annual report 2007 - the Admiral Group plc

ADMIRAL GROUP plc 7519. Reinsurance assets and insurance contract liabilitiesA) Objectives. policies and procedures for the management of insurance risk:The Group is involved in issuing motor insurance contracts that transfer risk from policyholdersto the Group and its underwriting partners.Insurance risk primarily involves uncertainty over the occurrence, amount and timing of claimsarising on insurance contracts issued. The key risk is that the frequency and / or value of theclaims arising exceeds expectation and the value of insurance liabilities established.The Board of Directors is responsible for the management of insurance risk, although asmentioned in note 18, it has delegated the task of supervising risk management to the RMC.The Board implements certain policies in order to mitigate and control the level of insurance riskaccepted by the Group. These include underwriting partnership arrangements, pricing policiesand claims management and administration policies.A number of the key elements of these policies and procedures are detailed below:Financial statements 43 - 94i) Co-insurance and reinsurance:As noted in the underwriting structure section of the financial review above, the Group passesout a significant amount of the motor insurance business written to external underwriters. In2007, 60% of the risk was shared under a co-insurance contract, under which the primary risk isborne by the co-insurer.A further 17.5% was ceded under quota share reinsurance contracts.As well as these proportional arrangements, an excess of loss reinsurance programme is alsopurchased to protect the Group against very large individual claims and catastrophe losses.ii) Data driven pricing:The Group’s underwriting philosophy is focused on a sophisticated data-driven approach topricing and underwriting and on exploiting the competitive advantages direct insurers enjoy overtraditional insurers through:· Collating and analysing more comprehensive data from customers;· Tight control over the pricing guidelines in order to target profitable business sectors; and· Fast and flexible responsiveness to data analysis and market trends.The Group is committed to establishing premium rates that appropriately price the underwritingrisk and exposure. Rates are set utilising a larger than average number of underwriting criteria.The Directors believe that there is a strong link between the increase in depth of data that theGroup has been able to collate over time and the lower than average historic reported loss ratiosenjoyed by the Group.