annual report 2007 - the Admiral Group plc

ADMIRAL GROUP plc 55The estimates and underlying assumptionsare reviewed on an ongoing basis. Revisionsto accounting estimates are recognised in theyear in which the estimate is reviewed if thisrevision affects only that year, or in the yearof the revision and future years if the revisionaffects both current and future years.2. Critical accountingjudgements and estimatesJudgements:In applying the Group’s accounting policies asdescribed in note 3, management has primarilyapplied judgement in the classification of theGroups contracts with reinsurers as quotashare reinsurance contracts. A contract isrequired to transfer significant insurance riskin order to be classified as such. Managementreviews all terms and conditions of thecontract, and if necessary obtains the opinionof an independent expert at the negotiationstage in order to be able to make thesejudgements.Estimation techniques used in calculationof claims provisions:Estimation techniques are used in thecalculation of the provisions for claimsoutstanding, which represents a projection ofthe ultimate cost of settling claims that haveoccurred prior to the balance sheet date andremain unsettled at the balance sheet date.The key area where these techniques are usedrelates to the ultimate cost of reported claims.A secondary area relates to the emergenceof claims that occurred prior to the balancesheet date, but had not been reported at thatdate.The estimates of the ultimate cost of reportedclaims are based on the setting of claimprovisions on a case-by-case basis, for all butthe simplest of claims.The sum of these provisions are comparedwith projected ultimate costs using a varietyof different projection techniques (includingincurred and paid chain ladder and an averagecost of claim approach) to allow an actuarialassessment of their likely accuracy. Theyinclude allowance for unreported claims.The most significant sensitivity in the use ofthe projection techniques arises from anyfuture step change in claims costs, whichwould cause future claim cost inflation todeviate from historic trends. This is mostlikely to arise from a change in the regulatoryor judicial regime that leads to an increasein awards or legal costs for bodily injuryclaims that is significantly above or below thehistorical trend.The claims provisions are subject toindependent review by the Group’s actuarialadvisors.3. Significant accountingpoliciesa) Revenue recognitionPremiums, ancillary income and profitcommission:Premiums relating to insurance contracts arerecognised as revenue proportionally over theperiod of cover.Income earned on the sale of ancillaryproducts and income from policies paidby instalments is credited to the incomestatement over the period matching theGroup’s obligations to provide services.Where the Group has no remainingcontractual obligations, the income isrecognised immediately. An allowance ismade for expected cancellations where thecustomer may be entitled to a refund ofancillary amounts charged.Under some of the co-insurance andreinsurance contracts under which motorpremiums are shared or ceded, profitcommission may be earned on a particularyear of account, which is usually subject toperformance criteria such as loss ratios andexpense ratios. The commission is dependenton the ultimate outcome of any year, withincome being recognised based on loss andexpense ratios used in the preparation of thefinancial statements.Income is allocated to profit commissionin the income statement when the right toconsideration is achieved, and is capable ofreliable measurement.Revenue from Gladiator Commercial andConfused.com:Commission from these activities is creditedto income on the sale of the underlyinginsurance policy.Financial statements 43 - 94