Notes

Today agenda for the presentation is to discuss Reserving and underwriting result as at December 2021. So, Here are the reserves that we are going to discuss today. and these are UPR, OSLR, IBNR, ULAE, URR and ultimate loss ratios

Lets Starts with Unearned premium reserves (UPR)
UPR is basically share of written premium received associated with the proportion of policy period that is yet to lapse as at the valuation date.
The table shows the comparison of UPR for 2021-Q3 and 2021-Q4.
Let look at the total gross UPR so, it has increased in the last quarter of 2021 from 31.4 M to 39.4M which is primarily driven by Fire increment from 16M to 26M which is due to increase in the written premium of fire in Q4. Other than Fire Liability and marine cargo have also shown an increase in 2021-Q4. We have calculated UPR on both gross of reinsurance and net of reinsurance bases. as the UPR data contain both gross and net premiums and if we look at the net UPR, the trend is similar to gross for all the LOBs. One thing that I want to mention here that the UPR on net side is significantly lower then in the Gross because of less retention ratios of Engineering large policies. MSI has started to RI engineering in 2019 and since we have written large policies with very low retention ratio.

OSLR:
OSLR is the amount of claim the insurer has not yet paid and thus expects to pay.
The table show the line of business wise comparison of Outstanding loss reserves for last two quarters of AY 20201
The overall OSLR for the company has significantly increased in the last quarter. and the main reason for this is a large Claim of Fire being reported in 2021-Q4 worth of AED 42.2 M that can be seen by increase in Fire OSLR value of 2021-Q4 of 53.4 M that is increased from 11M. Other LOBs have shown slight changes in gross OSLR
For Net OSLR, all the LOBs have shown an increase except engineering where it decreased from 604,000 to 365,000 and yet the gross OSLR is same it means that the engineering have even lower retention in 2021-Q4 which is specifically due to a large policy in Q4 which was only retained by 13%.
Fire net number are same for both gross and net, represents that the claims of fire are fully retained even though there a large claim of 42.2 too. it is because of high XOL priority.
we have used the values of OSLR as provided by the Company on both gross of reinsurance and net of reinsurance base

IBNR:
IBNR are reserves for claims that are incurred in the valuation period but not reported. It includes IBNYT, IBNER (enough reported means that claim is report but the claims amount is expected to change)
There is no significant increase in Overall IBNR for the last quarter of AY 2021. and For line of business Fire, General Accident, liability and engineering had shown a slight increase in Gross UPR
IBNR was calculated on a gross of reinsurance basis using ELR method there are some changes in the assumption of ELR for eng and marine cargo. For Eng the ELR is decreased from 15% to 10% for last 4 quarters and the assumption of marine cargo of 30% ELR for last 4 quarters and 25% is applied to 2017-Q2 in account for the large loss at that quarter so, the assumption have changes to 25% for last 4 quarters and 25% for 2017-Q2. The reason for the change in assumption is low reported loss ratios in recent quarters. For all lines, IBNR on a net of reinsurance basis was set equal to the IBNR on a gross of reinsurance basis.

ULAE:
ULAE are the reserves for future settlement of expenses and losses that cannot be assigned to individual Claims
The table shows the calculation of ULAE reserve on a gross of reinsurance basis.
ULAE on net of reinsurance basis is set equal to the ULAE reserve on a gross of reinsurance basis. The assumption here is that half the expenses are incurred at time of opening of the claim and half at time of settlement of the claim. Hence, the ULAE ratio is adding 50% to OSLR and 100% to IBNR. and then multiplied to ULAE ratio of 7.5% for all the lines.
Outstanding for a large claim has been excluded for ULAE calculation

URR:
URR is the reserves that is kept if the expected inflow (UPR) is not enough to cover the expected outflow.
The table show the required element for the calculation of URR.
We have a measure Excess UPR for the calculation of URR. So, Excess UPR is the expected inflow -expected outflow. we set URR zero if , Excess UPR > 0. Because we will have enogh UPR to cater expenses and claims and
If Excess UPR < 0, then URR = (Excess UPR) * - 1
For Expected Expenses here for Excess UPR, we have use the Expense ratios for AY 2021. For Expected claims, we have use the maximum of 2021 ultimate loss ratios or the 3 years average loss ratio. except Fire where we have used ultimate loss ratio of 2021 excluding the large claim because we believe it is one of a occurance. For marine Cargo the loss ratio is assumed to be 5% because?
URR is determined on a net of reinsurance basis. As, company do not defer RI commission so, Gross URR is set equal to the Net URR.

