Management of insurance risk
for the period ended 30 June 2011

The group's consolidated insurance businesses are conducted in two separate subsidiaries, namely OUTsurance Holdings Limited ("OUTsurance") and RMBSI Investments (Proprietary) Limited ("RMB Structured Insurance" or "RMBSI").

The following table shows the gross insurance contract liabilities:
R million RMBSI OUTsurance Total
Gross insurance contracts      
Short-term insurance contracts      
– claims reported 121 576 697
– claims incurred but not reported 28 264 292
– unearned premiums 766 831 1 597
– unexpired risk provision 570 570
– insurance contract cash bonuses 854 854
Long-term insurance contracts      
– claims incurred but not reported 6 6
– policyholder liabilities 2 2
Gross insurance contract liabilities 1 491 2 527 4 018
 
RMB Structured Insurance holds both short-term and life insurance licences. It creates individual insurance and financial risk solutions for large corporates by using sophisticated risk techniques and innovative financial structures. RMBSI's business strategy is to mitigate insurance risk by passing a significant portion of risk back to the policyholders or external parties or to write business where the overall portfolio insurance risk is controlled within acceptable limits with minimal residual risk accruing to shareholders. RMBSI generally writes few policies for a number of large corporate clients. In the case of customer protection and credit insurance, policies are written over the entire customer base of the corporate client. This business is written in all retail outlets of the corporate client which has branches throughout South Africa and its adjoining territories. The geographic diversity of this business reduces concentration risk to acceptable levels.

OUTsurance is a direct personal lines and small business shortterm insurer and provides long-term insurance to individuals in the form of credit life policies and full life policies. OUTsurance has developed an enterprise risk management framework to provide reasonable assurance that the group's risks are being prudently and soundly managed. The framework is designed according to acceptable principles on corporate governance and risk management standards. The risk management framework outlines the key risks facing the business and how these risks are monitored.

As the insurance offerings of these businesses differ, the management of insurance risk is presented for each of these businesses.
 
OUTsurance
 
Short-term insurance
Terms and conditions of insurance contracts
 
The group conducts short-term insurance business on different classes of short-term insurance risk. Furthermore, the group underwrites risk products marketed and distributed by FirstRand and MMI.  
 
Types of insurance contracts written Personal lines Commercial Cell captive 
Personal accident X X  
Liability X X  
Miscellaneous X X
Motor X X
Property X X  
Transportation X X  
Engineering   X  
 
The personal lines segment of the business sells insurance to the general public allowing them to cover their personal possessions and property. The commercial segment of the business targets medium and small businesses in South Africa. Insurance products are sold with either a monthly or an annual premium payable by the covered party or entity. Cell captive business refers to arrangements whereby the group underwrites various risk products marketed and distributed by FirstRand. The management of cell captive risks underwritten by the group is performed by the cell administrators itself. The following gives a brief explanation of each risk:
 
Personal accident
Provide compensation arising out of the death or disability directly caused by an accident occurring anywhere in the world, provided that death or disability occurs within 12 months of this injury.
 
Liability
Provide cover for risks relating to the incurring of a liability other than relating to a risk covered more specifically under another insurance contract.
 
Miscellaneous
Provide cover relating to all other risks that are not covered more specifically under another insurance contract.
 
Motor
Provide indemnity cover relating to the possession, use or ownership of a motor vehicle. The cover includes comprehensive cover, third party, fire and theft and liability to other parties.
 
Property
Provide indemnity relating to movable and immovable property caused by perils such as fire, explosion, earthquakes, acts of nature, burst geysers and pipes, malicious damage, impact, alterations and additions.
 
Transportation
Provide cover to risks relating to stock in transit.
 
Engineering
Provide cover for liability to other parties, loss or damage related to the ownership and usage of machinery and equipment as well as the construction of buildings and other structures.
 
