Underwriting process The Association provides Protection and Indemnity risk cover to Members. The Association is a mono-line insurer writing complex risks. The Association utilises an acceptable loss ratio method of pricing risks and development of claims is monitored on a quarterly basis by the reserving committee and the audit committee.
Underwriting authority is delegated to specific individuals who operate under set underwriting parameters and the ongoing guidance and review of senior management. These parameters cover areas such as screening of potential new members and risks.
Reinsurance and International Group Pooling Agreement The establishment of the Association’s reinsurance programme is driven by the Board’s objective to manage risk to acceptable level and to optimise the Club’s capital position. The programme comprises excess of loss reinsurance cover purchased jointly with other members of the International Group, facultative reinsurance to cover specific risks, cover against a single catastrophic event and an accumulation of smaller attritional claims.
The International Group Pooling agreement provides a sharing of claims costs between thirteen member associations. For the current policy year (the 2010/11 year) the first $8 million (2009/10: $7 million) of each claim is retained by the Association with the next $42 million (2009/10: $43 million) shared between Pool members at a rate calculated each year.
Above $50 million, the excess of loss reinsurance provides cover up to a limit of $3.05 billion. Management of claims cost
As a mutual, the Association considers the management of claims cost for its Members with great importance. The Association’s strategy is to help its Members prevent and avoid the occurrence of incidents as well as ensuring the efficient handling and management of claims when they occur. To facilitate this strategy the Association has established programmes to reduce claims risk including: information for Members on common claims and how they may be prevented, completion of inspections to review ship conditions, the pre-employment medical exam- inations and production of various guides for safe carriage of goods and the avoidance of incidents.
Reserving process The Association establishes provisions for unpaid claims, both reported and unreported, and related expenses to cover its expected ultimate liability. These provisions are established through the application of actuarial techniques and assumptions as set out in note 2 of the financial statements and is reviewed by the Audit and Risk committee. In order to minimise the risk of understating these provisions the assumptions made and techniques employed are reviewed in detail by senior management and periodically tested against third party consulting actuaries.
(b) Market Risk The Board of the Group’s subsidiary undertaking, IPIR, manages the investment risk of the majority of the Association’s assets. The investment policy is set by the Board of Directors and reviewed annually. The policy reflects the risk appetite of the Association and is designed to maximise return whilst holding risk to a level deemed acceptable. The policy allows the investment manager to invest a proportion of the portfolio in assets which carry a greater risk but potentially higher return, such as equities, with the majority in safer investments such as government bonds and cash.
Interest rate risk
Interest rate risk arises primarily from investments in fixed interest securities the value of which is inversely correlated to movements in market interest rates. In addition, to the extent that claims inflation is correlated to interest rates, liabilities to Members are exposed to interest rate risk.
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