Every entrepreneurial decision involves a certain degree of risk. For companies operating in the (re)insurance industry, however, entering into risks is at the very heart of their business model. The mission of companies such as these is to take on and spread risks on a deliberate and calculated basis. For this reason, these companies purposely enter into a wide range of risks as part of their commercial activities. A distinction is to be made here between operational risks, which we avoid or mitigate as far as possible in the context of our risk management and on which we report in the chapter entitled "Governance & Dialogue", and the conscious acceptance of risks as part of our core business. These consist of underwriting risks from the business groups of Property & Casualty reinsurance and Life & Health reinsurance as well as investment risks.
As a leading player in the reinsurance industry, our commercial success is crucially dependent on the correct assessment of present and emerging risks that arise in connection with our business activities. The assessment and measurement of the associated underwriting risks is therefore of central importance.
In the context of our materiality process we defined risk expertise and risk assessment as material issues.
For the purposes of this publication risks can be subdivided into the following categories:
Responsibility for the management and monitoring of material and hence significant underwriting risks is assumed by Group Risk Management within the scope of risk management. The steering of these risks is the task of the individual operational business centres. In accordance with our decentralised corporate structure, each organisational unit considers its risks separately. Finally, risks are considered from an overall perspective by management.
Group Auditing is responsible for the Group-wide auditing and line-independent oversight of all functional areas.
This process of evaluating risks is growing in complexity due to the constant monitoring and analysis of new and emerging risks, trends and future-related factors; sustainability aspects are also playing a greater role here. In some instances these have direct strategic and operational relevance to our reinsurance products and the management of our investments. We can gain insights from the risks and opportunities for our own risk management and also use them as a basis for product and service innovations. In this way, we constantly adjust to societal changes and the needs of our clients. Not only does this enhance our competitiveness, it also boosts trust in our company among our customers and business partners.
As a general principle, every risk is evaluated quantitatively. Only risk types for which quantitative risk measurement is currently not possible or scarcely practicable are qualitatively evaluated, for example by means of expert assessments. Such risks include strategic risks, reputational risks and emerging risks.
In property and casualty reinsurance we make a distinction for risk assessment purposes between risks that result from business operations of past years (reserve risk) and those stemming from activities in the current or future years (price/premium risk). At the present time, our most significant risks are the reserving and catastrophe risks within the underwriting risks of property and casualty reinsurance. Licensed scientific simulation models, refined by drawing on the experience of our own specialist departments, are used to assess our material catastrophe risks from natural hazards (especially earthquake, windstorm and flood). Furthermore, we establish the risk to our portfolio from various scenarios in the form of probability distributions. The monitoring of the risks resulting from natural hazards is rounded out by realistic extreme scenarios.
Biometric risks, i.e. all risks directly connected with the life of an insured person, are among the material factors that need to be assessed in life and health reinsurance. The risks associated with assessment include, for example, the miscalculation of mortality, life expectancy, morbidity and occupational disability. In this respect, mortality risks have varying implications for our life and health reinsurance business. While annuity portfolios are, as a general principle, adversely impacted by improvements in mortality, the effects for death benefit portfolios are inversely positive. In addition, we must evaluate the lapse risk because the cash flows resulting from reinsurance treaties are in part dependent on lapse rates among policyholders. In addition, consideration must be given to catastrophe risks in life and health reinsurance as well, especially with an eye to events involving a high number of fatalities, natural disasters or pandemics.
Our most significant risks within the (capital) market risks are currently the default and spread risks. We subject all new products to a separate risk review with regard to underwriting risks.
Social and environmental risks are considered primarily in the context of our reputational risks under "Other risks" in both property & casualty and life & health reinsurance.
In the area of other risks we pay particular attention to emerging risks, which have direct implications for our treaty portfolio in both main lines of business, not only in terms of the risks they may entail for the future (e.g. questions of liability) but also in the form of opportunities, such as increased demand for reinsurance products. The hallmark of such risks is that their content cannot as yet be reliably assessed. It is vital to detect and evaluate these risks at an early stage. A separate working group of specialists spanning divisions and lines of business is therefore deployed and its linkage to risk management is ensured. The members of the working group on "Emerging Risks and Scientific Affairs" analyse, for example, potential risks associated with climate change. Global warming would, for instance, affect not only natural perils, but also human health (e.g. the pandemic risk), the world economy, the agricultural sector (food availability and food security) and much more besides. Further examples of emerging risks include technology risks, shortage of resources, antibiotic resistance and supply chain risks. On these and other topics the working group formulates internal position papers and makes recommendations in the form of risk briefings regarding their handling in reinsurance practice. With a view to supporting this process of identifying measures, we have set up a committee that assists with the coordination and implementation of recommendations on emerging risks. In this way, we ensure that the recommendations of the working group are factored into underwriting decisions and the design of our products and services. Within the working group the trend radar continuously tracks long-term and mega-trends and explores whether the latest trends, such as the sharing economy or the low carbon economy, may also give rise to emerging risks. The insights and risk assessments of the working group are utilised Group-wide in order to determine any measures that may be needed. In addition, the evaluation results are integrated into the quarterly internal risk reports, which serve to keep the Executive Board – among others – updated on material risk assessments.