Insurance risks
The primary activity of the group relates to the assumption of possible loss arising from risks to which the group is exposed through the sale of short-term insurance products. Insurance risks to which the group is exposed relate to property, personal accident, liability, motor, transportation and other miscellaneous perils that may result from a contract of insurance. The group is exposed to uncertainty regarding the timing, magnitude and frequency of such potential losses.   The theory of probability forms the core base of the risk management model. Through the continuous sale of insurance products and subsequent growth in the pool of insured risks, the group can diversify its portfolio of risks and therefore minimise the impact of variability of insurance losses affecting that portfolio. Insurance perils are unpredictable in nature, timing and extent which expose the group to a risk that the effect of future insured losses could exceed the expected value of such losses.

The group manages its insurance risk through its reinsurance programme which is structured to protect the group against material losses to either a single insured risk, or a group of insured risks in the case of a catastrophe where there would tend to be a concentration of insured risks.

The underwriting of insurance risk and the passing on of excessive insurance risk to reinsurers is further described below.
 
Underwriting strategy
The group aims to diversify the pool of insured perils through writing a balanced portfolio of insurance risks over a large geographical area. Products are priced using statistical regression techniques which identify risk factors through correlations identified in past loss experiences. Risk factors would typically include factors such as age of the insured person, past loss experiences, past insurance history, type and value of asset covered, security measures taken to protect the asset, major use of the covered item, and so forth. Risks are priced and accepted on an individual basis and as such there is a minimal cross subsidy between risks. Insurance premiums charged for a certain pool of risks are adjusted frequently according to the normalised loss ratios experienced on that pool of risks.

Insurance risk is monitored within the group on a daily basis to ensure that risks accepted by the group for its own account are within the limits set by the OUTsurance board. Exception reporting is used to identify areas of concentration of risk so that management are able to consider the levels adopted in the reinsurance programme covering that pool of risk.

Risks are rated individually by programmes loaded onto the computer system based on information captured by staff for each risk. Conditions and exclusions are also automatically set at an individual risk level. Individual risks are only automatically accepted up to predetermined thresholds which vary by risk type. Risks with larger exposure than the thresholds are automatically referred and underwritten individually by the actuarial department. These limits are set at a substantially lower level than the reinsurance retention limits. No risks which exceed the upper limits of the reinsurance can be accepted without the necessary facultative cover being arranged. No-claims bonuses, which rewards clients for not claiming, also forms part of the group's underwriting strategy.   Multi-claimants are also monitored and managed by increasing conditions of cover or ultimately cancelling cover.
 
Reinsurance strategy
The group reinsures a portion of the risk it assumes through its reinsurance programme in order to control the exposure of the group to losses arising from insurance contracts and in order to protect the profitability of the group and its capital. A suite of treaties are purchased in order to limit losses suffered from individual and collective insurance risks. Facultative reinsurance is purchased for certain individual risks that have been identified as being outside the limits set for these risks. The retention limits are modelled to optimise the balance between acceptable volatility and reinsurance cost. Acceptable volatility is as defined by the limits set by the board. The group only enters into reinsurance agreements with reinsurers which have adequate credit ratings.
 
Concentrations of risk and mitigating policies
Risk concentrations are monitored by means of exception reporting. When large risks are underwritten individually, the impacts which they could have on risk concentrations are considered before they are accepted. Marketing efforts are also coordinated to attract business from a wide geographical spread. Risks which could lead to an accumulation of claims as a result of a single event are declined due to diversification and overall pool of risk covered. Focus is placed to attract large numbers of relatively small independent risks which would lead to very stable and predictable claims experience.

The group is exposed to a concentration of insurance risk in the Gauteng province of South Africa where 50.4% of the group's total sum insured is domiciled. In order to manage this concentration of insurance risk, the group has entered into a catastrophe excess of loss reinsurance treaty that would limit the loss of the group to pre-determined levels following the occurrence of a localised catastrophe in this area.
 

