2020 INTEGRATED REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2020 36. MANAGEMENT OF RISKS (continued) 36.2 Insurance product risk management (continued) a. Frequency and severity of claims (continued) The Group manages these risks through its underwriting strategy. The underwriting strategy ensures that the risks accepted are in line with PPS’s risk appetite. Medical risk selection is included in the underwriting protocols. Premium loadings and benefit exclusions may be imposed which reflect the health and medical history of the applicant. The Group has maximum exposure limits in respect of any single life insured. Maximum exposures are determined relative to gross professional income to ensure that policyholders are not overinsured. These limits are increased annually in line with expected salary inflation for professionals. Policyholders are reminded each year of their benefits and asked to review these benefits to ensure they are not over insured relative to their income as this may impact on future claims. In some instances, maximum exposures are not increased annually where not appropriate. Where appropriate, reinsurance contracts are in place to limit the Group’s liability. There is a Board approved reinsurance strategy in place, which is regularly reviewed by the Actuarial Committee for its ongoing appropriateness. The table below presents the total insured benefits per month and the average benefit per month per individual life assured on the basic sickness and disability contract. Total insured Benefit monthly per month benefit per life Group R’m Rand 2020 7 686 73 525 2019 7 597 71 775 Insurance risk for contracts disclosed in this note is also affected by the contract holders’ right to terminate the contract completely. As a result, the amount of insurance risk is also subject to contract holder behaviour. On the assumption that contract holders will make decisions rationally, overall insurance risk can be assumed to be aggravated by such behaviour. For example, it is likely that contract holders whose health has deteriorated significantly will be less inclined to terminate contracts insuring death benefits than those contract holders remaining in good health. This results in an increasing trend of expected mortality, as the portfolio of insurance contracts reduces due to voluntary terminations. The Group has factored the impact of contract holders behaviour into the assumptions used to measure these liabilities (see note 12). b. Sources of uncertainty in the estimation of future benefit payments and premium receipts Uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality and morbidity and the variability in contract holder behaviour. The Group uses appropriate base tables of standard mortality and morbidity rates. An investigation into the actual experience of the Group over the last or previous year is carried out, to produce a best estimate of the expected morbidity and mortality for the future. The best estimate of future mortality is based on standard industry tables adjusted for the Group’s overall experience and where no such table exists, tables are developed specifically on PPS historic experience. Lapse experience can have a significant impact on the Group. To manage lapse risk, the Group conducts monthly lapse analyses for each of the product lines. Where experience is worse than long-term valuation expected lapse experience management intervention is taken, over and above normal ongoing retention efforts to reduce overall lapse and exits. 186 | PPS INTEGRATED REPORT 2020