Financial Statements Independent Auditors Report 1 2 Appointed Actuary Report to the Board of Directors 3 Statement of Financial Position 4 Statement of Comprehensive Income 5 Statement of Changes in Home Office Account and Reserves 6 Statement of Cash Flows 7 8 36 Page
Statement of Comprehensive Income, with corresponding figures for 2015 Note 2016 2015 Gross premiums written 7 $ 2,932,108 3,199,173 Change in gross provision for unearned premiums 7 (100,491) (82,268) Gross insurance premium revenue 7 2,831,617 3,116,905 Written premiums ceded to reinsurers 7 (1,640,476) (1,888,134) Excess of loss reinsurance (213,744) (196,168) Reinsurers share of change in provision for unearned premiums 7 40,304 42,192 Net insurance premium revenue 1,017,701 1,074,795 Underwriting expenses: Claims paid - net 7 (797,890) (534,240) Change in claims outstanding provision 7 411,662 216,587 Reinsurers share of claims and benefits incurred 7 (287,490) (184,727) Net insurance claims and benefits incurred (673,718) (502,380) Commission income 11 636,486 702,434 Premium tax (87,963) (95,975) Commission expenses 9 (494,426) (543,204) Total underwriting expenses (619,621) (439,125) Underwriting profit before other income and expenses 398,080 635,670 Operating income and expenses: Interest on investments 6 28,497 20,417 Miscellaneous 62,054 18,963 Foreign exchange loss (4,833) (3,040) Operating expenses 5, 17, 18 (560,542) (565,612) (474,824) (529,272) Net (loss)/income and total comprehensive (loss)/income for the year $ (76,744) 106,398 See accompanying notes to financial statements. 5
Statement of Changes in Head Office Account and Reserves, with corresponding figures for 2015 Head Office Revenue Account Reserve Total Balance as at January 1, 2015 $ Transactions with head office: Contribution (note 12) 2,340,056 2,340,056 Total comprehensive income for the year: Net income for the year 106,398 106,398 Balance as at December 31, 2015 2,340,056 106,398 2,446,454 Transactions with head office: Contribution (note 12) 491,107 491,107 Total comprehensive loss for the year: Net loss for the year (76,744) (76,744) Balance at December 31, 2016 $ 2,831,163 29,654 2,860,817 See accompanying notes to financial statements. 6
Statement of Cash Flows, with corresponding figures for 2015 Note 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss)/income $ (76,744) 106,398 Adjustments for: Depreciation on property, plant and equipment 5 36,086 39,576 Change in unearned premium reserve 100,491 82,268 Interest income (28,497) (20,417) Bad debt expense 8 17,740 17,436 Loss on disposal of property, plant & equipment 3,039 Operating cash flow before changes in working capital 49,076 228,300 (Increase)/decrease in assets: Premiums receivable 79,101 (148,219) Reinsurance assets (327,794) 142,535 Deferred commission expense (16,414) (14,398) Due (from)/to related parties - net (26,110) Other accounts receivable and prepayments 7,667 (10,745) Increase/(decrease) in liabilities: Accounts payable and accrued charges (287,792) 33,994 Insurance payables (339,458) (70,937) Insurance contracts provisions 411,662 (216,587) Net cash used in operating activities (423,952) (82,167) CASH FLOWS FROM INVESTING ACTIVITIES Interest received 12,934 26,866 (Placement)/maturity of investments (1,896,303) 1,071,250 Additions to property, plant and equipment 5 (949) (1,190) Net cash (used in)/provided by investing activities (1,884,318) 1,096,926 CASH FLOWS FROM FINANCING ACTIVITIES Contributed surplus 12 (50,534) Contributions from Head Office 12 491,107 Net cash provided by/(used in) financing activities 491,107 (50,534) Net (decrease)/increase in cash and cash equivalents (1,817,163) 964,225 Cash and cash equivalent at beginning of year 3,510,089 2,545,864 Cash and cash equivalent at end of year $ 1,692,926 3,510,089 Cash and cash equivalents comprise: Cash on hand and at bank $ 408,127 3,009,690 Investments maturing within 3 months of origination 6 1,284,799 500,399 $ 1,692,926 3,510,089 Supplemental information: Premium tax paid $ 87,963 95,975 See accompanying notes to financial statements. 7
1. Corporate structure and nature of business The Insurance Company of the West Indies (Bahamas) Limited ( the Company ) was incorporated on October 8, 2007 in The Bahamas under the Companies Act. It is domiciled in The Bahamas and is a wholly owned subsidiary of ICWI Bahamas Limited, which is also incorporated in The Bahamas. ICWI Bahamas Limited is a wholly-owned subsidiary of ICWI Group Limited, the Parent, which is incorporated in Jamaica. The ultimate parent is Atlantic and Caribbean Sea Development Limited, which is incorporated in Jamaica. On August 1, 2008, the Company started writing insurance business in The Bahamas previously written by the Insurance Company of the West Indies Limited ( ICWI Jamaica ), a fellow subsidiary of ICWI Group Limited. At that date, all assets and liabilities relating to the business conducted in The Bahamas were transferred from ICWI Jamaica to the Company. On January 1, 2015 the Company ceased writing insurance business and transferred all assets and liabilities relating to the business to ICWI Jamaica, and now operates as a branch of ICWI Jamaica ( the Branch ). 2. Insurance licence The Branch is licensed under the Insurance Act, 2005 to underwrite general insurance business. 