Sampo Group

Underwriting Risks
Life Insurance Underwriting Risks

P&C Insurance Underwriting Risks

Underwriting risk is the risk that the cost of future claims payments will be higher than anticipated. Underwriting risk is the elementary risk in If P&C and the management of it forms the foundation for insurance operations. The reasons for higher than expected costs are threefold: claims sizes are bigger than expected, claims frequency is higher than expected and timing of claims payments differs from expected timing.

The figure 'Illustrative figure of P&C insurance risk concepts' depicts the P&C insurance underwriting risk on a general level.

In P&C insurance the insurer promises to compensate a certain loss caused by a certain incident. When incidents like motor accidents, windstorms and fires occur the insurer establishes a preliminary estimate of loss at the moment when the claim is reported and technical provisions are booked. Later, during the claims handling process, the estimate may be adjusted and technical provisions may be changed.

In the figure 'Illustrative figure of P&C insurance risk concepts' risk sources at left are original sources for policyholders’ losses and variations in them affect claims frequency and claims sizes. Risk sources in the middle may later change original estimates of claims payments.

In P&C insurance business the management of underwriting risk is traditionally organized into premium and reserve risk management. Expense risk is not as crucial as in life insurance, but it is also taken into account when estimating the expected liability cash flows.

Premium Risk

P&C insurance undertakes the obligation to indentify the insured in case of claims, and in exchange, the insured pays a premium. A crucial factor contributing to the profitability of P&C insurance operations is the ability to accurately estimate claims and administrative costs and thereby correctly price the insurance contracts correspondingly.

Given the inherent uncertainty of P&C insurance there is a risk that the future claims are unexpectedly frequent and/or high. Examples include large fires, natural catastrophes such as severe windstorms and unforeseen increases in the frequency or the average size of small and medium-sized claims. Such deviations can be purely random, i.e. an effect of the inherent uncertainty of the claims cost. The deviations can also be the result of more systematic and permanent changes in e.g. inflation, legislation or exposures. Random deviations are significant in the Industrial insurance business, where claims could potentially be very large, e.g. a fire in a large factory. Systematic deviations to a larger degree affect the Private business area, which is characterized by a large number of small claims and consequently a lower degree of random variation.

Premium Risk Management

The Underwriting Policy (UW Policy) is the principal document for underwriting and sets general principles, restrictions and directions for the organization of underwriting activities. The Board of Directors of each company approves the UW Policy at least once a year.

The UW Policy is supplemented with guidelines outlining in greater detail how to conduct underwriting within each business area. These guidelines cover, such areas as, tariff and rating models for pricing, guidelines in respect of standard conditions and manuscript wordings, as well as authorities and limits, such as sums insured and risks that are not acceptable to undertake. The Underwriting Committee (UWC) is responsible for monitoring compliance with the established underwriting principles.

The business areas manage the premium risk on a day-to-day basis. The pricing within the Private business area and smaller risks within the Commercial business area are set through fixed tariffs. The underwriting of risks in the Industrial business area and more complex risks within Commercial business area are based to a greater extent on general principles and individual underwriting than strict tariffs. In general, pricing is based on statistical analyses of historical claims data and assessments of the future development of claims frequency and claims inflation.

Given the large number of customers in P&C insurance and the fact that business is underwritten in different geographical areas and across several classes of insurance, the portfolio and respective premiums are well-diversified. The degree of diversification is shown in the figure 'Breakdown of gross written premiums by business area, country and line of business, If P&C, 31 December 2011' and in the table 'Technical provisions per line of business and country, If P&C, 31 December 2011'.

Despite the inherently well diversified insurance portfolio, risk concentrations may still arise through, for example, exposures to natural disasters, such as windstorms and floods. The geographical areas most exposed to such disasters are Denmark, Norway and Sweden. In addition, since single large claims can potentially have a major impact on the result, the risk of severe outcomes is mitigated using reinsurance.

If P&C’s Reinsurance Policy stipulates guidelines for the purchase of reinsurance. The need and optimal choice of reinsurance is evaluated through statistical methods and models. The remaining net exposure is subject to the capital requirements (economic, regulatory and rating) and the cost of reinsurance must be favorable compared to the cost of capital.

To analyze the exposure to natural disasters, the probability of major losses and the need for reinsurance, If P&C cooperates with external advisors. Two different approaches are used for these analyses

  • statistical models, in which historical losses are used to estimate distributions for the frequency and size of losses; and
  • catastrophe models, in which catastrophes are simulated on the basis of historical meteorological data. Subsequently, insurance losses can be calculated, taking into account vulnerability, exposure and terms of the policy.

A Nordic-wide reinsurance program has been in place in If P&C since 2003. In 2011, retention levels were between SEK 100 million (approximately EUR 11.2 million) and SEK 200 million (approximately EUR 22.4 million) per risk and SEK 200 million (approximately EUR 22.4 million) per event.

Reserve Risk

Defining the value of insurance liabilities always includes uncertainty since the future cost of claims is based on estimates of the size, frequency and timing of future claims payments. The value of insurance liabilities changes also when interest rates used in discounting change. Whenever all insurance liabilities are discounted with market rates, the end result is called economic value of insurance liabilities.