Along with our internal research activities, we also cultivate an ongoing dialogue with various globally operating risk managers, universities, reinsurers, clients, political actors and industry associations and we attend a number of conferences. Furthermore, our goal is to offer individual customer care and to assist our clients successfully not only through pure risk transfer but also with our range of services. Thus, for example, we offer our customers services and system-based applications to identify and successfully manage potential risks.
We subdivide our extensive activities in relation to risk expertise and risk assessment into the areas of research and development, services as well as dialogue and exchange.
Selected activities in the area of risk expertise and risk assessment
Simulation models: Our subsidiary E+S Rück, which bears responsibility for German business, offers its clients a range of simulation models for analysis of the natural perils risks of flood, hail and earthquake – "es I bebt", "es I hagelt" and "es I flutet" – with a view to pinpointing potential risks. Similar tools have been developed to assess and evaluate accident risks ("es I unfallt").
Underwriting software: In the field of functional disability insurance E+S Rück supports its clients with the underwriting software "es | meRiT", thereby making it possible to offer individuals with pre-existing medical conditions coverage for accident and other disability risks by means of risk-specific adjustments to the policy wordings.
Expert networks: On the life side we have expert networks covering a variety of topics, including biometric research, financial solutions, longevity, R&D technology, automated underwriting systems as well as medical underwriting and risk assessment. The networks are made up of experts at our subsidiaries, branches and our Hannover location.
Cooperation with insurtechs: By cooperating with insurtechs we are able to offer our clients solutions for improving digital sales processes and enhancing customer retention. Partnerships of this type enable us, among other things, to help our clients address social groups that are particularly tech-savvy and attach considerable importance to a healthy lifestyle. It is virtually impossible to reach such groups via traditional life insurance industry sales channels and we therefore take an active part in developments in this area.
Cyber insurance is another area of growing significance in Germany. In 2018 we continued to expand our service and pricing models in order to cater to the rising demand for these covers. In addition, we partnered with FinLeap, a fintech incubator, to create Perseus. Perseus offers SMEs a platform for insurance protection and IT solutions in connection with cyber risks. We booked selective growth in the area of cyber covers; growing demand here was driven by a number of loss events and by regulatory changes.
Automated underwriting systems: With our modular automated systems we facilitate quick and expert underwriting directly at the point of sale (e.g. over the counter at banks, during a telephone interview or online). We are currently working on a version for health business and on an underwriting workbench as well as a claims module in order to expand our range of modular automated systems.
Medical cooperation: E+S Rück works with various cooperation partners. The rehab service provider RehaAssist, for example, supports severely injured policyholders so as to enable them to recover as comprehensively and quickly as possible. Another cooperation partner is the Malteser aid agency, which helps insurance customers who have been injured in an accident to reintegrate into daily life by providing a range of assistance services.
Global Communities: We are a partner on the "Promoting Resilient Communities" project. The partners plan to cooperate with the "InsuResilience Solutions Fund" with the goal of developing insurance solutions for extreme weather events designed to close the protection gap in selected pilot regions.
Working group on "Climate Change": As a member of the International Insurance Law Association (AIDA), we also regularly share insights with insurers and reinsurers in the "Climate Change" working group on coverage concepts and on loss events that may be attributable to climate change.
Global networks for assessment of the risks from natural perils: Hannover Re is actively involved in various market initiatives and oversight bodies focused on assessing the risks from natural perils. We are represented on the CAT workstream of the European Insurance and Occupational Pensions Authority (EIOPA) and thus belong to the group of experts elaborating the future standards to be observed by all companies in the field of risk management for natural perils and climate change. We are a member of the Risk Management Steering Group of the Insurance Development Forum (IDF), which will ensure the interoperability of the various simulation models for natural perils by developing uniform data standards for the exchange of data between insurers and reinsurers. In addition, we are a community member supporting the Open Loss Modelling Framework (OASIS). OASIS has developed an open source simulation engine and a financial software component that are intended to enable scientists to efficiently provide proprietary natural hazards models for the insurance industry without having to spend too much time grappling with the technical requirements for using the models and the technical needs of the industry. Through our participation in various initiatives we cultivate a dialogue with a number of globally active risk managers. This dialogue encompasses, among others, universities, other reinsurers, clients, political actors and industry associations such as the German Insurance Association (GDV).
