underwriting and the use of reinsurance.
Underwriting is managed through a dedicated underwriting department, with formal underwriting limits and
appropriate training and development of underwriting staff. Individual policies carrying insurance risk are generally
underwritten individually on their merits. Individual policies which are transferred from a group scheme are generally
issued without underwriting. Group risk insurance policies meeting certain criteria are underwritten on the merits of
the employee group as a whole.
Claims are managed through a dedicated claims management team, with formal claims acceptance limits and
appropriate training and development of staff with an objective to ensure payment of all genuine claims. Claims
experience is assessed regularly and appropriate actuarial reserves are established to reflect up-to-date experience and
any anticipated future events. This includes reserves for claims incurred but not yet reported.
AMP Life and NMLA reinsure (cede) to reinsurance companies a proportion of their portfolio or certain types of
insurance risk, including catastrophe. This serves primarily to:
– reduce the net liability on large individual risks;
– obtain greater diversification of insurance risks;
– provide protection against large losses;
– reduce overall exposure to risk;
– reduce the amount of capital required to support the business;
The reinsurance companies are regulated by the Australian Prudential Regulation Authority (APRA), or industry
regulators in other jurisdictions and have strong credit ratings from A+ to AA+.
4396 Chapter 51
This extract from Beazley plc illustrates the disclosure of non-life insurance and
reinsurance risk policies and processes.
Extract 51.26: Beazley plc (2016)
Notes to the financial statements [extract]
2 Risk management [extract]
2.1 Insurance risk [extract]
The group’s insurance business assumes the risk of loss from persons or organisations that are directly exposed to an
underlying loss. Insurance risk arises from this risk transfer due to inherent uncertainties about the occurrence, amount and timing of insurance liabilities. The four key components of insurance risk are underwriting, reinsurance, claims
management and reserving.
Each element is considered below.
a) Underwriting risk [extract]
Underwriting risk comprises four elements that apply to all insurance products offered by the group:
• cycle risk – the risk that business is written without full knowledge as to the (in)adequacy of rates, terms and conditions;
• event risk – the risk that individual risk losses or catastrophes lead to claims that are higher than anticipated in
plans and pricing;
• pricing risk – the risk that the level of expected loss is understated in the pricing process; and
• expense risk – the risk that the allowance for expenses and inflation in pricing is inadequate.
We manage and model these four elements in the following three categories; attritional claims, large claims and
catastrophe events.
The group’s underwriting strategy is to seek a diverse and balanced portfolio of risks in order to limit the variability
of outcomes. This is achieved by ac
cepting a spread of business over time, segmented between different products,
geographies and sizes.
The annual business plans for each underwriting team reflect the group’s underwriting strategy, and set out the classes
of business, the territories and the industry sectors in which business is to be written. These plans are approved by
the board and monitored by the underwriting committee.
Our underwriters calculate premiums for risks written based on a range of criteria tailored specifically to each
individual risk. These factors include but are not limited to the financial exposure, loss history, risk characteristics, limits, deductibles, terms and conditions and acquisition expenses.
The group also recognises that insurance events are, by their nature, random, and the actual number and size of events
during any one year may vary from those estimated using established statistical techniques.
To address this, the group sets out the exposure that it is prepared to accept in certain territories to a range of events such as natural catastrophes and specific scenarios which may result in large industry losses. This is monitored
through regular calculation of realistic disaster scenarios (RDS). The aggregate position is monitored at the time of
underwriting a risk, and reports are regularly produced to highlight the key aggregations to which the group is
exposed.
The group uses a number of modelling tools to monitor its exposures against the agreed risk appetite set and to
simulate catastrophe losses in order to measure the effectiveness of its reinsurance programmes. Stress and scenario
tests are also run using these models. The range of scenarios considered includes natural catastrophe, cyber, marine,
liability, political, terrorism and war events.
One of the largest types of event exposure relates to natural catastrophe events such as windstorm or earthquake.
Where possible the group measures geographic accumulations and uses its knowledge of the business, historical loss
behaviour and commercial catastrophe modelling software to assess the expected range of losses at different return
periods. Upon application of the reinsurance coverage purchased, the key gross and net exposures are calculated on
the basis of extreme events at a range of return periods.
Insurance contracts (IFRS 4) 4397
The group’s high level catastrophe risk appetite is set by the board and the business plans of each team are determined
within these parameters. The board may adjust these limits over time as conditions change. In 2016 the group operated
to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of $412.0m (2015: $462.0m) net of
reinsurance. This represented a reduction in our catastrophe risk appetite of 11% compared to 2015.
[...]
To manage underwriting exposures, the group has developed limits of authority and business plans which are binding
upon all staff authorised to underwrite and are specific to underwriters, classes of business and industry. In 2016, the
maximum line that any one underwriter could commit the managed syndicates to was $100m. In most cases,
maximum lines for classes of business were much lower than this.
