claim. A quota share arrangement is in place for the Heath professions indemnity line of business. On the inwards reinsurance business, reliance is placed on the expertise and processes applied by the cedent in arriving at the relevant individual case estimates that have been reported. Claims incurred but not reported (IBNR) There is also considerable uncertainty concerning the eventual outcome of claims that have occurred but had not yet been reported to the insurer by the reporting date. The IBNR provision relates to these events, as well as potential movements in existing case estimates. or directly underwritten Personal Lines, the stochastic chain-ladder methodology assists in developing a greater understanding of the trends inherent in the data being projected to estimate the ultimate cost of claims. This process is performed separately for Motor and Non-Motor business. The same approach is used for Commercial Lines business where a separate process in respect of Motor and Non-Motor is applied. For directly underwritten Health Professions Indemnity business, the experience of the Chief Medical Officer and Internal Legal Advisor is of critical importance to assess the risk presented by each reported incident. The IBNR is then further assessed by considering the actual in-force book composition within the various risk categories of business underwritten. Frequency and severity assumptions are applied to the composition to estimate the ultimate losses for policies written and allocated to the relevant underwriting years. The projected ultimate losses earned at the valuation date is compared to the known claims incurred, with the difference representing the IBNR disclosed. Once a sufficient claims history has been built up, additional actuarial techniques will be employed to determine the IBNR for this segmentation. The Stochastic chain-ladder technique involves analysing historical claims development factors and selecting estimated development factors based on this historical pattern. The selected development factors are applied to cumulative internal claims data for each accident year that is not yet fully developed to produce an estimated ultimate claims cost for each accident year. It is the nature of this technique that a weighted average of claims inflation within the past data will be projected into the future. A stochastic process is applied to the choice of development factors for each accident year in accordance with standard statistical practices. Numerous simulations are performed to obtain a distribution of the ultimate claims cost. The IBNR reserve is held so as to be. As this method uses historical claims development information, it assumes that the historical claims development pattern is a predictor of future claim developments. There are reasons why this may not be the case. Such reasons include: change in processes that affect the development/recording of claims paid and incurred, economic, legal, political and social trends, and changes in mix of business, random fluctuations and including the impact of large losses. The degree of uncertainty will vary by policy class according to the characteristics of the insured risks and the cost of a claim will be determined by the actual loss suffered by the policyholder. There may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the Company. Following the notification of an insured loss, there may still be uncertainty as to the magnitude and timing of the settlement of the claim. The establishment of insurance liabilities is an inherently uncertain process and as a consequence of this uncertainty, the eventual cost of settlement of outstanding claims can vary substantially from the initial estimates. The Company seeks to provide appropriate levels of claim provisions taking the known facts and experience into account. It should be emphasised that the estimation techniques for the determination of insurance liabilities involve obtaining corroborative evidence from as wide a range of sources as possible and combining these to form the overall estimate. 14. Short-term insurance policy liabilities (continued) 14.1 Short-term insurance contracts – assumptions (continued) 143 Notes to the Consolidated Financial Statements
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