Exposure to catastrophes and policies mitigating this risk
Catastrophe modelling is performed to determine the impact of different types of catastrophe events (including natural disasters) in different geographical areas, at different levels of severity and at different times of the day. Catastrophe limits are set so as to render satisfactory results to these simulations. The catastrophe cover is also placed with reinsurers with a reputable credit rating and cognisance is taken of the geographical spread of the other risks underwritten by the reinsurers in order to reduce correlation of our exposure with the balance of their exposure. These reinsurance models are run at least annually to take account of changes in the portfolio and to take the latest potential loss information into account.
 
Cell captives
Cell captive arrangements have been entered into with businesses within the FirstRand and MMI groups. Per these   arrangements, certain risk products marketed and distributed by these companies are underwritten by the company's subsidiary, OUTsurance Insurance Company Limited. Profits arising out of the cell captives are distributed by OUTsurance Insurance Company Limited to the FirstRand and MMI group companies by way of preference share dividends.

The collection of premium and the payment of claims is a function that is performed by the cell or its administrator. The results of the cell are fully consolidated into the results of OUTsurance Insurance Company Limited, and hence are included in these group results. OUTsurance Insurance Company Limited is responsible for maintaining the required solvency for the cell captives.

The profitability of cell captive business is reviewed on a monthly basis to ensure that the group is not exposed to uneconomical risks over which it has no day-to-day management control.
 
Profit sharing arrangements
A profit sharing arrangement has been entered into between OUTsurance Insurance Company Limited and FirstRand Bank Limited. In terms of this profit sharing arrangement, ninety percent of the operating profit generated on the homeowners insurance business referred by FirstRand Bank Limited businesses is paid to FirstRand Bank Limited by way of a biannual preference dividend. Where operating losses arise, OUTsurance remains liable for such losses in full, but these losses may be offset against future profit distributions.
 
Long-term insurance

Terms and conditions of insurance contracts

The group conducts long-term insurance business on various classes of long-term insurance risk. Products are only sold to the South African retail market. The types of insurance contracts written or risks covered are as follows:
   
Death cover
Disability cover
Critical illness cover
Retrenchment cover
Temporary disability cover
 
The following gives a brief explanation of each risk:
 
Death cover
Provide compensation arising out of the death of the policyholder. With respect to the credit life product, in the event of a valid death claim, OUTsurance Life Insurance Company Limited ("OUTsurance Life") settles the policyholder's outstanding debt by way of a lump sum payment to the finance provider. In the case of the underwritten life product, OUTsurance Life pays the sum assured, in the event of a valid death claim.
 
Disability cover
Provide compensation arising out of the permanent disability of the policyholder. With respect to the credit life product,   in the event of a valid disability claim, OUTsurance Life settles the policyholder's outstanding debt by way of a lump sum payment to the finance provider. In the case of the underwritten life product, OUTsurance Life pays the sum assured, in the event of a valid disability claim.
 
Critical illness cover
Provide compensation arising from the policyholder contracting a specified critical illness. With respect to the credit life product, in the event of a valid critical illness claim, OUTsurance Life settles the policyholder's outstanding debt by way of a lump sum payment to the finance provider. In the case of the underwritten life product, OUTsurance Life pays the sum assured, in the event of a valid critical illness claim.
 
Retrenchment cover
Provide compensation arising from the policyholder being retrenched during the policy term. In the event of a valid retrenchment claim, OUTsurance Life undertakes to pay the policyholder's monthly instalment to the finance provider as well as the credit risk premium for a specified period of time.
 
Temporary disability cover
Provide compensation arising out of the temporary disability of the policyholder. In the event of a valid temporary disability claim, OUTsurance Life undertakes to pay the policyholder's monthly instalment to the finance provider as well as the credit risk premium for a specified period of time.
 
Insurance risks
The primary activity of OUTsurance Life relates to the assumption of loss arising from risks to which it is exposed through the sale of long-term insurance products. It is exposed to uncertainty regarding the timing, magnitude and frequency of such potential losses.

The theory of probability forms the core base of the risk management model. Through the continuous sale of insurance products and subsequent growth in the pool of insured risks, OUTsurance Life can diversify its portfolio of risks and therefore minimise the impact of variability of insurance losses affecting that portfolio.

