TD Bank 2014 Annual Report Download - page 189

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS 187
INSURANCE
NOTE 24
INSURANCE RISK
The Bank is engaged in insurance businesses relating to property and
casualty insurance, life and health insurance, and reinsurance through
various subsidiaries.
Insurance risk is the risk of financial loss due to actual experience
emerging differently from expectations in insurance product pricing
or reserving. Unfavourable experience could emerge due to adverse
fluctuations in timing, actual size and/or frequency of claims (for
example, non-life premium risk, non-life reserving risk, catastrophic
risk, mortality risk, morbidity risk, and longevity risk), policyholder
behaviour, or associated expenses.
Insurance contracts provide financial protection by transferring
insured risks to the issuer in exchange for premiums. The Bank is
exposed to insurance risk through its property and casualty insurance
business, life and health insurance business and reinsurance business.
Senior management within the insurance business units has primary
responsibility for managing insurance risk with oversight by the Chief
Risk Officer for Insurance who reports into Risk Management. The
Audit Committee of the Board acts as the Audit and Conduct Review
Committee for the Canadian Insurance company subsidiaries. The
Insurance company subsidiaries also have their own Boards of Directors,
who provide additional risk management oversight.
The Bank’s risk governance practices ensure strong independent
oversight and control of risk within the Insurance business. The Risk
Committee for the Insurance business provides critical oversight of the
risk management activities within the business. The Bank’s Insurance
Risk Management Framework and Insurance Risk Policy collectively
outline the internal risk and control structure to manage insurance
risk and include risk appetite, policies, processes as well as limits and
governance. These documents are maintained by Risk Management
and support alignment with the Bank’s risk appetite for insurance risk.
The assessment of reserves for claim liabilities is central to the
insur
ance operation. The Bank establishes reserves to cover estimated
future
payments (including loss adjustment expenses) on all claims
arising from insurance contracts underwritten. The reserves cannot be
established with complete certainty, and represent management’s
best estimate for future claim payments. As such, the Bank regularly
monitors liability estimates against claims experience and adjusts
reserves as appropriate if experience emerges differently than antici-
pated. Claim
liabilities are governed by the Bank’s general insurance
reserving policy.
Sound product design is an essential element of managing risk.
The Bank’s exposure to insurance risk is generally short term in nature
as the principal underwriting risk relates to automobile and home
insurance for individuals.
Insurance market cycles as well as changes in automobile insurance
legislation, the judicial environment, trends in court awards, climate
patterns and the economic environment may impact the performance
of the Insurance business. Consistent pricing policies and underwriting
standards are maintained and compliance with such policies is moni-
tored by the Risk Committee for the insurance business.
Automobile insurance is provincially legislated and as such, policy-
holder benefits may differ between provinces. There is also exposure
to geographic concentration risk associated with personal property
coverage. Exposure to insurance risk concentrations is managed
through established underwriting guidelines, limits, and authorization
levels that govern the acceptance of risk. Concentration risk is also
mitigated through the purchase of reinsurance.
Strategies are in place to manage the risk to the Bank’s reinsurance
business. Underwriting risk on business assumed is managed through
a policy that limits exposure to certain types of business and countries.
The vast majority of reinsurance treaties are annually renewable, which
minimizes long-term risk. Pandemic exposure is reviewed and esti-
mated annually.
OTHER RELATED RISKS
Credit risk is managed through a counterparty credit policy. To prop-
erly manage interest rate risk and liquidity risk, the Bank maintains a
system to match a portion of its investments to the net provision for
unpaid claims. Therefore, most of the change in the value of the assets
held for matching purposes will be offset by a corresponding change
in the net provision for unpaid claims’ discounted values.
INSURANCE REVENUE AND EXPENSES
Insurance revenue is presented on the Consolidated Statement of
Income under Insurance revenue and claims-related expenses are
presented under Insurance claims and related expenses, including
the impacts of claims and reinsurance on the Consolidated Statement
of Income.
Insurance Revenue and Insurance Claims and Related Expenses
(millions of Canadian dollars) For the years ended October 31
2014 2013 2012
Insurance Revenue
Earned Premiums
Gross $ 4,423 $ 4,253 $ 3,990
Reinsurance ceded 856 836 834
Net earned premiums 3,567 3,417 3,156
Fee income and other revenue1 316 317 381
Insurance Revenue 3,883 3,734 3,537
Insurance Claims and Related Expenses
Gross 3,041 3,273 2,771
Reinsurance ceded 208 217 347
Insurance Claims and Related Expenses $ 2,833 $ 3,056 $ 2,424
1
Ceding commissions received and paid are included within fee income and other
revenue. Ceding commissions paid and netted against fee income in 2014 were
$182 million (2013 – $182 million; 2012 – $184 million).