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  • RM-5.1 RM-5.1 Insurance Technical Risk

    • RM-5.1.1

      Section RM-5.1 applies only to insurance firms.

    • RM-5.1.2

      An insurance firm licensee must identify and manage its insurance technical risk across all its operations, and document its underwriting and claims policies for achieving this in an underwriting policy.

      Amended: January 2007

    • RM-5.1.3

      Insurance technical risk is the normal trading risk, arising out of contracts of insurance, that the insurance licensee is exposed to in its day-to-day operations, and includes the technical and actuarial bases of calculation for premiums and technical provisions in both long-term and general insurance.

      Amended: January 2007
      Amended: October 2007

    • RM-5.1.4

      An insurance firm must document its underwriting and claims policies and review these at regular intervals.

    • RM-5.1.5

      The underwriting policy must be at a level of detail appropriate to the nature, magnitude and source of its business and must include (but is not limited to) a description of the following elements:

      (a) Classes and sources of business to be written (including limits on concentrations of class, location and counterparty);
      (b) Rating and pricing strategy and methodology;
      (c) The management of, and reserving for, claims;
      (d) Responsibilities and authority levels; and
      (e) Reinsurance protections, including any mismatch between the duration of the contracts and the underlying reinsurance protection.
      Amended: January 2007

    • RM-5.1.6

      The claims policy must be at a level of detail appropriate to the nature, magnitude and source of its business and must include (but is not limited to) a description of the following elements:

      (a) Reporting (e.g. evidence required, appointment of loss adjusters);
      (b) Scrutiny;
      (c) Authority levels;
      (d) Valuation;
      (e) Monitoring claims settlement, payments, reinsurance recoveries and subrogation; and
      (f) Provisioning of claims, including the bases and assumptions followed, authority levels, record-keeping and review.
      Amended: January 2007

    • RM-5.1.7

      Where necessary to demonstrate the adequacy of its financial resources under reasonably foreseeable deteriorations of its underwriting and claims positions, the insurance firm must conduct stress testing under a range of foreseeable adverse scenarios.

    • RM-5.1.8

      In assessing the outcome of adverse scenarios on the future solvency position, insurance firms must consider the impact of future further deterioration claims reserves (or, in the case of long- term business, the inadequacy of mathematical reserves) and future loss ratios being higher than past claims patterns would suggest.

      Amended: January 2007

    • RM-5.1.9

      Factors that licensees may consider appropriate in assessing the levels of underwriting risk include:

      (a) The adequacy of the licensee's pricing structure;
      (b) The volatility of sales volumes (e.g. the risk of poor underwriting from over-rapid expansion);
      (c) The uncertainty of claims experience (and the length of the claims 'tail');
      (d) The share of premium paid to intermediaries;
      (e) The adequacy of the coverage of the reinsurance programme;
      (f) The impact of the licensee's inability to secure renewal of part of its reinsurance at acceptable terms or at all;
      (g) The risk of unintended risks claims being covered (or not excluded) by policy wordings; and
      (h) The risk of mis-selling, for example, the number of complaints or disputed claims.
      Amended: January 2007
      Amended: October 2007

    • RM-5.1.10

      Factors that insurance licensees may consider appropriate in assessing the levels of claims risk include:

      (a) The frequency and size of large claims;
      (b) Possible outcomes relating to any disputed claims, particularly where the outcome is subject to legal proceedings;
      (c) The ability of the licensee to withstand catastrophic events, increases in unexpected exposures, latent claims or aggregation of claims;
      (d) The possible exhaustion of reinsurance arrangements, both on a per-risk and per-event basis;
      (e) The non-payment of outstanding claims due to the lack of coverage offered by the reinsurance purchased for underwritten risks (i.e. offsetting potential liabilities);
      (f) Social changes regarding an increase in the propensity to claim and to sue;
      (g) The impact of unanticipated legal judgements on claims and claims reserves;
      (h) Other social, economic and technological changes; and
      (i) The risk associated with dealing with a reinsurer, fronting 100% of the risks ceded.
      Amended: January 2007
      Amended: October 2007

    • RM-5.1.11

      The CBB believes that insurance firms need to consider carefully dealing with reinsurers fronting 100% of the risks that is ceded to them. The concern is that the reinsurer ceding 100% of the risk to a retrocessionaire has little incentive to adhere to proper standards of underwriting, due to it receiving a fee, based on maximizing volume of premium, at the expense of underwriting soundness. Fronting arrangements can result in abrupt cancellation by the assuming reinsurer and sometimes refusal to pay claims because of the lack of observation of the understandings with regard to business quality that were agreed upon when the arrangement was negotiated. Consequently, insurers may have to assume risks for which they believed to have covered through a proper reinsurance arrangement, should the reinsurer no longer honour the arrangement. The CBB will scrutinise carefully the management by firms of the risks associated with fronting, in the course of its supervision.

      Amended: January 2007

    • RM-5.1.12

      Additional factors that general insurers may consider appropriate in assessing the levels of claims risk include:

      (a) The adequacy and uncertainty of the technical claims provisions, such as outstanding claims, IBNR and claims handling expense reserves;
      (b) The adequacy of other underwriting provisions, such as the provisions for unearned premium and unexpired risk reserves;
      (c) The appropriateness of catastrophe models and underlying assumptions used, such as possible maximum loss (PML) factors used; and
      (d) The effects of inflation.
      Amended: January 2007

    • RM-5.1.13

      Additional factors that long-term insurers may consider appropriate in assessing the levels of claims risk include future variations in investment returns and in mortality and morbidity rates.