OUTsurance Life manages its insurance risk through its quota share and excess of loss reinsurance programme which is structured to protect it against material losses on single insured risks.

The underwriting of insurance risk and the passing on of excessive insurance risk to reinsurers is further described below.
 
Mortality and morbidity risk
Mortality risk is the risk of loss arising due to actual death rates on life insurance business being higher than expected.   Morbidity risk is the risk of loss arising due to policyholder health related claims being higher than expected.

The following processes and procedures are in place to manage mortality and morbidity risk:
   
Premium rates are differentiated by factors which historical experience has shown are significant determinants of mortality and morbidity claims experience such as medical history and condition, age, gender, smoker status and HIV status.
The expertise of reinsurers is used for pricing where adequate claims history is not available.
Reinsurance arrangements are put in place to reduce the mortality and morbidity exposure per individual policy and provide cover in catastrophic events.
 
Underwriting experience risk
There is a risk that actual mortality and morbidity experience is higher than expected. This could arise as a result of the number of claims or the value of the claims being higher than expected. Selection risk is the risk that worse than expected risks are attracted and inadequate premiums are charged. There is also a risk that the number of claims can increase due to the emergence of a new disease or pandemic.

Underwriting experience risk is managed through:
 
Product design and pricing
Rating factors are applied to different premium rates to differentiate between different levels of risk. Amongst other, premiums are differentiated by age, gender, smoking status and medical history. Premium rates are approved and reviewed by the statutory actuary.
Underwriting
Underwriting ensures that only insurable risks are accepted and that premiums accurately reflect the unique circumstances of each risk. The group has developed an advanced medical underwriting system which captures detailed information regarding the clients' medical history and condition which is used for premium adjustments and to indicate where further underwriting is required by experienced medical underwriters. To verify the accuracy of client data, all new clients are subject to various medical tests. Quality audits are performed on the underwriting process to ensure underwriting rules are strictly followed.
Reinsurance
OUTsurance Life's quota share and excess of loss reinsurance programme mitigates claims volatility and risk accumulation. Reinsurers also assist with pricing and product design decisions.
Experience monitoring
Experience investigations are conducted and corrective action is taken where adverse experience is noted.
 
Lapse risk
Policyholders have the right to cancel their policies at any given time during the policy duration. There is a risk of financial loss and reduced future profitability due to the lapse experience being higher than expected. Lapse risk is managed by:
   
appropriate product design and pricing;
providing high quality service; and
continuous experience monitoring.
   
Modelling and data risk
Modelling risk is the risk that discounted cash flow models used to calculate actuarial liabilities and valuations do not accurately project the policy cash flows into the future. Data risk is the risk that the data which is used by the above models is inaccurate relative to actual experience. Modelling risk is mitigated by way of employing specialist actuarial software which is widely used by industry participants. The services of the statutory actuary are also employed to ensure models are accurately set up. Data risk is managed by using internal systems and warehouse technology which is used by all companies within the group. Data reports are readily available and frequently used by management to track performance and verify experience variables.
 
Expense risk
Expense risk is the risk that actual expenses are higher than the budgeted expenses on which premium rates are calculated. Expenses are monitored on a monthly basis against budgeted expenses. Any deviation from budget is investigated, reported and remedial action taken where necessary.
 
Tax risk
Tax risk is the risk that the actual future tax liability is different to what is currently expected. This could be as a result of interpretation or application of tax legislation or as a result of changes in the tax legislation. External tax advice is obtained where necessary.
 

Critical accounting estimates and judgements in applying accounting policies relating to insurance contracts
 
Short-term insurance
 
Provision for outstanding claims ("OCR")
Each reported claim is assessed separately on a case by case basis, by either a computer algorithm based on past experience or a claims assessor with the relevant experience, taking into account information available from the insured. The estimates are updated as and when new information becomes available.
 
