Major external factors influencing risk management

Brexit: In view of the slow progress of negotiations in 2017, it is increasingly likely that the status of legal relations between the European Union and United Kingdom will not be entirely resolved by the withdrawal date of 30 March 2019. Consequently, the Hannover Re Group must also be prepared for a “hard” Brexit and the associated workload and expenses. With this in mind, Hannover Re has set up a Group-wide working group to address readiness measures. The major impacts will be felt by our entities in the United Kingdom. The “Hannover Re Life UK Branch” and “Inter Hannover UK Branch” write significant premium volumes in life reinsurance as well as property and casualty insurance respectively. The legal status of a locally authorised entity in the United Kingdom in the form of a “third-country branch” will be sought in order to continue operations after a hard Brexit. This would be necessary in the event of the United Kingdom not recognising EU supervision and / or the Solvency II regulatory regime in the future. This will, however, entail an increased regulatory workload and capital expenditure. “Argenta Holdings plc” is a stand-alone subsidiary in the United Kingdom and already authorised as a member of Lloyd’s. Furthermore, the business volume transacted with the EU is minimal with a premium share of less than 5%. Argenta will therefore be affected only marginally. We also write business in the United Kingdom through Group companies in Hannover and Ireland. In this regard we do not anticipate any significant changes as a result of Brexit.

All in all, our current analyses indicate that the implications of Brexit are manageable for the Hannover Re Group.

US tax reform: The changes in tax legislation adopted by the US administration at the end of 2017 entered into force on 1 January 2018. They provide for new tax regulations that have far-reaching implications for subsidiaries operating in the United States. On the one hand, the reform cuts the corporate tax rate from 35% to 21%. On the other hand, the legislative package includes the introduction of the so-called “Base Erosion and Anti-Abuse Tax” (BEAT). In this connection, premiums for ceded insurance risks within the corporate group are also included in the taxable base and will in future be taxed at a rate of 5% to 12.5% (rising over the next nine years). Extensive restructuring activities were undertaken within the Group in the first half of 2018 in order to avert this increased burden of taxation. As a consequence of these moves, large parts of US business are now no longer ceded to Hannover Re Ireland but rather to Hannover Life Re America Bermuda.

Risks from electronic data retention: Recent years have seen the increasing emergence of risks relating to electronic systems and their data. Hannover Re, in common with other companies, is at risk of attacks on its IT systems and has put in place extensive safeguards. Furthermore, Hannover Re offers reinsurance coverage for risks connected with electronic systems and the associated data. The dynamic pace of developments in the context of digitalisation presents a particular challenge to the assessment of such risks.

Natural catastrophe risks and climate change: The above-average number of natural disasters in 2017 was optimally reflected in the assumptions underlying the natural perils models used for pricing and managing natural catastrophe risks. The possibility that the increased storm activity is due to progressive global warming cannot be ruled out. Hannover Re works together with partners to closely monitor the implications of global warming for extreme weather events so as to be able to incorporate the insights obtained into the models.

US mortality business: In view of the deterioration in the performance of, most notably, the large block of business acquired by Hannover Re at the beginning of 2009, the technical provisions calculated in accordance with IFRS and in the economic balance sheet according to Solvency II were reassessed by a project set up specifically for this purpose. This resulted in a substantial increase in the technical provisions under Solvency II. Under IFRS the provisions continued to be calculated according to the lock-in principle because the value in force (VIF) of the book of US mortality business remained positive overall. The actual mortality experience in the first half of 2018 proved to be better than anticipated. As part of our portfolio management we initiated rate adjustments for the portfolio in question. Insofar as the affected cedants exercise their right of recapture, this can lead to charges to the IFRS result.

Capital market environment: On the investment side we expect to see increased volatility on equity and credit markets worldwide. We take the view, however, that we are suitably prepared with our rather defensively oriented investment posture.