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
5.1.6. Risk management in the area of reinsurance protection
General description of the purpose and goals of reinsurance protection
Reinsurance enables the Group to underwrite also insurance contracts that exceed Group's own capacities, i.e. to take over
risks above the Groups own retention and provide for solvency and liquidity of operations. Thus it represents a key element of
risk management in insurance industry / business.
The Group pursues the objective to achieve the optimum protection both against individual large claims and against the
aggregate exposure of the Group's insurance portfolio to natural and other insurance hazards.
The Group decides on the form and structure of the reinsurance based on the level of retention of the insurer and the profiles
of insurance portfolio.
Contractual reinsurance ensures automatic cover of the vast majority of underwritten risks, even in the event of potential risk
assessment errors.
For exceptional risks which exceed the contractual reinsurance protection by scale or content of the cover provisions, the
Group ensures additional special facultative reinsurance protection. The program of planed reinsurance is composed of
traditional proportional and non-proportional types of reinsurance protection, and is by structure and by extent of covers
practically the same as in business year 2008. Through operational risks management the Group carefully monitors the
frequency and the scale of the risks reinsured either under ordinary contractual provisions or under special facultative
reinsurance provisions.
Basic assumptions used in sensitivity tests
We assume two types of reinsurance protection risks. The first risk is whether the structure and scale of protection have been
adequately chosen, which can be checked by simulation of whether decreasing reinsurance protection would significantly
decrease net profit or loss, which would consequently jeopardise the Group’s capital adequacy. The second risk is whether
the profit or loss would worsen significantly if an above-average number of large-scale and mass losses (which would also
involve above-average amounts) occurred in a given period.
Two income sensitivity tests have been designed to assess reinsurance protection risk: first, the test of sensitivity to a
decrease in reinsurance protection, and second, the test of sensitivity to above-average incidence of loss (for large-scale and
mass losses).
Analysis of the group portfolio from the aspect of reinsurance risk
In the largest group of other property insurance contracts, we analysed the sensitivity of individual portfolios of insurance
categories/groups of insurance categories to large-scale and mass losses, with the aim of focusing the reinsurance risk
management analysis on the most exposed insurance categories. This analysis showed that the reinsurance risk is most
significantly affected, both in terms of the amount and number of potentially large-scale and mass losses, by the portfolio of
auto liability insurance and the portfolio of fire and other damage insurance. These portfolios also significantly affect the profit
or loss; therefore the sensitivity analysis was made on the basis of these reinsurance contracts.
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