Georgia Healthcare Group PLC Annual Report 2018 Financial Statements Notes to Consolidated Financial Statements continued (Thousands of Georgian Lari unless otherwise stated) 39. Risk management continued Insurance risk The risk under an insurance contract is the risk that an insured event will occur including the uncertainty of the amount and timing of any resulting claim. The principal risk the Group faces under such contracts is that actual claims and benefit payments exceed the carrying amount of insurance liabilities. This is influenced by the frequency of claims, severity of claims, actual benefits paid that are greater than originally estimated and subsequent development of long-term claims. The Group primarily uses its loss ratio and its combined ratio to monitor its insurance risk. Loss ratio is defined as net insurance claims divided by net insurance revenue. Combined ratio is sum of loss ratio and expense ratio. Expense ratio is defined as insurance related operating expenses excluding interest expense divided by net insurance revenue. The Group’s loss ratios and combined ratios were as follows: 31 December 31 December 2018 2017 Loss ratio 77.3% 84.2% Combined ratio 94.0% 102.5% The Group issues the following types of insurance contracts: health, term life bundled with health, personal accident and travel insurance. The table below sets out concentration of insurance contract liabilities by type of contract: Year ended Year ended 31 December 31 December 2018 2017 Healthcare 2,308 2,177 Term Life 570 660 Travel 280 202 Personal accident 96 62 3,254 3,101 For these insurance contracts the most significant risks arise from lifestyle changes, epidemic as well as changes in loss frequency and increases in prices of medical services. These risks vary significantly in relation to the location of the risk insured by the Group and the type of risks insured. The above risk exposure is mitigated by diversification across a large portfolio of insurance contracts. The variability of risks is also improved by careful selection and implementation of underwriting strategies. The Group establishes underwriting guidelines and limits that stipulate who may accept risks, their nature and applicable limits. These limits are continuously monitored. Strict claim review policies to assess all new and ongoing claims, as well as the investigation of possible fraudulent claims are in place. The Group also enforces a policy of actively managing and promptly processing claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Group. Loss development triangle Reproduced below is a table that shows the development of claims over a period of time. The table shows reserves for both, claims reported as well as claims incurred but not yet reported, and cumulative payments. Claims estimates are translated into Georgian Lari at the rate of exchange that applied at the end of the accident year: 31 December 31 December 31 December Accident year 2018 2017 2016 At the end of accident year 36,038 38,255 49,959 One year later – 17 19 Two years later – – – Three years later – – – Current estimation of cumulative claims incurred 36,038 38,272 49,978 At the end of accident year (32,784) (35,153) (45,544) One year later – (3,145) (4,357) Two years later – – – Three years later – – – Cumulative payments to date (32,784) (38,298) (49,901) Outstanding claims provision 3,254 (26) 77 Current estimation of (deficit)/surplus (20) 58 % of (deficit)/surplus to initial gross reserve -0.05% 0.12% 166