Profitability of Insurance Product Categories: Third-Party Motor, All Risks, and Transport

57.088/PC4/VK Brussels, 1 December 1992.

COMMUNICATION NO. D.102

Subject: Profitability of the categories of insurance products: Third-Party Motor, All Risks, and Transport

I. INTRODUCTION.

Within the framework of ex post facto control, it is important that the Control Service clarifies its position regarding the application of Article 21bis of the Control Act.
To this end, the basic principles of profitability per product or group of products are explained below.
Where necessary, amendments and clarifications are made to Communication D.95 regarding the statistics of Third-Party Motor, All Risks, and Transport insurance (direct insurance transactions in Belgium).
The new statistics regarding 1992, amended in accordance with the Communication, will be sent to the companies at a later date.

II. BASIC PRINCIPLES.

1. Statistics for Third-Party Motor, All Risks, and Transport.
   The aforementioned document is extremely important and must therefore be filled in by the companies with the utmost care. The Control Service will indeed base its analysis and control of profitability on it. In a first phase, the Control Service will limit itself to direct business in Belgium.

2. Categories of insurance products.
   The categories of insurance products eligible for profitability control correspond to headings I to XXXIII, mentioned in point B. PROFITABILITY of Annex 1 of Communication D.95.

3. Non-technical income.
   Companies that would allocate non-technical income to products must fill in the newly included heading "Allocation of non-technical income (after deduction of costs) to categories of insurance products" in the statistics, and this for the 33 corresponding columns. The use of non-technical income will, however, not be taken into account in the profitability calculation per product category, unless a deviation is obtained from the Control Service based on properly justified elements.

4. Unrealized capital gains and losses.
   These are not included in the profitability calculation. For information purposes, however, companies that would allocate unrealized capital gains or losses to product categories are asked to fill in the new headings "Unrealized capital gains on investments" and "Unrealized capital losses on investments", and this without distinction according to their origin (technical income or non-technical income).

5. Investment income and costs.
   The Control Service will, in the analysis of profitability per product category, use as the reference basis for determining investment income and costs the method described in Annex B.
   Nevertheless, companies may use their own method when filling in the statistics, provided that this method respects the principles set out in the present Communication (and in particular point 3 regarding non-technical income). The Control Service will, together with the company concerned, investigate any significant difference that might arise between the results obtained according to the "C.D.V." method and those obtained according to the company's own method. Furthermore, account will be taken of the exceptional or recurring nature of the following elements: impairments and depreciation, reversal of impairments and depreciation, capital gains and losses on realization.

6. Theoretical rent.
   In order to correctly allocate the income and costs of each category of insurance products, companies may take into account "theoretical rent".

7. Profit-sharing (including premium refunds that have the nature of profit-sharing).
   Companies may allocate profit-sharing for a category of products or for any smaller subset thereof, provided that this does not jeopardize the profitability of the category of products concerned or the smaller subset of products. The Control Service may object to the allocation of profit-sharing for a smaller subset of a category of products if this jeopardizes the profitability of the category of products. The payments of profit-sharing must be recorded in item 5.2. (062 and 063) of the statistics (Annex A), and therefore may not be deducted from item 1.1. (002 + 004 - 005).

8. Operating costs and income.
   If it appears that the distribution of operating costs and income by the company among the different categories of products gives a distorted picture of the situation, the Control Service may, in consultation with the company, adopt other allocation keys.

9. Financial year.
   The statistical document allows balances to be determined per financial year. In an initial analysis, the profitability study will therefore take place per financial year, without being limited to one financial year, as the evolution of results over several years is of great importance.

10. Accident year or underwriting year.
    Subsequently, the Control Service will ensure that its analysis is refined by studying the statistics based on accident years or, in some cases, underwriting years, which should lead to a more accurate determination of the recent evolution of the profitability of a given product.

11. Ceded reinsurance.
    The Control Service confirms that the result of ceded reinsurance must be filled in for the total of all lines of business.
    To the extent possible and as long as it remains reliable, companies must nevertheless provide us with a more detailed breakdown.

