2020 INTEGRATED REPORT

Risk exposure and concentrations of risk The following table shows the Group’s exposure to insurance risk (based on the carrying value of the long-term insurance liabilities at the reporting date) per category of business. The table also shows the extent to which the Group has mitigated this risk by reinsurance: Non-DPF DPF Group component of component of 2020 insurance insurance R'm liabilities liabilities Total South Africa Gross 4 781 28 101 32 882 Net of reinsurance 4 835 28 101 32 936 Namibia Gross 340 1 104 1 444 Net of reinsurance 337 1 104 1 441 Non-DPF DPF Group component of component of 2019 insurance insurance R'm liabilities liabilities Total South Africa Gross 3 576 27 710 31 286 Net of reinsurance 3 649 27 710 31 359 Namibia Gross 329 1 016 1 345 Net of reinsurance 324 1 016 1 340 Insurance contracts – Short-term For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the allowance made for the payments of these benefits. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year-to-year from the estimate established using statistical techniques. The Group believes that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to appropriately charge for the insurance risks accepted. Pricing for the Group’s short-term insurance products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes trended forward to recognise anticipated changes in claims patterns. While claims remain the Group’s principal cost, the Group also makes allowance in the pricing procedures for acquisition expenses, administration expenses, investment income, the cost of reinsurance and for a profit loading that adequately covers the cost of the capital. Underwriting limits are set to ensure that the underwriting policy is consistently applied. Underwriting performance is monitored continuously and the pricing policy is revised accordingly. Risk factors considered as part of the review would typically include factors such as age of the insured person, past loss experiences, past insurance history, type and value of asset covered, security measures taken to protect the asset and major use of the covered item. The Group has the right to reprice and change the conditions for accepting risks on renewal and/or 30 days. The underwriting strategy aims to ensure that the risks underwritten are well diversified in terms of type and amount of risk, size and geography. PPS INTEGRATED REPORT 2020 | 187