Provision for claims incurred-but-notreported ("IBNR")
The IBNR provision is calculated as a percentage of net written premium. The required IBNR percentage is calculated with reference to the run-off period of incurred claims and includes an additional margin to bring the IBNR reserves to a 75% sufficiency level. The overall IBNR percentage represents the weighted average of the required IBNR per business class, weighted by the net written premium generated by each business class.
 
Unearned premium provision ("UPP")
The underlying risk of the insurance contracts underwritten is predominately evenly spread over the contract term. The unearned premium is released over the term of the insurance contract in line with the risk profile release.
 
Liability for cash bonuses
The provision for cash bonuses is determined by taking into account the past experience and the underlying structure of the cash bonus benefit, with the implicit assumption that the future experience will be similar. Management take cognisance of trends that are inherent in the pool of risks that are eligible for this benefit in order to ensure that the reserving rate is sufficient to cover future payments made.
 
Sensitivity analysis
The IBNR provision is currently in excess of the 75th percentile of the statistically determined probability distribution function. A one percentage point change in the IBNR reserving rate would result in a R57,9 million (2010: R46,2 million) change in value of the IBNR reserve.

The provision for cash bonuses has an inherent hedge against worse than expected performance, since it will relate to better than expected claims experience
 
Claims development
The presentation of the claims development tables for the group is based on the actual date of the event that caused the claim (accident year basis).
 
Reporting development
  Financial year in which claims were reported
Net claims
Accident year
Total
R’000
2011
R’000
2010
R’000
2009
R’000
2008
R’000
Prior 2007
R’000
2011 2 752 395 2 752 395
2010 2 295 840 8 317 2 287 523
2009 1 918 125 2 356 24 308 1 891 461
2008 1 816 652 868 1 042 25 746 1 788 996
2007 and prior 4 577 897 208 748 1 505 23 114 4 552 322
Current estimate of cumulative            
claims incurred 13 360 909    2 764 144 2 313 621 1 918 712 1 812 110 4 552 322
             
Payment development            
  Financial year in which claims were paid
Net claims
Accident year
Total
R’000
2011
R’000
2010
R’000
2009
R’000
2008
R’000
Prior 2007
R’000
2011 2 288 849 2 288 849
2010 2 244 659 280 462 1 964 197
2009 1 987 813 11 850 203 707 1 772 256
2008 1 780 719 7 284 6 245 177 854 1 589 336
2007 and prior 4 603 749 4 544 7 614 18 303 175 463 4 397 825
Current payments to date 12 905 789 2 592 989 2 181 763 1 968 413 1 764 799 4 397 825
 
Long term insurance
 
Policyholder liabilities assumptions and estimates
 
Policyholder liabilities
 
The actuarial value of policyholder liabilities is determined based on the Financial Soundness Valuation (FSV) method as detailed in the Professional Guidance Note (PGN) 104 issued by the Actuarial Society of South Africa (ASSA). The FSV basis is a prospective, discounted cash flow basis calculated as the difference between the present value of future benefit payments and expenses and the present value of future premiums. In addition, compulsory margins are added to allow for risk and uncertainty based on the requirements of PGN 104.

As at 30 June 2011 the compulsory margins were as follows:
 
Assumption Margin
Investment return 0,25% increase/decrease*
Mortality 7,5% increase
Morbidity 10% increase
Disability 10% increase
Retrenchment 10% increase
Expenses 10% increase
Expense inflation 10% increase of estimated escalation rate
Lapses 25% increase/decrease* on best estimate *
   
* Depending on which change increases the liability
 
In addition to the above compulsory margins, discretionary margins may be added to protect against future possible adverse experience. Negative reserves are eliminated on a per policy basis. The results for the experience investigations are briefly described below:
 
Demographic assumptions
In light of insufficient experience emerging during the first year of operation, the best estimate assumptions with regard to dread disease and disability, mortality and retrenchment rates were set equal to those used in the pricing basis as developed by the reinsurer and approved by the statutory actuary. Provision has been made for the expected increase in the occurrence of AIDS related claims.
 
