3 Management of risk continued Marine and major property contracts accepted under limited circumstances.
3.1 Insurance risk continued are normally underwritten by reference Claims typically arise from incidents such
i) Underwriting risk continued to the commercial replacement value of as errors and omissions attributed
the property covered. The cost of repairing to the insured, professional negligence
A significant proportion of the reinsurance or rebuilding assets, of replacement or and specific losses suffered as a result
inwards business provides cover on an indemnity for contents and time taken of electronic or technological failure
excess of loss basis for individual events. to restart or resume operations to original of software products and websites.
The Group agrees to reimburse the cedant levels for business interruption losses are
once their losses exceed a minimum level. the key factors that influence the level of The provision of insurance to cover
Consequently the frequency and severity claims under these policies. The Group’s allegations made against individuals acting
of reinsurance inwards claims is related not exposure to commodity price risk in relation in the course of fiduciary or managerial
only to the number of significant insured to these types of insurance contracts is responsibilities, including directors and
events that occur but also to their individual very limited, given the controlled extent officers’ insurance, is one example of
magnitude. If numerous catastrophes of business interruption cover offered in the a casualty insurance risk. However the
occurred in any one year, but the cedant’s areas prone to losses of asset production. Group’s specific exposure to this specific
individual loss on each was below the risk category is relatively limited. The
minimum stated, then the Group would have Other property risks Group’s casualty insurance contracts mainly
no liability under such contracts. Maximum The Group provides home and contents experience low severity attritional losses.
gross line sizes and aggregate exposures insurance, together with cover for artwork, By nature, some casualty losses may take
are set for each type of programme. antiques, classic cars, jewellery, collectables longer to settle than the other categories
and other assets. The Group also extends of business.
The Group writes reinsurance risks for cover to reimburse certain policyholders
periods of mainly one year so that contracts when named insureds or insured assets The Group’s pricing strategy for casualty
can be assessed for pricing and terms are seized for kidnap and a ransom demand insurance policies is typically based upon
and adjusted to reflect any changes is subsequently met. Events which can historical claim frequencies and average
in market conditions. generate claims on these contracts include claim severities, adjusted for inflation
burglary, kidnap, seizure of assets, acts and extrapolated forwards to incorporate
Property risks – marine and major assets of vandalism, fires, flooding and storm projected changes in claims patterns.
The Group directly underwrites a diverse damage. Losses on most classes can be In determining the price of each policy
range of property risks. The risk profile predicted with a greater degree of certainty an allowance is also made for acquisition
of the property covered under marine and as there is a rich history of actual loss and administration expenses, reinsurance
major asset policies is different to that experience data and the locations of the costs, investment returns and the Group’s
typically contained in the other classes of assets covered, and the individual levels cost of capital.
property (such as private households and of security taken by owners, are relatively
contents insurance) covered by the Group. static from one year to the next. The losses Reserving risk
associated with these contracts tend to The Group’s procedures for estimating the
Typical property covered by marine be of a higher frequency and lower severity outstanding costs of settling insured losses
and other major property contracts includes than the marine and other major property at the balance sheet date, including claims
fixed and moveable assets such as ships assets covered above. incurred but not yet reported, are detailed
and other vessels, cargo in transit, energy in note 26.
platforms and installations, pipelines, The Group’s home and contents insurance
other subsea assets, satellites, commercial contracts are exposed to weather and The majority of the Group’s insurance
buildings and industrial plants and climatic risks such as floods and windstorms risks are short-tail and, based on historical
machinery. These assets are typically and their consequences. As outlined earlier claims experience, significant claims are
exposed to a blend of catastrophic and the frequency and severity of these losses normally notified and settled within 12- to
other large loss events and attritional claims do not lend themselves to accurate 24-months of the insured event occurring.
arising from conventional hazards such prediction over the short-term. Contract Those claims taking the longest time to
as collision, flooding, fire and theft. Climatic periods are therefore not normally more develop and settle typically relate to casualty
changes may give rise to more frequent than one year at a time to enable risks risks where legal complexities occasionally
and severe extreme weather events (for to be regularly repriced. develop regarding the insured’s alleged
example earthquakes, windstorms and river omissions or negligence. The length of time
flooding etc.) and it may be expected that Contracts are underwritten by reference required to obtain definitive legal judgements
their frequency will increase over time. to the commercial replacement value and make eventual settlements exposes
of the properties and contents insured. the Group to a degree of reserving risk
For this reason the Group accepts major Claims payment limits are always included in an inflationary environment.
property insurance risks for periods to cap the amount payable on occurrence
of mainly one year so that each contract of the insured event. The majority of the Group’s casualty
can be repriced on renewal to reflect exposures are written on a claims made
the continually evolving risk profile. The Casualty insurance risks basis. However the final quantum of these
most significant risks covered for periods The casualty underwriting strategy attempts claims may not be established for a number
exceeding one year are certain specialist to ensure that the underwritten risks are well of years after the event. Consequently
lines such as marine and offshore diversified in terms of type and amount of a significant proportion of the casualty
construction projects which can typically potential hazard, industry and geography. insurance amounts reserved on the balance
have building and assembling periods However, the Group’s exposure is more sheet may not be expected to settle within
of between three and four years. These focused towards marine and professional 24-months of the balance sheet date.
form a small proportion of the Group’s and technological liability risks rather than
overall portfolio. human bodily injury risks, which are only
Notes to the consolidated financial statements Hiscox Ltd Report and Accounts 2012 65