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
The Group regularly checks the adequacy of liability calculations and the adequacy of assumptions used in the calculation of
higher liabilities stemming from insurance contracts. The Group also carries out liability adequacy tests. If the liability
adequacy test indicates that the liabilities are understated, they are increased.
In the case of property insurance, an accurate estimate of the obligations of the reported and unreported claims is the most
important factor, i.e. the assessment of liabilities assumed for any claims that are already registered, and obligations under
insurance contracts for incurred but not reported claims (IBNR). Inaccurately estimated liabilities for reported claims also
affect the calculation of IBNR. Contingencies may occur in the Group for which the obligations for claims were not designed
(eg, in the past, asbestosis), or liability insurances, where there is a gap of a number of years between the conclusion of the
insurance contract and the time when the claim is reported.
For insurance contracts with DPF component and unit-linked insurance contracts, assumptions on future mortality, interest
rates, contract terminations and administrative costs are applied. These assumptions are used to determine liabilities
stemming from the insurance contract. The assumptions also include a risk adjustment.
For estimations on the mortality rate, mortality tables are used, as in the past the portfolio of insurance contracts has been too
small for it to be able to rely on its own experience. Thus, for insurances for the event of death and insurances for the event of
death and maturity, the Group uses Slovenian mortality tables made in 1990–1992, and for annuity insurance it uses Austrian
annuity tables from the year 1996. In comparison with 2008, the Group has not changed its assumptions regarding population
mortality. In the context of managing insurance risk, actuarial services are constantly checking the applied assumptions
against the actual damage result, by individual insurance product.
It is the management’s assessment that Slovenian mortality tables adequately reflect expectations with regard to the maturity
and mortality rate of the Slovenian population.
In its long-term insurance products, the Group uses interest rates spanning from 2.75% (new insurance products) to 4% (older
products). The adequacy of returns on investments of insured liabilities in the future is checked on a regular basis.
On each reporting date the assumptions are reset to reflect current assumptions and are used to check whether the liabilities
have been adequately evaluated. If the liabilities are inadequate, the assumptions are changed to reflect the current state.
Current assumptions do not contain a risk adjustment.
The assumption on mortality is determined using the statistical mortality rate and analyses of actual mortality of the insurance
portfolio in the past and current year. Also, in cases of disability, statistical tables and the insurer’s own experience are used.
The Group also regularly analyses the duration of insurance contracts and monitors the movements of such durations over
the period by main product and, as necessary, by sales channel if more significant deviations occur. These analyses are used
when estimating the duration of insurance contracts with a view to providing the best possible assessment of the insured’s
behaviour.
The return on investment affects the amount of future payouts from insurance contracts. When determining returns, the Group
considers government bonds as risk-free securities, and for other securities risk adjustments are applied. Considering this and
considering the structure of investments for covering liabilities, the expected returns of the investment portfolio are calculated.
Future costs are determined on the basis of current costs. Additionally, the assumption of future inflation is also used, which is
based on the EU’s long-term projections for the euro currency.
- Pricing risk applies to the risk that the amount of the insurance premium is not adequate for covering the insurance
liabilities stemming from claims and operating costs. The reasons can vary, e.g. unsuitable statistical data, inadequate
assessment of claims events, low premium due to competition, unsuitable premium for new products, unsuitable mortality,
annuity, morbidity tables, inadequate amount of expenses calculated into the price of the product. Furthermore, we can speak
about the adequacy of the probability tables used, which further expose the Group to risks of natural death, longevity, critical
illness and accident.
Already in the new product planning stage, the Group diligently checks and acquires the necessary statistics to confirm the
suitability of the assumptions used. In the case of high-risk products such as additional coverage for critical illness, the
Group’s general terms and conditions allow the possibility of subsequent changes in the amount of the insurance premium if
new statistics or claims events indicate that the premium is too low. Similarly, the Group diligently monitors the amount of
actual costs and, after analysing these costs, calculates the amount of costs to include in the price of individual products,
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