Conversely, technical provisions is a statutory concept and it is the value of insurance liabilities in bookkeeping. Technical provisions are discounted with statutory rates. In this section we focus on technical provisions.

What are technical provisions in P&C insurance?

Technical provisions are divided into provisions for unearned premiums and provisions for claims outstanding in the company’s balance sheet. Provisions for unearned premiums are recognized in the balance sheet at the time contracts are incepting. These are intended to cover anticipated claims costs and operating expenses during the remaining time of insurance contracts in force. Provisions for claims outstanding on the other hand, are intended to cover the anticipated future payments of all claims incurred, including claims not yet reported to the company.

The uncertainty of technical provisions is normally greater for new portfolios for which complete run-off statistics are not yet available, and for portfolios including claims that take a long time to settle. Workers’ Compensation (WC), Motor Third Part Liability (MTPL), Personal Accident, and Liability insurance, are lines of business with the latter characteristics.

Reserve Risk Management

If P&C’s Board of Directors approves the guidelines governing the calculation of technical provisions. If P&C’s Chief Actuary is responsible for developing and presenting guidelines on how the technical provisions are to be calculated and for assessing whether the level of the total provisions is sufficient. The Chief Actuary issues a quarterly report on the adequacy of technical provisions, which is submitted to the Board of Directors, IRCC, CEO and CFO.

The Actuarial Committee is a preparatory and advisory board for If P&C’s Chief Actuary. The Committee makes recommendations concerning guidelines for technical calculations. The Committee also monitors technical provisions and provides advice to If P&C’s Chief Actuary regarding the adequacy of these provisions.

The actuaries continuously monitor the level of provisions to ensure that they comply with established guidelines. The actuaries also develop methods and systems to support these processes.

The actuarial estimates are based on historical claims data and exposures that are available at the closing date. Factors that are monitored include loss development trends, the level of unpaid claims, legislative amendments, legal cases and economic conditions. When setting provisions, the Chain Ladder and Bornhuetter-Fergusson methods are generally used, combined with projections of the number of claims and the average claim costs.

For such insurance lines as MTPL and WC, legislation and hence the product features and risks differ significantly between countries. For instance, some of the Finnish, Swedish and Danish provisions for these lines include annuities that are sensitive to changes in mortality assumptions and discount rates. The proportion of technical provisions that are related to motor and WC is 68 per cent.

The book value of technical provisions and the duration broken down by line of business and country is shown in table 'Technical provisions per line of business and country, If P&C, 31 December 2011'.

Technical provisions per line of business and country,
If P&C, 31 December 2011
  Sweden Norway Finland Denmark Total












Motor other and MTPL











Workers' compensation


































































 Excluding If Life, Baltics and Russia.

The anticipated inflation trend is taken into account when calculating all provisions and is of the utmost importance for claims settled over a long period of time, such as MTPL and WC. This is based on external assessments of the inflation trend in various areas, such as the consumer price index and payroll index, combined with If P&C’s own evaluation of cost increases for various types of claims cost.

Inflation risk in the technical provisions is an important consideration underlying the If P&C's investment strategy. The sensitivity towards inflation differs between countries due to the different national rules.

The sensitivity of If P&C's technical provisions to an increase in inflation, an increase in life expectancy and a decrease in the discount rate is presented in the table 'Sensitivities of technical provisions, If P&C, 2011'.

Sensitivities of technical provisions,
If P&C, 2011

Technical provision item

Risk factor Change in risk parameter Country Effect EURm
Nominal reserves Inflation increase Increase by 1%-point Sweden 186.8
      Denmark 12.4
      Norway 65.2
      Finland 27.7
Annuities   Decrease in mortality Life expectancy increase by 1 year Sweden 12.8 
      Denmark 0.4 
      Finland 35.1 
Discounted reserves (annuities and part of Finnish IBNR)   Decrease in discount rate   Decrease by 1%-point Sweden 70.1 
      Denmark 8.6 
      Finland 215.5 

If P&C’s technical provisions are further analyzed by claims year before and after reinsurance in the claims cost trend tables. These are disclosed in the Note 27 to the Financial Statements.

Sensitivity of underwriting result and hence underwriting risk is presented by changes in certain key figures in the table 'Sensitivity test of underwriting result, If P&C, 31 December 2011 and 31 December 2010'.

Sensitivity test of underwriting result,
If P&C, 31 December 2011 and 31 December 2010
      Effect on pretax profit, EURm

Key figure

Current level (2011)

Change in
current level



Combined ratio, business area Private


+/- 1 percentage point

+/- 23

+/- 21

Combined ratio, business area Commercial


+/- 1 percentage point

+/- 13

+/- 12

Combined ratio, business area Industrial


+/- 1 percentage point

+/- 4

+/- 4

Combined ratio, business area Baltics


+/- 1 percentage point

+/- 1

+/- 1

Premium level

4,094 +/- 1 per cent

+/- 41

+/- 39

Claims frequency

3,059 +/- 1 per cent

+/- 31

+/- 29

Ceded reinsurance premium

214 +/- 10 per cent

+/- 21

+/- 20

Underwriting Risks
Life Insurance Underwriting Risks