3 Management of risk continued payment limits to cap the maximum amount
3.1 Insurance risk continued payable from these insured events over
i) Underwriting risk continued the contract period.
contract level, and also from a portfolio The Board requires all underwriters to
perspective where the risks assumed operate within an overall Group appetite for
in similar classes of policies are aggregated individual events. This defines the maximum
and the exposure evaluated in light of exposure that the Group is prepared to retain
historical portfolio experience and prospective on its own account for any one potential
factors. To assist with the process of pricing catastrophe event or disaster. The Group’s
and managing underwriting risk the Group underwriting risk appetite seeks to ensure
routinely performs a wide range of activities that it should not lose more than one year’s
including the following: profit plus 15% of core capital as a result
regularly updating the Group’s of a 1 in 250 bad underwriting year.
risk models;
documenting, monitoring and reporting The Group compiles estimates of losses
on the Group’s strategy to manage risk; arising from realistic disaster events using
developing systems that facilitate statistical models alongside input from its
the identification of emerging underwriters. These require significant
issues promptly; management judgement. Realistic disaster
utilising sophisticated computer scenarios, shown on page 15, are extreme
modeling tools to simulate catastrophes hypothetical events selected to represent
and measure the resultant potential major events occurring in areas with large
losses before and after reinsurance; insured values. They also reflect the areas
monitoring legal developments that represent significant exposures for
and amending the wording of policies Hiscox. The selection of realistic disaster
when necessary; scenario events is adjusted each year and
regularly aggregating risk exposures they are not therefore necessarily directly
across individual underwriting portfolios comparable from one year to the next.
and known accumulations of risk; The events are extreme and as yet untested,
examining the aggregated exposures and as such these estimates may prove
in advance of underwriting further large inadequate as a result of incorrect
risks; and assumptions, model deficiencies, or losses
developing processes that continually from unmodeled risks. This means that
factor market intelligence into the should a realistic disaster actually eventuate,
pricing process. the Group’s final ultimate losses could
materially differ from those estimates
The delegation of underwriting authority modeled by management.
to specific individuals, both internally
and externally, is subject to regular review. The Group also manages underwriting
All underwriting staff and binding agencies risk by purchasing reinsurance. Reinsurance
are set strict parameters in relation to protection, such as excess of loss cover,
the levels and types of business they is purchased at an entity level and is also
can underwrite, based on individual levels considered at an overall Group level to
of experience and competence. These mitigate the effect of catastrophes and
parameters cover areas such as the unexpected concentrations of risk. However,
maximum sums insured per insurance the scope and type of reinsurance protection
contract, maximum gross premiums written purchased may change depending on the
and maximum aggregated exposures extent and competitiveness of cover available
per geographical zone and risk class. in the market.
Monthly meetings are held between the
Chief Underwriting Officer and a specialist Overleaf is a summary of the gross and net
central analysis and review team in order insurance liabilities for each category, split
to monitor claim development patterns by region of risk.
and discuss individual underwriting
issues as they arise. The Chief Underwriting
Officer also holds weekly video conference
meetings with this team to discuss interim
underwriting matters.
The Group’s insurance contracts include
provisions to contain losses, such as the
ability to impose deductibles and demand
reinstatement premiums in certain cases.
In addition, in order to manage the Group’s
exposure to repeated catastrophic
events, relevant policies frequently contain
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012 63