3. Roles of the actuary and external auditors The actuary has been appointed by the Board of Directors to carry out an actuarial valuation of management s estimate of the Branch s policy liabilities and report thereon to the Board of Directors. Actuarially determined policy liabilities consist of the provisions for, and reinsurance recovery of, unpaid claims and adjustment expenses on insurance policies in force. The valuation is made in accordance with accepted actuarial practice, as well as any other matter specified in any directive that may be made by regulatory authorities. The actuary s valuation is contingent upon the reliability of the information supplied by the management of the Branch. The actuary s report outlines the scope of the valuation and the actuary s opinion. The independent auditors have been appointed by the shareholder to conduct an independent and objective audit of the financial statements of the Branch in accordance with International Standards on Auditing and report thereon to the shareholder. In carrying out their audit, the auditors also make use of the work of the appointed actuary and the actuary s report on the Branch s actuarially determined policy liabilities. The auditors report outlines the scope of their audit and their opinion. 4. Statement of compliance, basis of preparation and significant accounting policies (a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The principal accounting policies set out below have been applied consistently by the Branch and are consistent with those used in the previous year. 8
4. Statement of compliance, basis of preparation and significant accounting policies(continued) (b) Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, and the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next financial year are discussed below: (i) Allowance for impairment losses on receivables In determining amounts recorded for impairment losses in the financial statements, management makes judgements regarding indicators of impairment, that is, whether there are indicators that suggest there may be a measurable decrease in the estimated future cash flows from receivables, for example, based on default and adverse economic conditions. Management makes estimates of the likely estimated future cash flows from impaired receivables as well as the timing of such cash flows. (ii) Outstanding claims Management believes that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate net cost of losses incurred up to the reporting date. However, the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. Any subsequent differences arising are recorded in the period in which they are determined. (iii) In addition to the above, other significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in notes 4(d) Property, plant and equipment expected useful lives, 4(f) Financial instruments determination of fair values, 4(h) - Provisions, 4(k) - Impairment, 5, 8, 9, and 15. 9
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (c) Basis of measurement and functional and presentation currency Basis of measurement The financial statements are prepared on the historical cost basis. Functional and presentation currency These financial statements are presented in Bahamian dollars ($), which is the Branch s functional and reporting currency. (d) Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Branch and its cost can be measured reliably. The cost of the day to day servicing of property, plant and equipment is recognised in the statement of comprehensive income. Property, plant and equipment are depreciated using the straight-line method at annual rates estimated to write-off the assets, less their estimated residual values, over their expected useful lives, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset, and is recognised in the statement of comprehensive income. The depreciation rates are as follows: Furniture, fixtures and equipment 10% & 20% Motor vehicles 20% Building leasehold improvements are amortised over the shorter of the lease term or the estimated useful life, currently five years. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate. Gains and losses on disposals are determined by comparing proceeds with carrying amounts and are included in the statement of comprehensive income. Repairs and maintenance are charged in the statement of comprehensive income when the expenditure is incurred. (e) Related parties A party is related to an entity, if: (i) directly, or indirectly through one or more intermediaries, the party: 10
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (e) Related parties (continued) (a) controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries); (b) has an interest in the entity that gives it significant influence over the entity; or (c) has joint control over the entity; (ii) the party is an associate of the entity; (iii) the party is a joint venture in which the entity is a venturer; (iv) the party is a member of the key management personnel of the entity or its parent; (v) the party is a close member of the family of any individual referred to in (i) or (iv); (vi) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (ii) or (iii), or (vii) the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity. A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged. (f) Financial instruments A financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. Financial assets have been determined to include cash and cash equivalents, investments, accrued interest income, premium receivables, and other accounts receivable. Financial liabilities include accounts payable, and accrued charges and insurance payables. Financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition financial instruments are measured as described below. A financial instrument is recognised when the Branch becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are accounted for at the trade date, that is, the date the Branch commits itself to purchase or sell the asset. Financial assets are derecognised when the Branch s contractual rights to the cash flows from the financial assets expire or when the Branch transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Financial liabilities are derecognised when the Branch s obligations specified in the contract expire or are discharged or cancelled. Determination of fair values Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Branch has access at that date. The fair value of a liability reflects its non-performance risk. 11