Reserves 2020-Q4 vs 2021-Q4
This slide shows the comparison of all the reserves for the quarter ending of 2020 vs 2021.
The UPR has increased mainly due to increase in the written business of liability and engineering in 2021-Q4. The significant OSLR increment here is because of the large claim of Fire. Increase in IBNR is due to increment in EP of 2020-Q4 in 2021-Q4. ULAE has increased because it is a function of IBNR and OSLR and both of them have an increase. URR is zero for both the quarters because the URR was enough to cater the expected outflows.

Fire Gross ultimate loss ratio:
In terms of GWP, Fire is being the largest LOB and due to the nature of this LOB it is prone to large losses. But The loss ratio have done fairly well except in 2021 as, the Earned premium for all the years are sufficient to absorb the large losses. with cumulative report loss ratio at 54% and cumulative ultimate loss ratio of 61%. In AY 2021, the gross ultimate ratio increased to 126% due a extremely large loss of AED 42.2M large loss in Fire. The size of a large loss is never be seen in the Last 5 year history of the company. Let look at the portfolio size, the earned premium of Fire is consistently increasing over the review period.

Motor Gross Ultimate Loss Ratios:
The volume in this LOB is very small leading to volatile loss ratios over the review period. The Negative OS is due to recoveries salvage subrogation in recent quarters. The overall gross loss ratios have been at or below 30% over the review period. and from the loss ratio, it is clear the motor line is profitable even though the portfolio share for motor is very limited.

Engineering Gross Ultimate Loss Ratios:
For Engineering there were two large losses in 2017 reflected by the extraordinary high loss ratio numbers here. for 2018-2021, he loss ratios are less than or equal to 16%. and there is not claim activity in 2019. with the weighted average ultimate loss ratios equal to 81%.
The portfolio is being increasing from year to year over the review.

General Accident Gross Ultimate Loss Ratios:
The gross ultimate loss ratios have been at or below 10% for the last five accident years. with weighted average ultimate loss ratio of 4%. The graph shows here that Portfolio size of GA is decreasing from 2018 onwards

Liability Gross Ultimate Loss Ratios:
the ultimate gross loss ratios are at or below 10% for all accident years because of minimal claim activity. except 2018 loss ratio which is driving up by a large claim. There is also a positive growth in earned premium for all the years.

Marine Cargo ultimate loss Ratios:
The cumulative gross reported loss ratio is 25% while the cumulative ultimate loss ratio for marine cargo is 28%. AY 2017 have comparatively large loss ratio due to a large claim in 2017.
The earned premium for marine cargo have increased from 2017 to AY 2019 but declined since.

Marine Hull ultimate loss Ratios:
There has been no claim activity for Marine Hull over the review period and is leading to an ultimate loss ratio is 0%.
The earned premium of Marine Hull was increasing in period 2017-2019 but it decreased in 2020 and have shown an increase since.

Underwriting
This is the graph of portfolio mix for the ending quarters of 2020 and 2021. The business composition is consistent with fire being largest line contributing 81% of gross portfolio in 2020 and 69% in 2021. Similar situation is on net side.
The share of Fire in portfolio is high in document year 2020 Because of 2020 spike in Fire was unusually high due to 2 large policies which had a combined GWP of almost 35M. The gross share of engineering is 7% and 12% in 2020 and 2021 respectively while it 5% on net set because of a low retention of large policies
Overall the two major lines in portfolio are fire and marine.

These graph show the line of business wise premium and their growth in 2021 cmpared to 2020.
The total gross written premium has decreased 20% which is primarily driven by Fire. Except Fire and motor, all the line have shown an increase. For Net written premium the Fire, Engineering and Motor has decreased and GA and Marine has increased. The main reason for low written premium in current year the decrease is the substantially high Written business of Fire in 2020.

Methodology and assumption
The formulas that have used are mentioned here. and the ratios that we are using are percentage of earned premium like commission ratio would be the commission either on gross or net divided by the respective earned premium for each year

Loss Ratios:
Except Fire, all the LOBs are volatile due to the premium volume and the nature of business.
Fire have been consistently decline since 2018 due to premium growth but in 2021 the loss ratio has significantly increased to 126% due to a substantial large loss of 42 M.
So, the overall gross and net loss ratios are driven by Fire line.

Commission Ratio:

The overall gross commission ratios have increased from 16% in AY 2017 to 20% in AY 2020 and since decreased to 14% mainly due to decrease in fire gross commission ratio.
The gross commission ratio for Fire has a decreasing trend except in 2020. In AY 2020 there were few large policies which leads to high gross commission ratios.
For the Net commission ratio, The Fire trend is same, engineering ratio is -26% in AY 2021 which is due to RI commission exceeding gross commission primarily due low retention rate of large engineering policy. More specificaly in 2021 there was a large policy which was only 13% retained causing this -ve net commission ratio
The overall net commission ratios is volatile over the review period and at its lowest 11% in AY 2021 mainly brought down by Engineering and Fire.

