All risks directly connected with the life of an insured person are referred to as biometric risks. They include in particular the miscalculation of mortality, life expectancy, morbidity and occupational disability. Biometric risks are the material risks for our company in the area of life and health reinsurance. Our goal is to strike a balance between biometric risks. Furthermore, we are exposed to lapse risks because the cash flows resulting from our reinsurance treaties are in part dependent on lapse rates among policyholders. Counterparty default risks are also material since we partly prefinance our cedants’ new business acquisition costs. Furthermore, we are exposed to catastrophe risks, especially events involving a high number of fatalities in our insurance portfolio.
The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our clients. The biometric actuarial bases used and the lapse assumptions are continuously reviewed with an eye to their adequacy and if necessary adjusted. This is done using the company’s own empirical data as well as market-specific insights. Our current risk profile in life and health reinsurance is dominated by mortality and longevity risks. This is due to the fact that under some of our contracts we pay death benefits, while under others we pay survival benefits. The volume of our annuity portfolio contributes to diversification within life and health reinsurance. We calculate the diversification effect between mortality and longevity risks prudently in view of the fact that the contracts are normally taken out for different regions, age groups and individuals. The required risk capital with a confidence level of 99.5% for underwriting risks in life and health reinsurance breaks down as follows:
|Required risk capital 1 for underwriting risks life and health reinsurance|
|in EUR million||31.12.2017||31.12.2016|
|Mortality risk 2||1,922.0||1,637.4|
|Morbidity and disability risk||632.4||395.0|
|Underwriting risk life and health||2,354.7||2,117.9|
Diversification is a central management tool for our company. We seek to spread risks as far as possible across different risk classes and different regions. In our pricing of reinsurance treaties we provide incentives to further increase diversification.
Through our quality assurance measures we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e. g. use of mortality and morbidity tables, assumptions regarding the lapse rate). In addition, the assumptions are continuously reviewed on the basis of empirical data and modified if necessary. New business is written in all regions in compliance with underwriting guidelines applicable worldwide, which set out detailed rules governing the type, quality, level and origin of risks and how these considerations are factored into the pricing. These global guidelines are revised annually and approved by the Executive Board. Special underwriting guidelines give due consideration to the particular features of individual markets. By monitoring compliance with these underwriting guidelines we minimise the risk of an inability to pay or of deterioration in the financial status of cedants. Regular reviews and holistic analyses (e. g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. Large transactions are also examined by our risk management department. Individual actuarial reports and documentation ensure that regular scrutiny also takes place on the level of the subsidiaries. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to the design of our reinsurance treaties. We have confidence in the entrepreneurial abilities of our underwriters and grant them the most extensive possible powers. In our decentralised organisation we manage risks where they arise using a consistent Group-wide approach
In recent years we have reported regularly on the results of our US mortality business, which have been poorer than anticipated. This was again the case in the 2017 financial year. The reason for this development is the negative earnings performance of a large portfolio that we, as reported at the time, assumed at the beginning of 2009. The other US mortality business is, by contrast, performing satisfactorily and showing good growth. In consequence, this business overall – i. e. including the poorly performing portfolio – shows a positive value in force (VIF). For this reason, in accordance with the lock-in principle, the assumptions made at the time of treaty formation constitute the basis of reserving that is applicable for IFRS accounting purposes.
In view of the unsatisfactory performance of the aforementioned portfolio, we initiated a project at the end of 2016 with the aims of, firstly, reviewing actuarial assumptions relative to emerging experience and, secondly, deploying available means to improve results through inforce management measures on a targeted basis. This primarily involves rate management pursuant to contractual rights, as well as other measures. Based on the information available to us today, we continue to assume a positive VIF for our US mortality business as a whole. This assumption is based in large measure on the value of the cash flows that will be generated through future management actions. Should additional information lead to the determination that this is no longer the case, this would result in a oneoff charge to the IFRS result.
The risks arising out of life and health reinsurance are reflected in the internal capital model.