12. Profitability.
    The profitability study will in principle take place at the level of the gross technical-financial balance (see Annex A, page 5).
    Nevertheless, depending on the circumstances, especially when the loss ratio of a year is exceptionally high, account will be taken of the net technical-financial balance, i.e., after the result of ceded reinsurance. The Control Service will not lose sight of the fact that, in most cases, ceded reinsurance is in fact a cost for the company and reduces the technical-financial result of its products. Furthermore, care will be taken to ensure that reinsurance plays its "normal" role and does not serve to systematically compensate for the structural deficit of a product. In the profitability analysis, the Control Service will pay special attention to the level of technical reserves.

III. AMENDMENTS TO COMMUNICATION D.95.

1. Operating costs.
   Companies are required to distribute their operating costs over the 33 categories of products. They must justify to the Control Service the allocation methods they have used for these categories as well as for the different management and activities. For this purpose, a questionnaire has already been sent. The possibility for companies to limit themselves to a distribution over the insurance lines, as provided for in Communication D.95, is therefore abolished. The same applies to the reserve for internal claims settlement costs. Companies that from now on wish to report separate amounts for the 33 categories of products for internal claims settlement costs, acquisition costs, management costs, and costs related to the management of investments, must also justify to us the distribution of operating costs over these 4 items. To help companies that do not yet have a refined analytical accounting and management cost control, the Control Service is considering, in cooperation with the sector, defining rules that will allow operating costs to be distributed over the 33 categories of insurance products. Pending the possible establishment of these rules, companies will fill in the statistics in accordance with the provisions of the first paragraph above.

2. Management costs.
   Please replace the phrase "and of assumed and ceded reinsurance" with "and of ceded reinsurance" on page 6, point VIII, § 2 of Communication D.95.

3. Ceded reinsurance.
   Companies will provide an explanation in a questionnaire sent by the Control Service regarding how they have performed the breakdown across the different categories.

4. Statistics.
   4.1. It was decided to add the following headings for the 33 categories of products:

• PROFIT-SHARING PAID CHARGING THE FINANCIAL YEAR
  (heading V.5.2.b).
• ALLOCATION OF NON-TECHNICAL INCOME (AFTER DEDUCTION OF COSTS) TO CATEGORIES OF INSURANCE PRODUCTS (heading XI).
• ALLOCATION OF UNREALIZED CAPITAL GAINS ON INVESTMENTS TO CATEGORIES OF INSURANCE PRODUCTS (heading XII).
• ALLOCATION OF UNREALIZED CAPITAL LOSSES ON INVESTMENTS TO CATEGORIES OF INSURANCE PRODUCTS (heading XIII).
• GROSS BALANCE BEFORE FINANCIAL INCOME.
• GROSS TECHNICAL-FINANCIAL BALANCE.
  Since the balance of ceded reinsurance was moved between the gross technical-financial balance and the net technical-financial balance, the headings "net balance of insurance activity" and "net balance before financial income" have been deleted.

4.2. Reserve for amounts still to be paid.
We wish to clarify that headings 3.4. (reserve for amounts still to be paid at the beginning of the financial year) and 3.5. (reserve for amounts still to be paid at the end of the financial year) respectively correspond to the sum of 3.4.a., 3.4.b. and 3.4.c. on the one hand and 3.5.a., 3.5.b. and 3.5.c. on the other hand. The reserves for reported claims (3.4.a. and 3.5.a.) therefore do not contain the reserves for IBNR claims, nor the reserves for internal claims settlement costs. It was decided, in the various documents attached to the statistical statement, to replace the tables "3.5. - Reserve for amounts still to be paid" with new tables "3.5.a. + 3.5.b. - Reserve for amounts still to be paid (without reserve for internal claims settlement costs)."

4.3. Presentation of data per underwriting year.
The additional statistics (see point V of Communication D.95) are designed per accident year for all risks except for transport insurance, where reference is made to the underwriting year.
For products falling under the transport line (casco, goods, and liabilities), companies must report premiums, net of all commission fees, broken down by underwriting year from the financial year 1985 (see Annex D.1.). Companies that work by underwriting year in lines other than the transport line must fill in an analogous document to that requested for the transport line (see Annex D.2.). A table must be filled in per product or group of products, showing both the name of the product or group of products and the corresponding number of the statistics.

