Notes

Today I am going to present Resevering and underwriting result as at December 2021. So, Here are the reserves that we are going to discuss today.

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
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. So, 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 in net side compare to Gross because of less retention ratios of Engineering large policies.

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
less retention ratio in 2021 for example there is a large policy in that was retained only by 13%.
we have used the values of OSLR as provided by the Company on both gross of reinsurance and net of reinsurance base

IBNR:
IBNR was calculated on a gross of reinsurance basis. For all lines, IBNR on a net of reinsurance basis was set equal to the IBNR on a gross of reinsurance basis.
There is no significant increase in Overall IBNR for the last quarter of AY 2021. specific to the line of business Fire, General Accident, liability and engineering had shown a slight increase in Gross UPR

ULAE:
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 7.5%, a fixed estimate for all line.
Outstanding for a large claim has been excluded for ULAE calculation

URR:
The table show the required element for the calculation of URR. As, URR is kept if the expected inflow (UPR) is not enough to cover the expected outflow.
We have this measure Excess UPR that is being calculated by the formula UPR – Expected Claims – Expected Expenses. So, UPR is expected inflows and we are subtracting it with the expected outflows. we there is a condition that If, Excess UPR > 0, then URR = 0
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
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


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 the written business of in 2020 was substentially large due two large policy fire which combined have the premium around 35M being registered at 2020. One thing more to be noticed here is that the gross share of engineering in 21 is 12% while it 5% on net set because because of a large policies had a low retention rate of 13%. So, overall the two major lines 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 to a large engineering policy which is only 13% retained in 2021
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, expense are not absorbed by reinsurer at all. Basically the expenses ratios are the expenses as percentage of earned and over review period the net earned premium is lower than the gross reinsurance while the expense are exactly same for both gross and get .so, the net expense ratio are tend to higher than gross.

Cost of Reinsurance:
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.
And As, MSI do not defer the commissions the cost of reinsurance is volatile for Marine and Engineering here over the review period also the
Engineering was at its lowest -1.6M in AY 2019 due to the high volume of reinsurance commission written by this line.
The overall cost of reinsurance has increased from 10% in AY 2020 to 15% in AY 2021. All lines of business experienced an increase.

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 indicating an un-favourable reinsurance arrangement. The combined ratios also have a higher variance on the net level. Motor has the same gross and net ratios since it is not reinsured. The Company can look to assess and optimize its reinsurance arrangement.

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.