Risk types

Insurance risk

Insurance risk is the risk relating to our insurance operations. It is the most important risk that we are exposed to. The risk comprises underwriting risk, that is, the risk related to the determination of premiums, and provisioning risk, that is, the risk related to the assessment of future payments to be covered by premiums received.

Underwriting risk

To manage underwriting risk we use tariffs as well as business procedures and authorities for risks not covered by a tariff. We use reinsurance to hedge large fluctuations resulting from single events. Inadequate premiums may cause us to incur losses on our insurance operations. An excessive premium relative to the risk may cause us to lose competitive advantages and have an adverse effect on our business platform. Accordingly, we strive to strike the correct balance between risk and premium, and we regularly follow up on our tariffs and pricing methods.

Provisioning risk

After the period of the policy’s cover has expired, insurance risk relates to the provisions for claims made to cover future payments on claims already incurred. The size of the provisions for claims is determined both through individual assessments and actuarial calculations. We manage the risk that provisions for claims are incorrectly determined by sophisticated models, controls and follow-up in order to create the most exact match possible between provisions and claims expenses and to reduce unforeseen liabilities.

Up to December 2007, provisions for claims relating to annuities in Danish workers’  compensation insurance were calculated using the fixed-rate method, corresponding to a real interest rate of 1%. As from December 2007, the provisions for claims are discounted using the current market rate. This change exposes TrygVesta and TrygVesta’s financial statements to explicit inflation risk in case of changes in Danish wage inflation. We hedge such risk using an inflation swap.

Our provisions for claims amounted to DKK 21,104m at 31 December 2007.