The Group KD Group and KD Group dd

The Group KD Group Annual Report 2009
Notes to Consolidated Financial Statements as at and for the year ended 31 December 2009
Types of risks
5.1 Insurance risk
Risk related to the insurance policy represents the possibility that the event insured against actually occurs and uncertainty in
relation to the amount of the sum insured or indemnity. It is the nature of insurance contracts that insurance risks are
incidental and unpredictable; however, the main risk for the insurer is the possibility that claims and benefits exceed the
amount of insurance liabilities (technical provisions) created for a portfolio of insurance contracts using statistical methods.
This may happen because of a change in the frequency of claims or their amount, which can be higher than expected.
Insured events are incidental, which means that their number and amount vary in individual years and in relation to
statistically established averages. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the
relative variability of the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected by a
change in any subset of the portfolio.
Insurance companies in the Group have developed their own policy of concluding insurance contracts with the aim of
spreading the assumed risks and achieve, within each individual category, a sufficient amount of risk population to reduce the
variability of expected results. The principal means for reducing insurance risks is reinsurance, i.e. the transfer of risks that
exceed a predetermined amount to a reinsurance company.
When developing a new insurance product, it is very important that the parameters defining the insurance premium are
assessed adequately. The risk accepted by the Group at the inception of an insurance contract is reflected in the price, i.e.
the insurance premium. If the parameters defining the insurance premium are not assessed adequately when developing a
new insurance product, this is a risk for the Group to which it is exposed during the entire life cycle of the insurance product.
In the context of insurance risk, the Group is exposed to underwriting process risk, product design risk, pricing risk, economic
environment risk, policyholder behaviour risk, reserve risk and claims risk. Insurance risks are also managed with reinsurance
protection.
5.1.1 Description of risks
Insurance activities are based on managing insurance risks. Insurance risks apply to risks accepted by the insurer from the
policyholder. Insurance risks are random and unpredictable. At the signing of an insurance contract, the insurer accepts the
risk to repay the insured the agreed contractual amount if an insured event occurs or if the contract expires, whereas when
the insured event will occur is uncertain.
Insurance cases are random; their number and amounts vary from year to year and deviate from statistical averages. The
Group is therefore engaged in diversifying and increasing its portfolio. This allows it to disperse the risk and lower the
variability of expected events. An important instrument to lower insurance risks is reinsurance, i.e. the transfer of risks which
exceed a predetermined amount to a reinsurer. The Group further manages insurance risks through the effective performance
of internal controls, internal audits and forming appropriate insurance technical provisions to cover potential future liabilities
stemming from existing insurance contracts.
In the management’s opinion, the important risks faced by the Group in its operations are the following:
- Underwriting process risk, the danger of misevaluation of accepted risk. This risk involves mistaken decisions to
underwrite a risk regardless of the risk exposure of the insured, insurance on the basis of inaccurate and incomplete
information on the insured, incorrect information about the amount of maximum potential claims, or potential inappropriate
acquisition of reinsurance coverage by the reinsurer.
The Group manages the aforementioned risk through providing guidelines for accepting insurance risks, using software for
accepting insurance risks, and strict criteria and procedures for accepting insurance risks, especially for large insured sums
and coverage. Also, the Group has concluded an obligatory reinsurance contract with its reinsurer, by which the reinsured
risks over a certain contractually agreed insured sum are automatically reinsured. The Group also monitors claims outcome
and analyses any worsening thereof.
- The risk of inadequate assessment of liabilities stemming from insurance contracts (reserve risk) is the risk that these
reserves will not be adequate to cover the liabilities stemming from accepted risks, or the risk that future claims payments will
exceed the evaluated amount of liabilities.
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