Economic assumptions
 
Investment return
The assumed future investment return was set with reference to bond yields of appropriate duration at the valuation date. This resulted in an assumed investment return, gross of tax, of 7% (2010: 7,75%) for the Credit Life product and 8% for the Underwritten Life product (launched in the current financial period).  
 
Inflation
The current assumed level of future expense inflation is 5,25% (2010: 5,25%) per annum and was derived by comparing the real yield on inflation linked bonds with the nominal yield on conventional gilts, both of similar terms.
 
Taxation
Future taxation and taxation relief are allowed for at the rates and on the bases applicable to S29A of the Income Tax Act at the reporting date. The company's current tax position is taken into account and the taxation rates, consistent with that position and the likely future changes in that position, are allowed for.
 
Incurred but not reported claims
In addition to the discounted cash flow liability an IBNR reserve is held. The IBNR was set using a claims run-off model based on recent experience and best estimates.
 

RMB Structured Insurance
 
Insurance risk
 
The group's insurance business comprises a small number of large corporate insurance contracts issued to corporates and institutions, as well as a large number of smaller insurance contracts issued on behalf of the group by its corporate clients or underwriting managers under underwriting mandates. The group's compliance committee meets on a regular basis, performing a detailed review of all new corporate insurance contracts and underwriting mandates, and annually reviews the status of these contracts and mandates. The group's risk appetite is determined with reference to past experience, its capital base, predictability and volatility of the underwriting result, economic climate, and the availability of reinsurance cover, where applicable. In addition, the results from the internal capital model are also used to set risk appetite. There   are a large number of small contracts, therefore the risk exposure on this business is diversified.

The group mainly underwrites insurance risk in South Africa, with a small portion arising from risks in the Far East, Australia, United Kingdom, United States of America, and Sub-Saharan Africa.

Due to the number and size of insurance contracts, the profile of the group's business changes regularly, and as a result thereof gross premiums and gross claims show little comparability between different reporting periods.

The group therefore manages its insurance risk in respect of each insurance contract separately through limits of indemnity, reinsurance arrangements or through other arrangements with the group's clients where they provide the risk capital required for the business, whether on an actual or contingent basis. The group does not pool insurance risks, with the exception of the credit protection business. The group is able to re-price most of its insurance products in respect of future risks.

Customers are legally bound to report claims soon after a loss has been incurred. Most of the insurance contracts are not subject to significant lags or claim complexity risk and result in relatively low estimation uncertainty. Underwriting exposures are also limited by contractual limits of indemnity. The underwriting strategy provides for a variety of risks. Reinsurance decisions are made on a case-by-case basis when the compliance committee approves or reviews a transaction. The group reinsures a portion of the risks it underwrites in order to limit its exposures to losses and protect its own customer's capital resources.

Reinsurance contracts comprise both proportional and non-proportional reinsurance. Amounts recoverable under reinsurance contracts are reported after impairment provisions. The ability of reinsurers to meet reinsurance claims is monitored on an ongoing basis.  
 
Short-term insurance
 
         
The following table shows the net actuarial liabilities of the company at 30 June 2011:        
2011 UPP net of
DAC/DAR
R000’s
IBNR
R000’s
Outstanding
claims
R000’s
Total
R000’s
Motor 60 390 4 443 4 979 69 812
Property 1 609 786 3 831 6 226
Accident and health 20 112 1 310 51 21 473
Engineering 12 151 3 625 9 823 25 599
Liability 549 980 880 3 882 554 742
Transport 159 61 148 368
Total 644 401 11 105 22 714 678 220
Note: The actuarial liabilities calculated above by the actuaries do not take excess of loss reinsurance into account and therefore differ slightly from
the amount recorded on the statement of financial position.
 
The actuarial liabilities of the group include the following:
 
Unearned Premium Provision ("UPP")
 
The UPP is calculated on the assumption that the risk profile under a policy is uniformly distributed over the term of the policy. The method applies the proportion of the policy term still outstanding to the total written premium to obtain the value of premiums still to be earned.