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (f) Financial instruments (continued) Determination of fair values (continued) When available, the Branch measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price that is, the fair value of the consideration given or received. If the Branch determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Branch measures assets and long positions at a bid price and liabilities and short positions at an ask price. Investments held-to-maturity Financial assets for which the Branch has the positive intent and ability to hold to maturity, are classified as held-to-maturity, and are measured initially at cost and subsequently at amortised cost using the effective interest method less impairment losses. Financial assets classified as held-to-maturity include investments held with banks. Any sale or reclassification of more than an insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-tomaturity investments as available for sale, and prevent the Branch from classifying investment securities as held-to-maturity for the current and the following two financial years. Available for sale investments Available for sale investments are financial assets and liabilities that are either designated in this category or are not classified as loans and receivables, held-to-maturity investments, or investments at fair value through profit or loss. Available for sale investments are measured at fair value less impairment losses. The determination of fair values is based on quoted market prices or dealer price quotations for financial instruments traded in active markets. Any equity security that does not have a quoted market price in an active market and whose fair value cannot be reliably measured 12
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (f) Financial instruments (continued) Available for sale investments (continued) is stated at cost, including transaction costs, less impairment losses, if any. If a reliable measure of fair value becomes available subsequently, the instrument is measured at fair value. Changes in fair value are recognised directly in other comprehensive income in the statement of comprehensive income, except for impairment losses, which are recognised in net income or loss in the statement of comprehensive income. When an investment is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is transferred to net income or loss. Fair value measurement principles The Branch measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted market prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market and are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Receivables arising from insurance contracts, and other receivables are classified in this category. Other Other financial instruments are measured at amortised cost using the effective interest method, less impairment losses. 13
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (f) Financial instruments (continued) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Impairment financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Branch on terms that the Branch would not consider otherwise, or indications that a debtor or issuer will enter bankruptcy. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognised in net income or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through net income or loss in the statement of comprehensive income. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income, to net income or loss. The cumulative loss that is removed from other comprehensive income and recognised in net income or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in net income or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. (g) Cash and cash equivalents Cash and cash equivalents comprise cash and bank balances and short term investments held with financial institutions with original maturities of less than three months. (h) Provisions A provision is recognised in the statement of financial position if, as a result of a past event, the Branch has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash 14
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (h) Provisions (continued) flows at a rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the obligations. (i) Foreign currencies Transactions in foreign currencies are converted at the rates of exchange prevailing at the dates of those transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are converted at the rates of exchange prevailing on that date. Gains and losses arising from fluctuations in exchange rates are recognised in the statement of comprehensive income. For the purpose of the statement of cash flows, all foreign currency gains and losses recognised in the statement of comprehensive income are treated as cash items and included in cash flows from operating or financing activities along with movements in the principal balances. (j) Interest income Interest income is recognised on an accrual basis using the effective interest rate method. (k) Impairment non-financial assets The carrying amount of the Branch s assets is reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated at the reporting date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in net income or loss in the statement of comprehensive income. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognised. Calculation of recoverable amount: The recoverable amount of an asset is the greater of the fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted at their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. 15
