ALBERTA MUNICIPAL INSURANCE EXCHANGE

Notes to the Financial Statements

Year ended December 31, 2022, with comparative information for 2021

6. Claims liabilities and reinsurance assets (continued):

The net provision for claims liabilities consists of the case reserves on known claims, the IBNR provision, adjustment expenses including an amount for ILAE and a factor for deviations in the estimated results. The net provision for claims is discounted using rates based on the projected investment income from the assets supporting the provisions and reflecting the estimated timing of payments and recoveries. The discount rate used in the valuation was 4.22% (2021 - 1.39%).

The Exchange strives to establish adequate claims liabilities at the original valuation date. However, as time passes, the ultimate cost of claims becomes more certain. As determined by the appointed actuary, during the year ended December 31, 2022, the Exchange experienced favorable claims development of $2,151,000 (2021 - $nil) as stated on an aggregate undiscounted basis.

7. Financial risk management:

The primary goals of the Exchange’s financial risk management are to ensure that the outcomes of activities involving elements of risk are consistent with the Exchange’s objectives and risk tolerance, and to maintain an appropriate risk/reward balance while protecting the Exchange’s statement of financial position from events that have the potential to materially impair its financial strength. Balancing risk and reward is achieved through aligning risk appetite with business strategy, diversifying risk, pricing appropriately for risk, mitigating risk through preventative controls and transferring risk to third parties. The Exchange’s exposure to potential loss from financial instruments is primarily due to insurance risk along with market, credit, liquidity and capital management risks.

Insurance risk:

The Exchange accepts insurance risk through its insurance contracts where it assumes the risk of loss from organizations that are directly subject to the underlying loss. The Exchange is exposed to the uncertainty surrounding the timing, frequency and severity of claims under these contracts.

Insurance risk is the risk arising from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities. Insurance risk is comprised of underwriting and pricing risk, reserving risk, catastrophic loss risk, reinsurance risk and concentration risk.

Underwriting and pricing risk:

Underwriting risk is the risk that the total cost of claims and other expenses will exceed premiums received and can arise from numerous factors such as inappropriate underwriting and inadequate pricing (pricing risk).

Pricing risk arises when actual claims experience differs from the assumptions included in pricing calculations. Historically, the underwriting results of the property and casualty industry have fluctuated significantly due to the cyclical nature of the insurance market. The market cycle is affected by the frequency and severity of losses, levels of capacity and demand, general economic conditions and price competition. The Exchange focuses on prudent rate setting that considers the requirements for claim aggregates, planned expenses, funding objectives, investment returns, and the current funding status of the Exchange. The pricing process is designed to ensure an appropriate return on capital while also providing long-term rate stability. These factors are set in conjunction with the actuary, and are reviewed and adjusted periodically to ensure they reflect the current environment.

There has been no change to underwriting and pricing risk from the prior year.