For debt-related business, the premium in any period is related to the value of the outstanding debt. We therefore calculate the outstanding debt value as a proportion of the original debt and apply this to the total written premium to obtain the UPP.

For inward reinsurance business the UPP is subject to a minimum of 50% of the net written premiums.

It was assumed that all UPP implicitly include a risk margin equivalent to a 75% level of sufficiency in line with the requirements of PGN 401 for the purposes of the current valuation. This assumption is regarded as reasonable considering that on average premium rates are set at a profitable level.
 
Unexpired Risk Provision ("URR") and Additional Unexpired Risk Provision ("AURR")
 
The URR is equal to the expected cost of future claims and related expenses expected to arise from policies that have unexpired cover as at the valuation date. The methods used to estimate the URR may differ from one case to another. For most of the insurance transactions it was considered the historical loss ratios to form a view on the URR. If the URR exceeds the UPR this could indicate that the premiums charged are inadequate for the risks covered.

To allow for this, an AURR is set aside to cater for the additional expected loss. The AURR is the positive difference between the URR and UPR after the deduction of any deferred acquisition costs.

None of the insurance transactions of the company require an AURR as at 30 June 2011.
 
Incurred But Not Reported ("IBNR") Provision
The most common techniques used to determine IBNR provisions are the ultimate loss ratio method, Chain-Ladder and the Bornheutter-Ferguson methods or a combination of these methods.  

The Bornheutter-Ferguson method combines the chain-ladder technique with a market- or company-related estimate of ultimate loss ratio and is intended to stabilise the projections where data is scarce. This method is often useful where developed claims experience is not alone sufficient to determine IBNR provisions. The ultimate loss ratio method requires less information than the Bornheutter-Ferguson method in that is does not use or assume a development pattern.

The IBNR provisions were calculated using a combination of methods. On some transactions the IBNR was derived using a combination of the Bornheutter-Ferguson and Basic Chain- Ladder methods on paid claims data. The proposed Solvency Assessment and Management regulatory framework interim measure method was used to estimate the IBNR Claims Provisions for other transactions. This is a method of estimating IBNR claims provisions using the results of the industry data calibration performed by Deloitte Actuarial and Insurance Solutions for the Financial Services Board as part of the Financial Condition Reporting recalibration process.
 
Contingency Reserve
 
A contingency reserve is held to meet unforeseen future losses that may arise over the remaining term of in-force policies and will give rise to unexpected increase in the claims. Since the extent and nature of such contingencies are unknown, this reserve is generally set at a predetermined percentage of the net premium income of the preceding year of the subsidiary.
 
Long-term insurance
 
The group currently has the following business on its books:
 
Investment linked policies
The group has issued linked policies to companies and universities for their future uncertain employee obligations. The calculation of the investment contract liability is an amount equal to the underlying financial assets.
Credit Life policies
These policies grant protection to policyholders who have entered into instalment sale agreements. The protection is for the accidental loss of life and/or retrenchment of the policyholder.
 

The following shows the gross and net actuarial liability of the group:
     
       
2011 – R000’s Gross Reinsurance Net
Credit Life policies 6 528 6 528
Investment linked policies 1 045 874 1 045 874
Total 1 052 402 1 052 402
 
Critical accounting estimates and judgements in applying accounting policies relating to insurance contracts
 
RMBSI Investments makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
 
The ultimate liability arising from claims made under insurance contracts
The estimation of the ultimate liability arising from claims made under insurance contracts is the group's most critical accounting estimate. Several sources of uncertainty have to be considered in estimating the liability that the group will ultimately be exposed to for such claims. The risk environment can change quickly and unexpectedly owing to a wide range of events or influences. The group is constantly refining the tools with which it monitors and manages risks to place the group in a position to assess risk situations appropriately, despite the greatly increased pace of change. The growing complexity and dynamism of the environment in which we operate means that there are natural limits, however. There cannot and never will be absolute security when it comes to identifying risks at an early stage, measuring them sufficiently.