Blockchain Insurance Industry Initiative: In 2017 we joined other insurers and reinsurers participating in the B3i (Blockchain Insurance Industry Initiative) project to examine the potential benefits of distributed ledger technology for the insurance industry. Since it was first launched in October 2016 the initiative has enjoyed considerable acclaim that extends beyond the insurance sector. The focus of the pilot project is on executing transactions between member companies that are based on reinsurance treaties. Further solutions based on blockchain technology are now being created in Europe and overseas. We are testing these applications, which provide answers to other special problems existing between insurance undertakings, with considerable interest. If blockchain technology proves its worth, it may lead to fundamental changes in the industry. After all, the joint, transparent capture of contract-related information will boost efficiency in communication and accelerate workflows. This will enable insurers to optimise their business processes and offer insurance customers even better service.
CRO Forum: In the context of the Chief Risk Officer (CRO) Forum we contribute to the development and sharing of best practices in risk management.
Climate change: Climate change, defined as naturally occurring changes in climatic conditions or those caused by human activities, constitutes a major environmental risk. Owing to the multidimensional nature of the topic and its increasing importance in the future, we work closely with scientists from the fields of climatology, meteorology, geography and hydrology as part of the risk assessment process. Our interdisciplinary team for natural hazards modelling factors the insights obtained into the pricing of reinsurance solutions and risk management. For risk management purposes, we elaborate deterministic climate change scenarios that are designed to help us evaluate the potential impacts of climate change on all our business activities and initiate appropriate measures to steer the business.
Underwriting manual: Our electronic underwriting manual "hr | Ascent" – which gives our customers comprehensive support for individual risk assessment – is continuously revised and enhanced so as to ensure that we can map the latest market developments at all times.
Medical newsletter: Published quarterly, our newsletter "ReCent Medical News" is aimed at claim assessors, underwriters and of course all other interested readers around the world. "ReCent" casts light on topical issues relevant to medical underwriting and provides insights into the latest medical research findings, case studies and innovative underwriting methods.
Natural hazards research: In the field of natural hazards research we cooperate with universities and research institutions and provide financial assistance to appropriate initiatives and research projects. For example, we are a long-time supporter of the Geo Research Center in Potsdam and the Global Earthquake Model Foundation (GEM). The GEM Foundation's mission is to improve public understanding and awareness of earthquake risks by developing a global stochastic earthquake model. Efforts to promote cooperation in worldwide earthquake research and establish consistent standards have proven successful. The "Open Quake" model, which is now available online, is establishing itself as a platform used by the scientific community, governments as well as commercial and private users worldwide. The improved transparency about the risk situation in countries and cities around the globe makes it possible to objectively evaluate and mitigate the impacts of earthquakes on the population and on concentrations of values.
Flood information in ZÜRS: We participate in the German Insurance Association (GDV) project group "Flood information in ZÜRS". The findings that are developed are subsequently incorporated into the zoning system used Germany-wide for flood, backwater and heavy rain (ZÜRS Geo). This system can enable policyholders to identify whether their residential property is located in a risk zone and to adjust their insurance coverage accordingly.
Digital library on climate risks: In cooperation with universities, research institutes and government organisations we have built up an extensive knowledge base for the assessment of climate risks. This digital library already encompasses more than 500 scientific publications and is continuously expanded. Among other things, the papers explore the influence of rising temperatures on natural disasters and the correlation between natural catastrophe events across different regions.
Working group on "Extreme Events and Climate Risks": Through our active involvement in the Geneva Association working group on "Extreme Events and Climate Risks" we raise awareness of the considerable potential losses from natural hazards and climate change around the world. Studies, position reports and targeted decision templates are prepared with the aim of enabling various stakeholders on the highest level to efficiently obtain an overview of the facts and circumstances, the status of research on the individual topics and the role of the insurance/reinsurance industry in mastering the problems. Actions taken by the United Nations, governments and those with local responsibility to mitigate the possible impacts of extreme events and climate change on populations are encouraged and their effectiveness is evaluated. Through innovative reinsurance solutions we seek to provide financial relief for the consequences of residual risks remaining after implementation of such measures.
Working group on "Global Ageing": We are a member of the Geneva Association working group on "Global Ageing" and are committed to exploring the demographic transition.
Longevity risks: Awareness of the consistent increase in life expectancy, coupled with more rigorous risk management and reporting requirements, will mean that reinsurance solutions for the transfer of longevity risks will take on even greater importance over the coming years. We are one of the leading providers in the market for longevity solutions. Equipped with our profound expertise on the longevity market, we have successfully supported clients since 1995 in the development of tailor-made solutions for the transfer of longevity risks.