36 2021 PROTECTOR FORSIKRING ANNUAL REPORT
NOTE 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of the financial statements IFRS and the application
of the adopted accounting policies require that management make
assessments, prepare estimates and apply assumptions that aect
the carrying amounts of assets and liabilities, income and expenses.
The estimates and the associated assumptions are based on
experience and other factors that are assessed as being justifiable
based on the underlying conditions. Actual figures may deviate from
these estimates. Changes in accounting estimates are recognised in
the period the estimates are revised if the change only aects this
period, or both in the period the estimates change and in future
periods if the changes aect both the existing and future periods.
The accounting policies that are used by Protector in which the
assessments, estimates and prerequisites may deviate significantly
from the actual results are discussed below.
Financial assets at fair value
There will be uncertainty associated with pricing of financial
instruments particularly related to instruments that are not priced
in an active market. See note 9.
Technical provisions
Use of estimates in calculation of technical provisions is primarily
applicable for claims provisions. Insurance products are generally
divided into two main categories: lines with short or long settlement
periods. The settlement period is defined as the duration between a
loss and/or notification date reported and settlement date. Produ-
cts with short settlement periods are e.g. property insurance, while
products with long settlement periods primarily involve personal and
liability lines of business. The uncertainty in the estimates of claims
provisions is highest for products with long settlement periods.
For products with long settlement periods the risk is linked to the
fact that the total claim costs must be estimated based on experience
and empirical data. For certain personal lines products, it may take 10
to 15 years before all the claims that occurred in a particular calendar
year are reported to the company. In addition, there will be many
instances where the reported information is inadequate to calculate
correct claims provisions. This may be due to ambiguity concerning
the causal relationship and uncertainty about the injured party’s
future work capacity etc. Many personal injury claims are tried in
the court system, and the level of compensation for such claims has
increased over time. This will also be a consequence for claims that
occurred in previous years which have not yet been settled. The risk
linked to provisions for personal lines of business is thus eected by
external conditions. To reduce this risk, the company calculates its
claims related liabilities based on various methods and ensures that
the registered provisions linked to ongoing claims are updated at all
times based on the current calculation rules.
Claims provisions consist of RBNS (Reported But Not Settled), IBNR
(Incurred But Not Reported) and ULAE (Unallocated Loss Adjustment
Expenses). RBNS are made on single claims level, and are based on
standard reserves or claims handler’s assessments, based on available
information related to specific claims.
IBNR are estimated based on recognized actuarial models. Models
applied are mainly variations based on Bornhuetter-Ferguson and
Chain Ladder methodologies. Bornhuetter-Ferguson is mainly used
for products with long settlement periods, while Chain Ladder is also
used for products with short settlement periods. The volume and
period of exposure are assumed to be sucient for most lines of
business in Norway, to estimate a run-o pattern based on company
data. Market data combined with own experience base is used to
estimate a complete settlement pattern for insurance industries
with assumed longer settlement time than own experience basis.
This mainly applies to occupational injury insurance in Denmark
and Finland, as well as liability industries in the UK. The models are
used as guiding calculating tools and are always subject to a fairness
assessment. Gross IBNR are estimated per combination of accident
year / segment / line of business / country. Net IBNR are calculated
proportionally to the net premium where there are ceded premium.
IBNR are in general set on aggregated portfolio level. A few claims
have explicit IBNR, set on a single claim basis.
ULAE are the company’s estimate of the cost related to future claims
handling, and is not yet allocated to the reserve for each case. ULAE
are estimated based on methodology and parameters developed and
distributed by the Norwegian FSA.
No discounted values are used for the accounting technical
provisions.
Contingent liabilities
Protector operates an extensive business in Norway and abroad,
and may become a party to litigations. Accounting for contingent
liabilities is assessed in each case and based on legal assessments.
See note 26.
NOTE 3 INSURANCE RISK
The risk in any insurance contract is the probability that the insured
event occurs and the uncertainty of the amount of the resulting
claim. By the very nature of an insurance contract, this risk is random
and must therefore be estimated.
Factors that have a negative impact on insurance risk include lack of
risk diversification in terms of type and amount of risk, geographical
location and type of industry covered.
Protector operates primarily in the Scandinavian market and in
Finland and UK. Protector covers all classes of business within
general insurance. Protector seeks to diversify the insurance
portfolio to reduce the variability of the expected results.
Premium risk
Premium risk is the risk related to whether charged premiums are
sucient to cover payable liabilities in respect of insurance contracts
Protector enters into.
This risk is assessed and managed on the basis of statistical analysis of
historical experience for the various lines of business. The insurance
premium must be sucient to cover expected claims, but also
comprise a risk premium equal to the return on the part of the
company’s capital that is used to protect against random fluctuations.
All other factors equal, this means that lines of business which, from
experience, are subject to major fluctuations, must include a larger
risk premium.
Reinsurance is used to reduce the underwriting risk in areas where
this is particularly required.
The company has clearly specified guidelines for which types of
insurance risks, as well as which limits of liability that can be
written. Underwriting limits are in place to ensure that appropriate
risk selection criteria are applied and to ensure that accepted risks
are within the terms and conditions of the company’s reinsurance
contracts. Protector’s reinsurance contracts which are a combination
of quota share and XL agreements, further reduces the risk exposure.
Insurance risks are considered moderate with the reinsurance cover
the company has in place.