ECIC IR 2023

ANNUAL Financial Statements for the year ended 31 March 2023

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Notes to the Financial Statements

2. Critical accounting judgements, estimates and assumptions Critical estimates and judgements in applying the accounting policies are described below:

(a) Insurance contract assets and liabilities The Corporation’s estimates for reported and unreported losses are continually reviewed and updated, and adjustments resulting from this review are reflected in the statement of comprehensive income. The process relies on the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. The underlying risks are highly variable due to unpredictable political and commercial factors and the heterogeneity of risks by country, size, term and sector. In addition, although claim amounts are high, the number of contracts issued is low. Therefore standard statistical techniques, such as the chain ladder method, are inappropriate and estimates are made on a contract by contract basis. The Corporation’s process for determining significant reserving assumptions is outlined in note 10 and note 14.4. – Unearned Premium Provision (UPP) The UPP refers to the amount of premium booked that remains unearned at the reporting date. It is therefore intended to cover against future claims incurred and is dependent on the policy’s earning pattern. To the extent that a contract’s risk profile changes, the UPP might be insufficient to cover the future claims risk of the unexpired period. In this case, an additional reserve must be established in the form of the Unexpired Risk Provision (URP) to cover the shortfall in UPP. The UPP calculation is calculated on a policy‑by‑policy level according to the risk profile of each policy. While the risk of concentration manifests at a portfolio level, premium reserves would be the first port of call in mitigating such risk. If the premiums are insufficient to cover the total claims risk (i.e. including the risk stemming from concentration) the reserve shortfall should then be addressed through the URP. The UPP for credit insurance is earned through the determination of earning curves for the credit insurance contracts such that these curves reflect the risk profile of the contracts in place at the reporting period. The UPP for the investment guarantee policies is determined by applying the standard 365th’s method, assuming the risk profile is uniform over the term of the contract. Therefore, the extent to which the Concentration Risk Provision (CRP) can form part of the URP depends on the overall sufficiency of premiums. Furthermore, the Corporation cannot defer more premiums than it has actually written. – Incurred But Not Reported (IBNR) claims provision ECIC holds an IBNR for contracts where management, on the basis of information gathered during the monitoring process, believes that it is likely a claim has materialised even though it has not yet been reported. Indicators that a claim will arise are often triggered by events such as: c The occurrence or a high probability that a non‑payment of a scheduled instalment under the insured contract (protracted default) would occur; c The occurrence or a high probability that a political cause of loss (e.g. war, change in law sabotage, transfer restriction, inconvertibility) will occur; and c The occurrence or a high probability that commercial causes of loss (e.g. insolvency or an act of insolvency) will occur. A rating scale is applied in assigning the probability of loss. The loss given default (LGD) assumptions have been made for the different risk events covered by the Corporation. The IBNR is calculated by taking the sum at risk at the point in time multiplied by the likelihood factor and multiplied by the LGD.

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