Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Six – The awkward squad
Exhibit 6.14: Insurance claims development table
Underwriting year 2001 2002 2003 2004 2005 Total
Estimate of cumulative € € € € € €
claims:
At end of underwriting 680 790 823 920 968
year
One year later 673 785 840 903
Two years later 692 776 845
Three years later 697 771
Four years later 702
Estimate of cumulative 702 771 845 903 968 4,189
claims
Cumulative payments -702 -689 -570 -350 -217 -2,528
Recognised on balance 0 82 275 553 751 1,661
sheet
The disclosure works as follows:
• Thetop half shows how the insurer’s estimates of claims develop over time.
For example at the end of 2002, the insurer estimated that it would pay €790
for insured events relating to contracts written in 2002.
• By the end of 2003 the insurer has revised this estimate from €790 down to
€785 (includes paid and still to be paid).
• The lower half of the table reconciles these numbers to the amounts in the
financials. Obviously if payments have been made then this reduces the
liability. For example it is no surprise that after 4 years large amounts of the
claims will have been settled.
For users this claims development table can provide some useful insights. First it
is a clear statement to users that you cannot estimate claims with 100 per cent
accuracy. It is a reminder of the uncertainty. Second, it can also be used to analyse
whether particular insurers tend to over or under estimate the level of liabilities.
This can feed into detailed comparable company analysis work.
Note that under IFRS 4, and unlike US GAAP, the table must be prepared for all
types of business – life and general. However, there is a carve out for policies
where the uncertainties are resolved within a year. This is likely to absolve many
insurance policies from the requirement. Second, it should go back to the earliest
existing material unresolved claim. However, it need not go back further than 10
years.
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