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (l) Revenue recognition Revenue is recognised in the statement of comprehensive income when the significant risks and rewards of ownership have been transferred to the policyholder. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due. Revenue comprises the following: (i) Gross written premiums: The accounting policies for the recognition of revenue from insurance contracts are disclosed in note 4(m) (i). (ii) Commission income: Reinsurance commission is recognised on a basis that is consistent with the recognition of the costs incurred on the acquisition of the underlying insurance contracts (see note 4(m)(i)). Profit commission in respect of reinsurance contracts is recognised in the year in which the profit commission is crystallized. (m) Insurance contracts (i) Classification, recognition and measurement The Branch issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer insurance risks. Such contracts may also transfer financial risk. The Branch considers an insurance risk to be significant where the sum insured or limit of indemnity is in excess of the maximum amount on any one loss as stated in note 14. The classification of contracts includes both the insurance and reinsurance contracts that the Branch enters into. Short term insurance contracts consist of Property, Liability, Motor and Marine insurance contracts. Insurance contracts are accounted for in compliance with the recommendations and practices of the insurance industry. The underwriting results are determined after making provision for, inter alia, unearned premiums, outstanding claims, unexpired risks, deferred commission expense and deferred commission income. Gross written premiums Gross premiums reflect business written during the period. The earned portion of premiums is recognised as revenue and is shown before deduction of premium tax, premiums ceded to reinsurers and commissions. Premiums are recognised proportionally over the period of coverage. Premiums received prior to the year end and processed after the year end by the agents are recognised by the Branch at the time of processing. 16
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (m) Insurance contracts (continued) (i) Classification, recognition and measurement (continued) Unearned premiums Unearned premiums represent the portion of premiums received on in-force contracts that relates to unexpired risks at the reporting date and is calculated on the three sixty fifths basis on the total premiums written. Outstanding claims Outstanding claims comprise estimates of the amount of reported losses and loss expenses plus a provision for losses incurred but not reported based on the historical experience of the Branch. The loss and loss expense reserves have been reviewed by the Branch s actuary using the past loss experience of the Branch and industry data. The Branch does not discount its liabilities for outstanding claims. Amounts recoverable in respect of claims from reinsurers are estimated in a manner consistent with the underlying liabilities. Liability adequacy test At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities. Tests include reviewing original estimates of ultimate claims cost for each accident year against the current year-end estimates. These tests are carried out at the portfolio level for each main category of business. Should any trend in reserve deficiency, at total portfolio level, become apparent then the deficiency would be immediately charged to net income or loss by establishing a provision for losses arising from liability adequacy tests. Commission income and expense Commission expense is incurred on gross written premiums and commission income is received on premiums ceded, and are recognised over the periods covered by the related policies. (ii) Reinsurance assets Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with reinsured policies. Unearned reinsurance premiums on business ceded up to the reporting date which are attributable to subsequent periods are calculated substantially on the three sixty fifth basis on the total premiums ceded. In the normal course of business the Branch seeks to reduce the loss that may result from catastrophe or other events that cause unfavourable underwriting results by reinsuring certain levels of risk with other insurers (see note 14). Reinsurance ceded does not discharge the Branch s liability as the principal insurer. Failure of reinsurers to honour their obligations could result in losses to the Branch. 17
