Protection & Indemnity

Glossary

Basis of financial analysis

The main aim in the Willis Towers Watson analysis of club report and accounts has been consistency. Although there are still variations between the way clubs report, we try as far as possible to compare ‘like with like’ and to apply the same approach year after year.

A glossary of terms is provided below.

Glossary of terms

Calls and Premiums All calls (gross basis, including brokerage)
Reinsurance Premiums All reinsurance premiums
Operating Expenses All general management, administrative and audit expenses (not including claims management costs)
Operating Income Calls, less reinsurance costs, less expenses
Gross Paid Claims Paid gross claims, including Pool contributions (including claims management costs)
Net Paid Claims Gross paid claims less reinsurance and Pool recoveries
Net Change in Provision for Claims Change in net estimated outstanding claims
Net Incurred Claims Net paid claims plus change in provision for claims
Technical Surplus (Deficit) Operating Income less Net Incurred Claims
Investment Income All investment income, including exchange gains/losses, tax etc
Overall Surplus for Year (Deficit) Incurred technical surplus (deficit), plus investment income
Net Assets Total assets, less creditors, less miscellaneous provisions for taxation etc
Net Outstanding Claims Total net estimated outstanding claims
Free Reserves (Including Forecast Deferred Calls) Net assets, less outstanding claims

Average Expense Ratio (AER)

Average Expense Ratios (AERs) were introduced in 1999 following pressure from the European Commission in an attempt to enable direct comparisons of operating costs between clubs within the International Group. The formula that all clubs are required to adhere to when calculating their AER figure is as follows:

The AER formula is the
five-year average of:

(Operating costs x 100)
(Premium income + Investment income)

In principle the AER is a reasonable idea, but in reality it is only ever a very approximate guide to the relative operating costs of individual clubs. For example different membership profiles, disproportionately high levels of premium or investment, whether the club owns or rents their office space, how much the club spends on loss prevention, global office network, member portals etc all have an impact on the AER.

Combined Ratio

Combined ratios provide a direct comparison of club underwriting performance. The combined ratio is essentially the net loss ratio for the club and is defined as follows:

Net combined ratio =

(Net incurred claims + operating expenses)
(Premium – reinsurance costs)
  • A combined ratio of 100% represents an underwriting break-even position
  • Anything in excess of 100% would be an underwriting loss
  • A combined ratio less than 100% would represent an underwriting surplus.