Expenses Ratios:
The gross expense ratio has shown a consistent decline from 34% in 2017 to 15% in 2021 which shows that the Company has achieved expense efficiency as volumes have increased
Net Expense Ratio have also declining trend from 2017 to 2020 and increased 1% in 2021. The expense rate are expected to be higher on net side as, the expense ratio is the expense as percentage of earned premium and earned premium is lower on net side and expenses are not absorbed by reinsurer at all. so, mathematically the net expense ratio is tend to be higher.

Cost of Reinsurance:
The CI is a measure of how much reinsurance costs the company by comparing premium ceded against commissions earned & claims recovered.
So, for MSI the cost of RI is entirely depends on RI premium and RI commission as the RI share of the claims is negligiable.
The overall cost of reinsurance has continued to increase over the last three years.
it is nearly doubled in 2021 from AED 5.3M in 2020 to AED 10.1M. This increase is brought on primarily by increase in RI earned premium for Fire and Engineering which is driven by some large policies written in previous years.
Engineering was at its lowest -1.6M in AY 2019 due to the high volume of reinsurance commission written by this line.
Cost of reinsurance is volatile for Marine and Engineering here over the review period because usually commissions are earned in line with earning of the policy but since for MSI the commissions are not deferred, we are using they are fully earned at the time they are written - this is leading to spikes in cost of RI. Overall cost of reinsurance for AY 2021 has increased from 10% to 15% . and this increase is experiance by all the line except Motor which is not reinsured.

Gross Underwriting performance:
If the gross combined ratio is below 100%, a line is considered profitable.
The gross combined ratios had a decreasing trend from 143% in AY 2017 to 48% in AY 2020 reflected in the increase in underwriting surplus. For AY 2021 Fire has incurred a substantial deficit due to a large claim of AED 42M. As, company is heavily relied on Fire performance so, this leads to an overall gross underwriting deficit.
The gross underwriting surplus have decreased.of all the LOBs except fire in AY 2021.

Net Underwriting performance:
Similar to gross, overall net combined ratio has been decreasing since 2017 to 2020 and increasing in 2021.The decline in Net Combined ratios reflect the growth in total net underwriting surplus.

Underwriting performance
The loss ratios have a higher variance on the net level as compared to the gross level for all lines. The combined ratios also have a higher variance on the net level. The Company can look to assess and optimize its reinsurance arrangement. Motor has the same gross and net ratios since it is not reinsured. (add more comments)

Business Plan Comparison
The table compared the Company’s business plan against actual performance obtained from Eforms. For AY 2021, the ratios have been calculated using draft financials.
So, basically we are comparing here the actual with the targets and ideally the company to perform better than the targets the actual ratios should be lower and we have indicating in green color.
So, let look at FY 2019 and 2020, Despite some negative deviations, the Company has been performing better than its targets. In FY 2021, net loss ratio performance is worse than the target as the actual value here is 60% higher than target that is due to significant a large Claim of fire ocuured that was not expected and was not accounted in the business plan and that's diving up the net combined ratio as well.

Prior Recommendation:
This slide shows the recommendation of 2021-Q2 valuation and the company's response
The first recommendation is to revisit the reinsurance arrangement as the net combined and loss ratio numbers and their variances were higher net side compared to gross.. The company's response on this was that they are more focusing on growing the portfolio to have more loss absorption capacity. as the local reinsurance arrangement will be costly and that will impact the underwriting results. as they currently deem the head office arrangement appropriate.

We had also recommend previously about the motor portfolio as motor portfolio has shown a decline over the year but the expenses ratio has increased in 2nd quarter of 2021. So, the company had advised to investigate expanding their motor portfolio and can also explore reinsurance options to aid in the expansion.
and in response the company

Recommendations:
Similar to the recommendation in 2021-Q2, we have recommended t0 revisit the reinsurance arrangement in this quarter too. This can costly for MSI as, they have responded on prior recommendation but we saw in the last quarter of 2021, that even in the fire line with the highest share of portfolio, the earned premium was not able to absorb the large claim and despite of unusual high loss, it is being fully retained because this claim amount is not able to reach XOL limit. So, by working on this recomendation , MSI can potentially lower the underwriting volatility.

because as we have seen that from the last three four years that the fire is performing well and we got the overall underwriting surplus over those years. but in 2021 the large claim experience has made an impact in overall performance.