4.4 Legal risk - Scor

B. Life reinsurance
The main categories of risks for the life reinsurance underwritten by SCOR’s Life division, which is referred to in this
Registration document as “SCOR Global Life,” “Life” or its “Life division,” are biometric, behavioral and catastrophe risks
as well as credit risk (see “Section 4.1.14 - SCOR is exposed to losses due to counterparty default risks or credit risks”),
currency risks (see “Section 4.2.4 – SCOR is exposed to foreign currency exchange rate fluctuations”) and market risks
(see “Section 4.2 – Market risk” and “Section 4.2.3 – SCOR is exposed to other risks arising from the instruments it
owns”).
(a) Biometric risks
The assessment of biometric risks is at the centre of underwriting in life reinsurance. These are risks which result from
adverse developments in mortality, morbidity, longevity or from epidemic/pandemic claims. These risks are evaluated by
the actuaries, research centers and medical underwriters of SCOR Global Life, who analyze and use information from
SCOR Global Life’s own portfolio experience, from the ceding companies as well as relevant information available in the
public domain, such as mortality or disability studies and tables as available from various sources, e.g. actuarial
associations or medical research bodies.
Mortality Risk
Mortality risk is the risk of negative deviation from expected results due to higher than anticipated death rates resulting
from either the inherent volatility, an adverse long-term trend or a mortality shock event in the reinsured portfolio.
Morbidity Risk
Products such as critical illness, short-term and long-term disability and long term care, which all contain morbidity risk,
are subject to the risk of negative trends in health, as well as to the consequences of improved medical diagnoses
capabilities which increase the number of claims that otherwise would possibly have remained undetected. Medical
progress may enable better treatment resulting in higher claims since certain diseases would have otherwise led to
immediate death of insureds. Products providing cover for medical expenses are in particular subject to the risk of higher
than frequency incidence rates and inflation of medical costs.
Longevity Risk
Longevity risk refers to the risk of a negative deviation from expected results due to the insured or annuitant living longer
than assumed in the pricing of the insurance cover. This risk exists within annuity and long-term care covers and within
other longevity protection products.
Pandemic
In Life reinsurance, a severe pandemic is a major risk. In the past century, three major outbreaks of influenza occurred
and claimed millions of lives. The occurrence of a similar event could cause large losses to SCOR due to an increased
mortality far beyond the usual volatility. Experts closely monitor current influenza virus strains and those of other
infectious diseases. A lethal virus strain not only of influenza but of any other communicable disease could lead to a
heavy increase in mortality rates and increased medical costs which could significantly affect SCOR’s results.
The potential loss relating to a severe pandemic is estimated using models. However, the limited amount of available
historical data, combined with the generic model risk, creates a high degree of uncertainty in the results. The financial
outcome of a severe pandemic could, therefore, differ considerably from that expected by the model, thus leading to a
potentially significantly higher loss than expected.
(b) Behavioural risks
SCOR Global Life is also exposed to risks related to policyholder behaviour. This includes risks such as lapsation, antiselection
at policy issue, resale of policies, exercising of policy options by the policyholder different from expected, and
fraudulent applications.
Lapsation
Lapses refer to either non-payment of premium by the policyholder or to policies which are terminated by the
policyholder before the maturity date of the policy. Depending upon the product design, higher or lower policyholder
lapses than assumed in the pricing may reduce SCOR Global Life’s expected future income. Policyholder lapses may
differ from expectations due to a changing economic environment or other reasons, such as changes in tax incentives
for the insurance policies, tarnished reputation of the cedant or from the introduction of more attractive insurance
products in the market. SCOR studies and closely monitors this risk.
Anti-selection
Anti-selection refers to the problem of asymmetry of information between the insured and the insurer. An individual
applying for life or health insurance cover usually has better knowledge about his or her own state of health than the
insurer. The risk to the (re)insurer is of policyholders deliberately deciding among other things to:
• take out a policy in the knowledge that either their chances of claiming is high or higher than average;
• terminate a policy in the knowledge that their chances of claiming are low or lower than average; or
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