on the Managers' best estimate of unreported claims on each policy year. The estimates are calculated by comparing the pattern of claims payments in the current policy years with earlier policy years, and then projecting the likely outcome of the more recent years adjusted by such variables required to project the likely ultimate cost of claims. The principal variables for which adjustment is made include the impact of large losses, changes in the mix of business written, the effects of inflation and changes in the Association’s processes which may accelerate or decelerate claims development or the recording of claims. The principal assumption underlying this approach is that future claims development will follow past experience.


The more recent the policy year, the more difficult it is to judge the eventual outcome. The forecast of unreported claims for the current year, which has run only twelve months, is therefore the subject of more uncertainty than more mature years. Accordingly, the Managers have taken a conservative approach when setting the level of unreported claims, preferring to be cautious in the most recent year until a clearer pattern emerges in the second year, when the level of uncertainty diminishes and forecasts may be made with greater certainty.


(l) Reinsurance recoveries The liabilities of the Association are reinsured above certain levels with similar associations under the International Group's Pooling Agreement and with market underwriters. The figures in the consolidated statement of operations relate to recoveries on claims incurred during the year. Outstanding claims in the balance sheet are shown gross and the reinsurance recoveries are shown as an asset.


(m) Reinsurance premiums These include premiums payable to market underwriters charged to the consolidated statement of operations on an accruals basis. The premiums are shown net of any commutations. The reinsurance contracts do not relieve the Association from its obligation to Members. The reinsurers are financially evaluated to minimise the exposure of the Association to losses caused by reinsurer insolvencies.


(n) Acquisition costs These comprise brokerage, commission and the management costs directly attributable to the processing of proposals and the issuing of policies; none of these costs have been deferred.


(o) Operating expenses These include management costs and general expenses. The management costs cover the cost of premium collection, reinsurance and investment management and include the cost of providing offices, staff and administration but exclude acquisition and claims management costs. The general expenses include the cost of Board meetings, travel, communications and other costs directly attributed to the insurance activities.


(p) Foreign currency Revenue transactions in foreign currencies have been translated into US dollars at rates revised at monthly intervals. All exchange gains and losses whether realised or unrealised are included in the consolidated statement of operations. The differences arising on currency translation and the realised differences arising on the sale of currencies are included within exchange gains and losses within investment income.


Foreign currency assets and liabilities except the cost of investments are translated into US dollars at the rates of exchange ruling at the balance sheet date. The resulting difference is treated as an exchange gain or loss within investment income.


Forward currency contracts are entered into in order to hedge the currency exposure within the investment portfolio or future cash flows relating to operating expenses. The open contracts have been re valued at year-end rates of exchange and the potential profit or loss included with investments. Where the contacts are not designated for the purposes of hedge accounting, the profit or loss is included within exchange gains and losses within the statement of operations. Where the contracts have been designated as cash flow hedges for the purposes of hedge accounting the profit or loss is included directly within reserves. At the year end the Association has a number of forward currency agreements covering the period to September 2012 to hedge future operating expenses payable in sterling.


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