Notes to the consolidated Legislation concerning the determination procedures, and ongoing compliance
financial statements of taxation assets and liabilities is complex
and continually evolving. In preparing the
therewith, partially through its own enquiries
but primarily through a dedicated internal
continued Group’s financial statements, the Directors audit function, which has operational
estimate taxation assets and liabilities after independence, clear terms of reference
taking appropriate professional advice. influenced by the Board’s Non Executive
2 Significant accounting policies continued To the extent that taxable losses carried Directors and a clear upwards reporting
2.22 Use of critical estimates, forward by the Group exceed taxable structure back into the Board. The Group,
judgements and assumptions continued temporary differences relating to the same in common with the non-life insurance
taxation authority and taxable entity, which industry generally, is fundamentally driven
is £1,000 million (2011: £964 million) and will result in amounts against which the by a desire to originate, retain and service
is included within total insurance liabilities losses can be utilised, the Group uses insurance contracts to maturity. The Group’s
on the balance sheet. estimates of probable future taxable profits cash flows are funded mainly through
available to determine whether recognition advance premium collections and the
Estimates of losses incurred but not of a deferred tax asset is appropriate. timing of such premium inflows is reasonably
reported are continually evaluated, based The determination and finalisation of agreed predictable. In addition, the majority of
on entity-specific historical experience and taxation assets and liabilities may not material cash outflows are typically triggered
contemporaneous developments observed occur until several years after the balance by the occurrence of insured events non-
in the wider industry when relevant, and are sheet date and consequently the final correlated to financial markets, and not
also updated for expectations of prospective amounts payable or receivable may differ by the inclination or will of policyholders.
future developments. Although the possibility from those presently recorded in these
exists for material changes in estimates financial statements. The principal sources of risk relevant
to have a critical impact on the Group’s to the Group’s operations and its financial
reported performance and financial position, 2.23 Reporting of additional statements fall into two broad categories:
it is anticipated that the scale and diversity performance measures insurance risk and financial risk, both of
of the Group’s portfolio of insurance The Directors consider that the claims which are described in notes 3.1 and 3.2
business considerably lessens the likelihood ratio, expense ratio and combined ratio below. The Group also actively manages
of this occurring. The overall reserving risk measures reported in respect of operating its capital risks as detailed in note 3.3.
is discussed in more detail in note 3.1 and segments and the Group overall at note Additional unaudited information is also
the procedures used in estimating the cost 4 provide useful information regarding provided in the corporate governance, risk
of settling insured losses at the balance the underlying performance of the Group’s management and capital sections of this
sheet date including losses incurred but businesses. These measures are widely Report and Accounts.
not reported are detailed in note 26. recognised by the insurance industry and
are consistent with internal performance 3.1 Insurance risk
The Group carries its financial investments measures reviewed by senior management The predominant risk to which the Group
at fair value through profit or loss with fair including the chief operating decision maker. is exposed is insurance risk which is
value determined using published price However, these three measures are not assumed through the underwriting process.
quotations in the most active financial defined within the IFRS framework and body Insurance risk can be sub-categorised into
markets in which the assets trade. During of standards and interpretations and i) underwriting risk including the risk of
periods of economic distress and diminished therefore may not be directly comparable catastrophe and systemic insurance losses
liquidity, the ability to obtain quoted bid with similarly titled additional performance and the insurance competition and cycle,
prices may be reduced and as such a greater measures reported by other companies. and ii) reserving risk.
degree of judgement is required in obtaining Net asset value per share and return
the most reliable source of valuation. Note on equity measures, disclosed at notes i) Underwriting risk
3.2 to the financial statements discusses 5 and 6, are likewise considered to The Board sets the Group’s underwriting
the reliability of the Group’s fair values. be additional performance measures. strategy for accepting and managing
underwriting risk, seeking to exploit identified
With regard to employee retirement benefit 3 Management of risk opportunities in the light of other relevant
scheme obligations, the amounts disclosed The Group’s overall appetite for accepting anticipated market conditions. Specific
in these consolidated financial statements and managing varying classes of risk is underwriting objectives such as aggregation
are sensitive to judgemental assumptions defined by the Group’s Board. The Board limits, reinsurance protection thresholds,
regarding mortality, inflation, investment has developed a governance framework geographical disaster event risk exposures
returns and interest rates on corporate and has set Group-wide risk management and line of business diversification
bonds, many of which have been subject policies and procedures which include parameters are prepared and reviewed
to specific recent volatility. This complex risk identification, risk management and by the Chief Underwriting Officer in order
set of economic variables may be expected mitigation and risk reporting. The objective to translate the Board’s summarised
to influence the liability obligation element of these policies and procedures is to protect underwriting strategy into specific
of the reported net balance amount to a the Group’s shareholders, policyholders measurable actions and targets. These
greater extent than the reported value of and other stakeholders from negative events actions and targets are reviewed and
the scheme assets element. For example, that could hinder the Group’s delivery of its approved by the Board in advance of each
if official UK interest rates are replicated with contractual obligations and its achievement underwriting year. The Board continually
lower yields emerging in UK corporate bond of sustainable profitable economic and reviews its underwriting strategy throughout
indices, a significant uplift may occur in the social performance. each underwriting year in light of the evolving
reported net scheme deficit through the market pricing and loss conditions and
reduced effect of discounting outweighing The Board exercises oversight of the as opportunities present themselves.
any expected appreciation in asset values. development and operational implementation The Group’s underwriters and management
A sensitivity analysis is given at note 30. of its risk management policies and consider underwriting risk at an individual
62 Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012