4.4. I.B.N.R. (Incurred But Not Reported).
The reserves for IBNR claims (heading 3.5.b. of the basic statistics) are composed for some products or groups of products for multiple accident or underwriting years. In that case, companies must break down heading 3.5.b. in the table included in Annex E. This breakdown must be done per product or group of products, showing both the name of the product or group of products and the corresponding number of the statistics.

5. List of investments regarding unallocated assets.
   Separately from the profitability control of products, the Control Service will request a list of investments regarding unallocated assets, and this per category of investment (e.g.: building, share, ...) without breakdown across the different insurance products. To this end, the necessary instructions will be given to the companies at a later date.

IV. CONFORMITY WITH THE ANNUAL ACCOUNTS.

1. The provisions of the Royal Decree of 12 November 1979 must be observed even if some of them would lead to a discrepancy with the new statistical statement. The Control Service cannot allow deviations from these provisions.
   In a Communication, the Control Service can, however, provide clarifications for certain points not explicitly dealt with in the aforementioned decree.
   This has happened, specifically for the "balance of R.D.R. transactions" (Communication D.68, page 11, point IV.E.4) and for the "tax on profit-sharing" (Communication D.89, page 11, point F).
   The instructions regarding these points in the aforementioned Communications are hereby abolished.
   Henceforth, regarding the annual accounts, the negative balance of R.D.R. transactions and the tax on profit-sharing are to be included in the heading "I.F. Other technical costs", while the positive balance of R.D.R. transactions is deducted from that same heading.

2. Companies are invited to send to the Control Service the accurately filled-in Annexes C.1 and C.2, to establish the link between the annual accounts relating to both direct insurance transactions in Belgium or abroad and reinsurance, and the statistical statements relating only to direct insurance transactions in Belgium.

DESCRIPTION OF THE ACTIVITIES CONCERNED

Annex C.1:
Annex C.1 allows a technical-financial balance "LIFE" and "NON-LIFE" to be presented by regrouping on the one hand the transactions included in the statistical statements, namely direct insurance transactions in Belgium, and on the other hand, the transactions that are not included therein and relate to:

• other activities (columns 3 and 7), i.e., insurance transactions abroad, directly or through branches, as well as reinsurance;
• transactions related to the activity group "Statutory Pensions" (column 4), as mentioned in the fifth column of Annex 13 of Chapter I, Section III of the Royal Decree of 12 November 1979;
• transactions related to accident insurance (column 8), as mentioned in the fourth column of Annex 13;
• income and costs associated with the management of free assets (column 10).
  Columns (2) and (3) together make up the activity group "LIFE", as defined in Article 8, § 2, A. of the Royal Decree of 12 November 1979. In the same way, columns (6) and (7) together make up the activity group "NON-LIFE" (B.O.A.R.), as defined in Article 8, § 2, B. of the same decree.

Annex C.2:
Conformity between the statistical statements and the published annual accounts is made possible by regrouping the income and costs associated with the activities "LIFE" and "STATUTORY PENSIONS" (column 5 - Annex C.1) and "NON-LIFE" (column 9 - Annex C.1) and with the management of "free assets" (column 10 - Annex C.1) within a single column, the sum of which must correspond to the total of headings I to VI of the first column of Annex 13.

Please find attached the following documents:
A. STATISTICS OF THIRD-PARTY MOTOR, ALL RISKS, AND TRANSPORT INSURANCE (Direct insurance transactions in Belgium).
This document replaces that included as Annex 2 to Communication D.95.
B. METHOD FOR THE BREAKDOWN OF INCOME AND COSTS OF INVESTMENTS BETWEEN THE 33 INSURANCE CATEGORIES - "C.D.V. METHOD".
C.1 and C.2 CONFORMITY STATISTICS AND ANNUAL ACCOUNTS.
D. PREMIUMS PER UNDERWRITING YEAR.
D.1. Transport
D.2. Other lines
E. I.B.N.R. BREAKDOWN

The Chairman,
J.-M. DELPORTE.