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (m) Insurance contracts (continued) (ii) Reinsurance assets (continued) Consequently, a contingent liability exists in the event that an assuming reinsurer is unable to meet its obligations. Reinsurance assets are assessed for impairment at each reporting date. A reinsurance asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Branch may not recover all amounts due, and that event has a reliably measurable impact on the amounts that the Branch will receive from the reinsurer. Impairment losses on reinsurance assets are recognised in the statement of comprehensive income. (iii) Insurance receivables and insurance payables Insurance receivables and payables are recognised when the contractual right to receive payment and contractual obligation to make payment arise, respectively. Amounts due from and to policyholders, brokers, agents and reinsurers are financial instruments and are included in insurance receivables and payables. Gross claims provisions and gross unearned premiums reserve are included in insurance contracts provisions and the related reinsurance recoveries are included in reinsurance assets on the statement of financial position. Insurance receivables are assessed for impairment in accordance with the note 4(f) above as it relates to impairment on financial assets. (n) Premium tax Premium tax is incurred at a rate of 3% of gross premiums written in The Commonwealth of The Bahamas and is recognised when the Branch s obligation to make payment has been established. (o) Employee benefits Short-term employee benefits Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Branch has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Defined contribution plan The Branch has set up a defined contribution pension plan for eligible employees whereby the Branch pays contributions to a privately administered pension plan. The Branch has no further payment obligations once the contributions have been paid. The plan requires participants to contribute a minimum of 5% of their eligible earnings and such amounts are matched by the Branch. The Branch s contributions to the defined contribution pension plan are charged to net income or loss in the year to which they relate (see note 17). 18
4. Statement of compliance, basis of preparation and significant accounting policies (continued) (p) New standards, interpretations and amendments to published standards Up to the date of issue of these financial statements, the International Accounting Standards Board has issued a number of amendments, new standards and interpretations which are not yet effective for the year ended December 31, 2016 and which have not been adopted in the preparation of these financial statements. Those which may be relevant to the Branch are set out below. The Branch does not plan to adopt these standards early. (i) IFRS 9 Financial Instruments IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. (ii) IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue. IFRS 15 is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. (iii) IFRS 16 Leases IFRS 16 introduces a single, on-balance lease sheet accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning on or after January 1, 2019. The Branch is in the process of making an assessment of what the impact of these new standards, interpretations and amendments to published standards is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the Branch s financial position. 19
5. Property, plant and equipment Building Furniture, leasehold fixtures and Motor improvements equipment vehicles Total Cost: Balance at December 31, 2014 $ 81,760 102,035 63,495 247,290 Additions 1,190 1,190 Disposals (3,506) (3,506) Balance at December 31, 2015 81,760 99,719 63,495 244,974 Additions 949 949 Balance at December 31, 2016 $ 81,760 100,668 63,495 245,923 Accumulated depreciation: Balance at December 31, 2014 $ 41,062 49,117 38,663 128,842 Charge for the year 16,352 10,525 12,699 39,576 Disposals (467) (467) Balance at December 31, 2015 57,414 59,175 51,362 167,951 Charge for the year 16,352 9,335 10,399 36,086 Balance at December 31, 2016 $ 73,766 68,510 61,761 204,037 Net book value: December 31, 2016 $ 7,994 32,158 1,734 41,886 December 31, 2015 $ 24,346 40,544 12,133 77,023 Included in operating expenses in the statement of comprehensive income is depreciation expense of $36,086 (2016 - $36,087). 6. Investments and cash at bank Investments comprise: 2016 2015 Certificates of deposit: maturing within 3 months from the date of acquisition and earning interest at the rate of 0.35% - 0.85% per annum (2015 0.20% - 0.25%) $ 1,284,799 500,399 maturing more than 3 months from the date of acquisition and earning interest at the rate of 1.00% - 1.75% per annum (2015 Nil%) 1,896,303 $ 3,181,102 500,399 As at December 31, 2016 interest accrued on certificates of deposit amounted to $15,596 (2015 - $33). 20
6. Investments and cash at bank (continued) Included in deposits maturing more than 3 months from the date of acquisition at December 31, 2015 is $1,000,000 placed in trust with the Company s banker, a recognised financial institution, to meet the requirements of the Insurance Act 2005, as outlined in note 16 (e) capital risk management. The deposit matured on March 17, 2017. Cash at bank of $408,127 (2015 - $3,009,690) is held in current accounts bearing interest at rates of 0% (2015 0% to 0.5%). 7. Reinsurance assets and insurance contracts provisions 2016 2015 Gross Reinsurance Net Gross Reinsurance Net Claims outstanding (note 14 & 15) $ 895,929 540,066 355,863 484,267 252,576 231,691 Unearned premiums reserve 1,125,015 634,972 490,043 1,024,524 594,668 429,856 $2,020,944 1,175,038 845,906 1,508,791 847,244 661,547 Analysis of movement in claims outstanding: 2016 2015 Gross Reinsurance Net Gross Reinsurance Net Balance at January 1 $ 484,267 252,576 231,691 700,854 437,303 263,551 Claims expenses incurred 2,591,158 1,669,096 922,062 1,085,420 583,040 502,380 Claims paid in the year (2,179,496) (1,381,606) (797,890) (1,302,007) (767,767) (534,240) Change in outstanding Claims provision 411,662 287,490 124,172 (216,587) (184,727) (31,860) Balance at December 31 $ 895,929 540,066 355,863 484,267 252,576 231,691 2016 2015 Gross Reinsurance Net Gross Reinsurance Net Claims notified $ 738,890 443,899 294,991 286,085 141,258 144,827 Claims incurred but not reported 157,039 96,167 60,872 198,182 111,318 86,864 Balance at December 31 $ 895,929 540,066 355,863 484,267 252,576 231,691 21
