Insurance contract liabilities (Continued)

2013 2012

Kshs'000 Kshs'000

Long term contracts

- claims reported and claims handling expenses 1,820,972 1,037,004

Total gross insurance liabilities 5,267,880 3,393,835

Insurance contract liabilities are classified as current liabilities. Movements in insurance liabilities and reinsurance assets are shown in Note 35.

(i) Short term insurance contracts liabilities

Gross claims reported, claims handling expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The expected recoveries at the end of 31 December 2013 and 31 December 2012 are not material.

The Group uses chain-ladder techniques to estimate the ultimate cost of claims and the IBNR provision. Chain ladder techniques are used as they are an appropriate technique for mature classes of business that have a relatively stable development pattern. This involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected development factors are then applied to cumulative claims data for each accident year that is not fully developed to produce an estimated ultimate claims cost for each accident year.

The development of insurance liabilities provides a measure of the Groups’ ability to estimate the ultimate value of claims. The table below illustrates how the Groups' estimate of total claims outstanding for each accident year has changed at successive year ends.

Year ended 31 December 2013

Accident year 2009 2010 2011 2012 2013 Total

(Kshs'000) (Kshs'000) (Kshs'000) (Kshs'000) (Kshs'000) (Kshs'000)

Estimate of ultimate claims costs

At end of accident year 1,498,938 1,282,736 1,640,318 1,960,370 2,388,975 8,771,337 One years later 1,395,323 909,409 959,398 1,061,865 - 4,325,995 Two years later 1,387,744 652,298 791,490 - - 2,831,532 Three years later 1,528,787 656,930 - - - 2,185,717 Four years later 1,660,100 - - - - 1,660,100 Current estimate of cumulative claims 1,660,100 656,930 791,490 1,061,865 2,388,975 6,559,360 Less: Cumulative payments to date (1,640,074) (608,450) (623,396) (583,131) (1,240,050) (4,695,101) Liability in the statement of financial position 20,026 48,480 168,094 478,734 1,148,925 1,864,259 Liability in respect of prior years 756 6,012 34,870 419,835 678,966 1,140,439 Incurred but not reported - - - - 442,210 442,210

Total gross claims liability included

in the statement of financial position 20,782 54,492 202,964 898,569 2,270,101 3,446,908

Notes to The Financial Statements

Kenya • Uganda • South Sudan • Rwanda • DR Congo • Tanzania UAP HOLDINGS LIMITED 2013 Annual Report & Financial Statements www.uap-group.com 32 Insurance contract liabilities (Continued)

(ii) Long term business contracts

The Group determines its liabilities on long term insurance contracts based on assumptions in relation to future deaths, voluntary terminations, investment returns and administration expenses. A margin for risk and uncertainty is added to these assumptions. The liabilities are determined on the advice of the consulting actuary and actuarial valuations are carried out on an annual basis.

Actuarial valuation assumptions

The latest actuarial valuation of the Life Fund was carried out as at 31 December 2013 by QED Actuaries and Consultants, using the Net Premium Valuation method (and basis) prescribed by the Kenyan Insurance Act, 1988, as amended, and the Gross Premium Valuation (GPV) method for the universal and uni linked policies for which it was not possible to use the NPV method. The GPV method is generally accepted in the actuarial industry as an appropriate method to place realistic value (with an appropriate allowance for margins) on the liabilities of a life Company. This method is based on a discounted cashflow approach taking into account the expected cashflows from the existing inforce business. By setting appropriate assumptions this method determines liabilities which are consistent with the value of assets included in the accounts.

The more significant valuation assumptions are summarised below. The assumptions used for the previous year-end valuation are shown in brackets:

a) Mortality – The Group used SA56-62 (2012: SA56-62) as a base table of standard mortality for the GPV valuation and KE01-03 (2012: A1949/52) for the NPV basis. Statistical methods are used to adjust the rates reflected in the table based on the Company’s experience. An allowance for AIDS is made based on the Actuarial Society of South

Africa’s 2003 AIDS tables. For contracts insuring

survivorship the a(55) (2012: a(55)) life table was used as a base; no allowance is made for future mortality

improvements.

b) Persistency – The Group does not have sufficient historical data to allow statistical methods to be used to determine an appropriate persistency rate. The persistency rates used in the valuation were set according to the experience observed (by the actuary) in the Group’s data.

c) Investment returns are derived with reference to the return on long term fixed interest investments available in Kenya and adjusted to reflect the actual underlying mix of assets. For the current valuation, the rate of return was 12.5% p.a. (2012: 12.25% p.a.) for the GPV basis and 4% p.a (2012: 4% p.a) for the NPV basis.

d) Expenses, tax and inflation – The current level of renewal expenses were taken to be an appropriate expense base. Expenses pertaining to business establishment and expansion were excluded from the valuation assumption. Expense inflation is assumed to be 10% p.a. (2012:10% p.a.). It has been assumed that the current tax legislation and rates continue unaltered. Under the NPV method it is not possible to model expenses, tax and inflation explicitly.

Sensitivity analysis

The following table presents the sensitivity of the value of long term insurance liabilities to movements in key assumptions used in the estimation of liabilities. For liabilities under insurance contracts with fixed and guaranteed terms, key assumptions are unchanged for the duration of the contract. For long term insurance contracts without fixed terms and with discretionary participation in profits, the liability is set approximately equal to the value of the underlying asset of the contract. Hence, there is no sensitivity analysis for these types of contracts.

Notes to The Financial Statements

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Kenya • Uganda • South Sudan • Rwanda • DR Congo • Tanzania UAP HOLDINGS LIMITED 2013 Annual Report & Financial Statements

32 Insurance contract liabilities (Continued)