Group review
Sustainability
and governance
Annual financial statements
 

Annexure A – Insurance businesses

 

    2009  
Rm  		   2008  
Rm  
1.   Liabilities under insurance contracts        
  1.1   Short term operation        
    Provision for unearned premiums   7     —  
    Provision for outstanding claims, including IBNR   4     —  
      11     —  
  1.2   Long term operation        
    Provision for unearned premiums   6     —  
    Provision for outstanding claims, including IBNR   2     —  
       8     —  
    Total liabilities   19     —  
    It is expected that all insurance contract liabilities will be settled within 12 months from year end.      
    The Group believes that the liabilities for claims reported in the balance sheet is adequate. However, it recognises that the process of estimation is based upon certain variables and assumptions which could differ when the claims arise.      
    The above liabilities are included in “Trade and other payables” in the Group’s balance sheet.      
2.   Financial assets        
  Neither the short term nor the long term insurance business had any investments other than cash and cash equivalents at year end. The following balances were included in the Group’s bank balances and cash:        
  Cash on call   45     —  
  Cash at bank   19     —  
    64     —  
3.   Revenue        
  Premium income is included in the Group’s “Financial services” revenue category and comprised the following:        
  3.1   Short term operation        
    Gross premiums written   50     —  
    Provision for unearned premiums   (7)    —  
    Earned premiums   43     —  
  3.2   Long term operation        
    Gross premiums written   57     —  
    Provision for unearned premiums   (6)    —  
    Earned premiums   51     —  
    Total premium income   94     —  
4.   Insurance risk management  
  Risk management objectives and policies for mitigating risk   
  The primary insurance activity carried out by the insurance operation assumes the risk of loss from persons that are directly subject to the risk. The insured risks are directly associated with furniture and equipment acquired by the policyholder on credit terms from furniture retailers within the JD Group.
  The theory of probability is applied to the pricing and provisioning for the portfolio of insurance contracts. The principal risk to the operation is pricing for the relevant insurance contracts written. Pricing risk is considered to be low due to the low sums insured and the short duration of the indemnity period. All contracts are renewable monthly.
  The operation manages its insurance risk through underwriting limits, approval procedures for transactions and by reviewing its pricing methodology regularly. The credit risk is low due to the credit worthiness of the policyholder being assessed at point of sale by the furniture retailer.
  Underwriting strategy   
  The operation’s underwriting strategy is to ensure a balanced portfolio and is based on a large portfolio of similar risks over a large geographical area. This reduces the variability of the outcome.
  Terms and conditions of insurance contracts   
  The short term operation currently offers a single product with two different indemnity options. The insurance contract protects the policyholder against physical loss or damage of the insured movable asset.
  The long term operation offers a single product with two different indemnity options. The insurance contract protects the policyholder against the financial obligations from the credit sale agreement in the event of death, disability or retrenchment.
  Claims development   
  The operation is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term, subject to predetermined time scales dependent on the nature of the insurance contract. The operation is therefore exposed to the risk that claims reserves will not be adequate to fund historic claims (runoff risk). As it is the businesses’ first year of operation, the runoff risk is minimal.
  The operation’s insurance contracts are classified as ‘short tailed’, meaning that any claim is settled within a year after the loss date.
5.   Financial risk management  
  Transactions in financial instruments may result in the operation assuming financial risks. These include market risk, interest rate risk, credit risk and liquidity risk. Each of these financial risks is described below, together with a summary of the ways in which the operation manages these risks.
  Market risk   
  Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the operation’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
  The operation has no significant market risk exposure due to the nature and duration of its financial instruments. The operation does not transact in foreign currency.
  Credit risk   
  Credit risk is the risk that a counterparty will be unable to pay amounts in full when due.
  The operation structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or groups of counterparties. Such risks are subject to an annual or more frequent review.
  The major concentration of credit risk arises from the operation’s cash balances. Reputable financial institutions are used for investing and cash handling purposes. Cash balances are placed with five reputable banking institutions.
  Liquidity risk  
  The operation is exposed to daily calls on its available cash resources mainly from claims arising. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Currently all cash and cash equivalents are available on call.
  Capital management   
  The operation manages its capital base to achieve a prudent balance between maintaining capital ratios to support business growth and confidence, and providing competitive returns to shareholders. The capital management process ensures that the operation maintains sufficient capital levels for legal and regulatory compliance purposes. The operation ensures that its actions do not compromise sound governance and appropriate business practices and it eliminates any negative effect on payment capacity, liquidity or profitability.
  Long term operation   
  The capital adequacy requirement is determined according to generally accepted actuarial principles in terms of the guidelines issued by the Actuarial Society of South Africa. It is an estimate of the minimum capital that will be required to provide for future experience that is more adverse than that assumed in the calculation of policyholder liabilities. As at 31 August 2009, the operation’s capital adequacy requirement is R10 million and the ratio of excess assets to capital adequacy requirements is 4.1 times.
  Short term operation   
  The operation submits quarterly and annual returns to the Financial Services Board in terms of the Short-term Insurance Act, 1998. The company is required at all times to maintain a statutory surplus asset ratio as defined in the Short-term Insurance Act.
6.   Judgements and estimates  
  Claims made under insurance contracts  
  The operation’s estimates for reported and unreported losses and establishing resulting provisions are continually reviewed and updated, and adjustments resulting from this review are reflected in income. The process relies upon the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events.
  Process used to determine the assumptions   
  The process used to determine the assumptions is intended to result in estimates of the most likely or expected outcome. The sources of data used as input for the assumptions are internal, using detailed studies that are carried out annually. The assumptions are checked to ensure that they are consistent with observable market prices or other published information.
  The nature of the business makes it easy to predict with certainty the likely outcome of claims and the ultimate cost of notified claims. Each notified claim is assessed on a separate, case by case basis with due regard to the claim circumstances, information available from loss adjusters and historical evidence of the size of similar claims. Case estimates are reviewed regularly and are updated as and when new information arises. The provisions are based on information currently available. However, the ultimate liabilities may vary as a result of subsequent developments.