Where an entity or business that includes an outstanding claims liability has been acquired the claims for the acquired businesses are
included in the claims development table from and including the year of acquisition.
Conditions and trends that have affected the development of the liabilities in the past may or may not occur in the future. Accordingly
conclusions about future results may not necessarily be derived from the information presented in the tables above.
The development table shown above relates to both short-tail and long-tail claims.
The gross outstanding claims liability includes international operations. For ease of comparison within the claims development table,
all payments not denominated in Australian dollars have been converted to Australian dollars using the exchange rates as at the
reporting date. Therefore, the claims development table disclosed each reporting year cannot be reconciled directly to the equivalent
tables presented in previous years' financial statements.
V. Central estimate and risk margin
a. REPORTING DATE VALUES
CONSOLIDATED
2015
2014
%
%
The percentage risk margin applied to the net outstanding claims liability
21
23
The probability of adequacy of the risk margin
90
90
b. PROCESS
The outstanding claims liability is determined based on three building blocks being:
a central estimate of the future cash flows;
discounting for the effect of the time value of money; and
a risk margin for uncertainty.
i. Future cash flows
The estimation of the outstanding claims liability is based on a variety of actuarial techniques that analyse experience, trends and
other relevant factors. The expected future payments include those in relation to claims reported but not yet paid or not yet paid in full,
claims incurred but not enough reported (IBNER), claims incurred but not reported (IBNR) and the anticipated direct and indirect
claims handling costs.
The estimation process involves using the Consolidated entity’s specific data, relevant industry data and more general economic data.
Each class of business is usually examined separately and the process involves consideration of a large number of factors. These
factors may include the risks to which the business is exposed at a point in time, claim frequencies and average claim sizes, historical
trends in the incidence and development of claims reported and finalised, legal, social and economic factors that may impact upon
each class of business, the key actuarial assumptions set out in section VI and the impact of reinsurance and other recoveries.
Different actuarial valuation models are used for different claims types and lines of business. The selection of the appropriate
actuarial model takes into account the characteristics of a claim type and class of business and the extent of the development of each
accident period.
ii. Discounting
Projected future claims payments, both gross and net of reinsurance and other recoveries and associated claims handling costs are
discounted to a present value using appropriate risk free discount rates.
iii. Risk margin
The central estimate of the outstanding claims liability is an estimate which is intended to contain no deliberate or conscious over or
under estimation and is commonly described as providing the mean of the distribution of future cash flows. It is considered
appropriate to add a risk margin to the central estimate in order for the claims liability to have an increased probability of sufficiency.
The risk margin refers to the amount by which the liability recognised in the financial statements is greater than the actuarial central
estimate of the liability.
Uncertainties surrounding the outstanding claims liability estimation process include those relating to the data, actuarial models and
assumptions, the statistical uncertainty associated with a general insurance claims run-off process, and risks external to IAG, for
example the impact of future legislative reform. Uncertainty from these sources is examined for each class of business and expressed
as a volatility measure relative to the net central estimate. The volatility measure for each class is derived after consideration of
statistical modelling and benchmarking to industry analysis. Certain product classes may be subject to the emergence of new types of
latent claims and such uncertainties are considered when setting the volatility and hence the risk margin appropriate for those
classes.
The long-tail classes of business generally have the highest volatilities for outstanding claims as the longer average time for claims to
be reported and settled allows more time for sources of uncertainty to emerge. Short-tail classes generally have lower levels of
volatility for outstanding claims.
The risk margin required to provide a given probability of adequacy for two or more classes of business or for two or more geographic
locations combined is likely to be less than the sum of the risk margins for the individual classes. This reflects the benefit of
diversification. The level of diversification assumed between classes has due regard to industry analysis, historical experience and the
judgement of experienced and qualified actuaries.
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