7. Reinsurance assets and insurance contracts provisions Unearned premiums reserve: 2016 2015 Gross Reinsurance Net Gross Reinsurance Net Balance at January 1 $1,024,524 594,668 429,856 942,256 552,476 389,780 Premiums written during the year 2,932,108 1,640,476 1,291,632 3,199,173 1,888,134 1,311,039 Premiums earned during the year (2,831,617) (1,600,172)(1,231,445) (3,116,905) (1,845,942) (1,270,963) Change in provision for unearned premiums 100,491 40,304 60,187 82,268 42,192 40,076 Balance at December 31 $1,125,015 634,972 490,043 1,024,524 594,668 429,856 Gross unearned premiums are analysed as follows: 2016 2015 Accident $ 3,118 727 Liability, engineering, bond and marine 38,217 25,137 Motor vehicle 925,198 817,161 Fire 158,482 181,499 $ 1,125,015 1,024,524 8. Premiums receivable 2016 2015 Premiums receivable, net $ 79,588 176,429 Premiums receivable is shown net of allowance for bad debts of $299 (2015 - $8,673). The Branch s exposure to credit and impairment losses related to premiums and other receivables are disclosed in note 15 (a). The movement during the year in the provision for doubtful accounts is as follows: 2016 2015 Balance of beginning of the year $ 8,673 12,836 Decrease in allowance (8,374) (4,163) $ 299 8,673 9. Deferred commission expense 2016 2015 Balance at January 1 $ 180,850 166,452 Commissions paid during the year 510,840 557,602 Amounts recognised in income during the year (494,426) (543,204) Balance at December 31 $ 197,264 180,850 22
10. Accounts payable and accrued charges 2016 2015 Accrued charges $ 66,006 72,511 Other payables 93,146 374,433 Balance at December 31 $ 159,152 446,944 Included in other payables is $77,657 (2015 - $320,918) representing policyholders accounts with credit balances. These credit balances comprise funds received from policyholders for policies that were processed subsequent to the year-end or amounts due to customers as returned premiums for cancelled or amended policies. 11. Insurance payables 2016 2015 Payables arising from insurance and reinsurance contracts due to other insurance companies $ (148,965) 206,910 Deferred commission income 223,608 207,191 Balance at December 31 $ 74,643 414,101 The analysis of the movement in deferred commission income is as follows: 2016 2015 Balance at January 1 $ 207,191 188,026 Commissions received during the year 652,903 721,599 Amounts recognised in income during the year (636,486) (702,434) Balance at December 31 $ 223,608 207,191 12. Reserves On July 2, 2014, The Insurance Company of the West Indies (Bahamas) Limited ( ICWI Bahamas ) received approval from The Insurance Commission of the Bahamas to convert to a branch of ICWI Jamaica. Approval was obtained from the Financial Service Commission to convert the subsidiary of the ICWI Group Limited, located in the Bahamas, (ICWI Bahamas) into a branch operation of ICWI Jamaica on October 2, 2014. The conversion was effected on January 1, 2015 (refer to note 1). On January 1, 2015, the asset and liabilities of the Company in the amount of $2,390,590 was transferred to ICWI Jamaica, of which $2,340,056 was established as the Head Office account. During the year ended December 31, 2016 ICWI Jamaica made contributions to the Branch in the amount of $491,107. 23
13. Underwriting policy and reinsurance ceded The Branch follows the policy of underwriting and reinsuring all contracts of insurance, which limit the retained liability of the Branch. The reinsurance of contracts does not, however, relieve the Branch of its primary obligation to the policyholders. In the event that the reinsurers are unable to meet their obligations under the reinsurance agreements, the Branch would also be liable for the reinsured amount. The Branch s credit risk management procedures are detailed in note 15. Aon Limited, whose registered office is in London, England, is the Branch s reinsurance broker and acts as the intermediary between the Branch and the reinsurers. Reinsurance contracts between the Branch and its reinsurers are renewable annually in accordance with the terms of the individual contracts. In accordance with its treaty agreement, the Branch limits its net exposure to a maximum amount on any one loss of US$750,000 (2015 - US$750,000) for Public Liability, US$50,000 (2015 - US$50,000) for Marine and Accident, US$30,000 (2015 - US$30,000) on Engineering, US$16,250 (2015 - US$16,250) for Property claims, US$50,000 (2015 - US$50,000) on Motor and US$125,000 (2015 - US$125,000) for Bonds and Fidelity Guarantee for the year ended December 31, 2016. On its local facultative reinsurance the Branch does not have specified limits on its net exposures and the Branch s exposure is based on a portion of the individual risk offered to the facultative reinsurer on the terms and conditions of the original policy. Premiums ceded and claim recoveries are based on the percentage of the sum insured accepted by the local reinsurers. The Branch has catastrophe reinsurance on which its liability in respect of each event is limited to US$225,000 (2015 - US$225,000). The reinsurers determine the total excess of loss reinsurance based on the aggregates for each territory where the Group s entities operate. The Branch s excess of loss reinsurance allocation is determined by the Parent based on a percentage of the total aggregates. 