Short-term insurance
Credit risk on reinsurance The credit risk on all reinsurance arrangements are assumed to be at an acceptable level.
 
Unearned Premium Provision
 
The assumption regarding the uniform emergence of risk over the policy term. Where relevant, the UPP calculation basis has been adjusted to take account of the actual outstanding risk as well as the pattern of risk expected in future periods.

The assumption that premiums are adequate.
 
Incurred But Not Reported Provision
The estimation of the IBNR provision generally holds a greater level of uncertainty than the other provisions as this is an estimation of claims that have not been reported yet based on past information. The larger the IBNR provisions, the longer the expected period between the date of loss and the claims reporting date and/or the more severe the unreported claims.

All actuarial estimates of IBNR claims provisions include a risk margin equivalent to a 75% level of sufficiency in line with the requirements of PGN 401. This risk margin is derived using a bootstrap method for the transactions where the Bornheutter- Ferguson or Basic Chain Ladder methods were used to derive the best estimate IBNR claims provision. The formula proposed by Deloitte Actuarial and Insurance Solutions to the Financial Services Board to estimate the risk margins on claims provisions was used for all other transactions.
 
Sensitivity analysis
     
 
The figures below illustrate the sensitivity of the net IBNR provisions to changes in the overall claims estimate.
       
2011 – R000’s Net IBNR
provision
IBNR
+10%
IBNR
-10%
Motor 4 443 4 887 3 999
Property 786 865 707
Accident and health 1 310 1 441 1 179
Engineering 3 625 3 988 3 263
Liability 880 968 792
Transport 61 67 55
Total 11 105 12 216 9 995
 
The sensitivity analysis shows that a 10% movement in the actuarial liability will not have a material effect on the profit or loss of the group.
 
Long-term insurance
 
Published reporting valuation methods and assumptions
 
Insurance contracts are valued using the Financial Soundness Valuation as described in PGN104 of the Actuarial Society of South Africa. This included the following components:
 
An IBNR provision in respect of the group credit life policies.
A gross premium provision in respect of the credit life policies which are currently in run-off. Due to the lag in development of claims which is normal for such business we have also maintained an IBNR provision.
 
The liabilities under investment linked contracts are valued at the value of the assets backing these contracts.

An explicit expense provision established to compensate for the reducing capacity of the credit life policies in run-off to absorb ongoing maintenance expenses.
 
Published reporting liability valuation methods and assumptions
 
In the calculation of liabilities for insurance contracts provision has been made for:
 
the best estimate of the future experience; and
the compulsory margins prescribed by PGN 104.
 
The following are the main assumptions used to calculate the value of the liabilities:
 
We have based our assumptions on mortality and other decrement rates on current market experience as the data provided in respect of these policies are not sufficient to perform credible experience investigations upon which assumptions could otherwise be based.
The investment return and expense inflation assumption has been determined to be consistent with current market conditions
The IBNR provisions are based on actual experience for certain classes of business with sufficient data, and for classes of business in run-off it is based on two months of projected claims
   
Provision for expenses (before adding margins) was based on an analysis of the latest expenses as well as future expected experience.
 
Effect of changes in assumptions
 
The value of policy liabilities as at 30 June 2011 decreased as a result of the combined effect of the following:
 
A reinsurance policy expired during the period
Established an explicit expense risk provision to cover shortfall of operating expenses over the next two years due to run-off of existing insurance contracts.
Continued run-off of a book of credit life policies.
   
Sensitivity analysis
The figures below illustrate the sensitivity of the net actuarial liabilities for insurance contracts to changes in the overall claims
estimate.
 
2011 – R000's Net
actuarial
liability
Claims
estimate
+10%
Claims
estimate
-10%
Credit life policies 6 528 7 180 5 875
 
The sensitivity analysis shows that a 10% movement in the actuarial liability will not have a material effect on the profit or loss
of the group.
 

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