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Notes to the consolidated fnancial statements (continued)

for the year ended 30 June 2011

34. Group risk management (continued)

34.2 Group insurance risk management

34.2.1 Policies for mitigating insurance risk

The risk management activities include prudent underwriting, pricing, acceptance and management of risk, together with claims management and reserving.

The key policies in place to mitigate insurance risk include the following:

–– the setting and adherence to underwriting guidelines that determine policies and procedures for acceptance of risk –– the setting of formal claims acceptance limits and the regular review and updating of claims experience data –– the reduction in the concentration of insurance risk through diversifcation

–– the Suncorp Group enters into reinsurance and ceding arrangements to preserve capital and manage earnings volatility from large individual or catastrophic claims –– the maintenance of appropriate actuarial reserves including reserves to cover claims incurred but not yet reported

–– the identifcation and consistent monitoring against budget projections derived from the actuarial projections models of external variables which impact claims cash fow such as mortality and morbidity experience, claims frequency and persistency

–– managing of risk exposures using various analyses and valuation techniques, including stochastic modelling, to calculate the capital required under adverse risk scenarios; and

–– the monitoring of natural disasters such as foods, storms, earthquakes and other catastrophes. Exposures to such risks are monitored using catastrophe models. In addition, the Board receives Financial Condition Reports from the Appointed Actuary who also provides advice in relation to premium, issuing of new policies and reinsurance arrangements in accordance with APRA Prudential Standards. The Company Actuary for Asteron Life Limited (New Zealand) (ALLNZ) provides a Financial Condition Report and similar advice to the ALLNZ Board.

Concentration of insurance risk is mitigated through diversifcation over classes of insurance business, industry segments, geographical segments (Australia and New Zealand), the use of reinsurer coverage and ensuring there is an appropriate mixture of individual and Suncorp Group insurance business split between mortality, morbidity and annuity beneft payments. Catastrophe insurance is also purchased to ensure that any accumulation of losses from one area is protected.

Exposure to risk of large claims for individual lives is managed through the use of surplus reinsurance arrangements whereby the Suncorp Group’s maximum exposure to any individual life is capped. Concentrations of risk by product type are managed through monitoring of the Suncorp Group’s in-force life insurance business and the mix of new business written each year.

A product pricing and re-rating process ensures that any cross subsidies between insurance rates for groups of policyowners of different sex and age are minimised such that proftability is not materially impacted by changes to the age and sex profle of the in-force business.

34.2.2 Terms and conditions of insurance business

(a) General Insurance

The majority of direct insurance contracts written are entered into on a standard form basis. Insurance contracts are generally entered into on an annual basis and at the time of entering into a contract all terms and conditions are negotiable or, in the case of renewals, renegotiable. Non-standard and long-term policies may only be written if expressly approved by a relevant delegated authority. There are no special terms and conditions in any non-standard contracts that would have a material impact on the fnancial statements. There are no embedded derivatives that are separately recognised from a host insurance contract. (b) Life business

The nature and terms of the insurance contracts written is such that certain external variables can be identifed on which related cash fows for claim payments depend.