These authority limits are enforced through a comprehensive sign-off process for underwriting transactions including
dual sign-off for all line underwriters and peer review for all risks exceeding individual underwriters’ authority limits.
Exception reports are also run regularly to monitor compliance.
All underwriters also have a right to refuse renewal or change the terms and conditions of insurance contracts upon
renewal. Rate monitoring details, including limits, deductibles, exposures, terms and conditions and risk characteristics are also captured and the results are combined to monitor the rating environment for each class of business.
b) Reinsurance risk [extract]
Reinsurance risk to the group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased.
Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 153.
The group’s reinsurance programmes complement the underwriting team business plans and seek to protect group
capital from an adverse volume or volatility of claims on both a per risk and per event basis. In some cases the group
deems it more economic to hold capital than purchase reinsurance. These decisions are regularly reviewed as an
integral part of the business planning and performance monitoring process.
The reinsurance security committee (RSC) examines and approves all reinsurers to ensure that they possess suitable
security. The group’s ceded reinsurance team ensures that these guidelines are followed, undertakes the administration
of reinsurance contracts and monitors and instigates our responses to any erosion of the reinsurance programmes.
11.2.2
Insurance risk – general matters
As noted at 11.2 above, IFRS 4 requires disclosure about insurance risk (both before and
after risk mitigation by reinsurance). [IFRS 4.39(c)].
These disclosures are intended to be consistent with the spirit of the disclosures
required by financial instruments. The usefulness of particular disclosures about
insurance risk depends on individual circumstances. Therefore, the requirements have
been written in general terms to allow practice in this area to evolve. [IFRS 4.BC217].
Disclosures made to satisfy this requirement might build on the following foundations:
(a) information about insurance risk might be consistent with (though less detailed than)
the information provided internally to the entity’s key management personnel as
defined in IAS 24 – Related Party Disclosures – so that users can assess the entity’s
financial position, performance and cash flows ‘through the eyes of management’;
(b) information about risk exposures might report exposures both gross and net of
reinsurance (or other risk mitigating elements, such as catastrophe bonds issued or
policyholder participation features). This is especially relevant if a significant
change in the nature or extent of an entity’s reinsurance programme is expected
or if an analysis before reinsurance is relevant for an analysis of the credit risk
arising from reinsurance held;
4398 Chapter 51
(c) in reporting quantitative information about insurance risk, disclosure of the strengths
and limitations of those methods, the assumptions made, and the effect of
reinsurance, policyholder participation and other mitigating elements might be useful;
(d) risk might be classified according to more than one dimension. For example, life
insurers might classify contracts by both the level of mortality risk and the level
of investment risk. It may sometimes be useful to display this information in a
matrix format;
(e) if risk exposures at the reporting date are unrepresentative of exposures during the
period, it might be useful to disclose that fact; and
(f) the
following
disclosures required by IFRS 4 might also be relevant:
(i) the sensitivity of profit or loss and equity to changes in variables that have a
material effect on them (see 11.2.3 below);
(ii) concentrations of insurance risk (see 11.2.4 below); and
(iii) the development of prior year insurance liabilities (see 11.2.5 below). [IFRS
4.IG51].
Disclosures about insurance risk might also include:
(a) information about the nature of the risk covered, with a brief summary description of
the class (such as annuities, pensions, other life insurance, motor, property and liability);
(b) information about the general nature of participation features whereby
policyholders share in the performance (and related risks) of individual contracts or
pools of contracts or entities. This might include the general nature of any formula
for the participation and the extent of any discretion held by the insurer; and
(c) information about the terms of any obligation or contingent obligation for the insurer
to contribute to government or other guarantee funds established by law which are
within the scope of IAS 37 as illustrated by Example 51.16 at 3.8.2 above. [IFRS 4.IG51A].
An extract of the narrative disclosures provided by Legal & General about the types of
life insurance contracts that it issues is shown below.
Extract 51.27: Legal & General Group plc (2017)
Group consolidated financial statements [extract]
Balance sheet management [extract]
7 Principal products [extract]
Legal & General Insurance (LGI) [extract]
UK protection business (retail and group)
The group offers protection products which provide mortality or morbidity benefits. They may include health,
disability, critical illness and accident benefits; these additional benefits are commonly provided as supplements to
main life policies but can also be sold separately. The benefit amounts would usually be specified in the policy terms.
Some sickness benefits cover the policyholder’s mortgage repayments and are linked to the prevailing mortgage
interest rates. In addition to these benefits, some contracts may guarantee premium rates, provide guaranteed
insurability benefits and offer policyholders conversion options.
Insurance contracts (IFRS 4) 4399
US protection business
Protection consists of individual term assurance, which provides death benefits over the medium to long term. The
contracts have level premiums for an initial period with premiums set annually thereafter. During the initial period,
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