14. Insurance risk management Risk management objectives and policies for mitigating insurance risk: The Branch s management of insurance risk is a critical aspect of the business. The primary insurance activity carried out by the Branch is the transfer of risk from persons or entities that are directly subject to the risk, by means of the sale of insurance policies. As such, the Branch is exposed to uncertainty surrounding the timing, frequency and severity of claims under these policies. The principal types of policies written by the Branch are as follows: Liability insurance Property insurance Motor insurance The Branch manages its insurance risk through its underwriting policy which includes, inter alia, authority limits, approval procedures for transactions that exceed set limits, pricing guidelines and the centralised management of reinsurance. 24
14. Insurance risk management (continued) Risk management objectives and policies for mitigating insurance risk (continued): The Branch actively monitors insurance risk exposures primarily for individual types of risks. These methods include internal risk measurement, portfolio modeling and scenario analyses. Underwriting strategy: The Branch seeks to underwrite a balanced portfolio of risks at rates and terms that will produce an underwriting result consistent with its long term objectives. The Board of Directors of ICWI Jamaica approves the underwriting strategy which is part of the annual budgeting exercise and management is responsible for the attainment of the established objectives. Reinsurance strategy: The Branch reinsures a portion of the risks it underwrites in order to protect capital resources and to limit its exposure to variations in the projected frequency and severity of losses. Ceded reinsurance includes credit risk, and the Branch monitors the financial condition of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically. The Board of Directors of ICWI Jamaica is responsible for setting the minimum security criteria for monitoring the purchase of reinsurance against those criteria. They also monitor its adequacy on an ongoing basis. Credit risk on reinsurance is discussed in more detail in note 15. Terms and conditions of general insurance contracts: The table below provides an overview of the terms and conditions of general insurance contracts written by the Branch and the key factors upon which the timing and uncertainty of future cash flows of these contracts depend. 25
14. Insurance risk management (continued) Terms and conditions of general insurance contracts: (continued): Type contract Liability Property Motor Terms and conditions Under these contracts, compensation is paid for injury suffered by individuals, including employees or members of the public. The main liability exposures are in relation to bodily injury. Property insurance indemnifies, subject to any limits or excesses, the policyholder against the loss or damage to their own material property and business interruption arising from this damage. Motor insurance contracts provide cover in respect of policyholders motor vehicles and their liability to third parties in respect of damage to property and injury. The exposure on motor insurance contracts is normally limited to the replacement value of the vehicle and a policy limit in respect of third party damage. Key factors affecting future cash flows The timing of claim reporting and settlement is a function of factors such as the nature of the coverage and the policy provisions. The majority of bodily injury claims have a relatively short tail. In general, these claims involve lower estimation uncertainty. The risk on any policy varies according to many factors such as location, safety measures in place and the age of the property. The event giving rise to a claim for damage to buildings or contents usually occurs suddenly (as for fire and burglary) and the cause is easily determinable. Therefore, claims are generally notified promptly and can be settled without delay. Property business is therefore classified as short-tailed and expense deterioration and investment return is of less importance in estimating provisions. The cost of repairing or rebuilding assets, of replacement or indemnity for contents and the time taken to restart or resume operations to original levels for business interruption losses are the key factors influencing the level of claims under these policies. In general, claims reporting lags are minor and claim complexity is relatively low. The frequency of claims is affected by excessive speeding, and failure by some motorists to obey traffic signals. The number of claims is also correlated with economic activity, which also affects the amount of traffic activity. Liability contracts: Risks arising from liability insurance are managed primarily through pricing, product design, risk selection, adopting an appropriate investment strategy, rating and reinsurance. The Branch monitors and reacts to changes in the general economic and commercial environment in which it operates to ensure that only liability risks which meet its criteria for profitability are underwritten. In pricing contracts, the Branch makes assumptions that costs will increase in line with the latest available financial and actuarial forecasts. 26