4.4 Legal risk - Scor

(A) GUARANTEED MINIMUM DEATH BENEFIT (GMDB)
In connection with its October 2007 acquisition of Converium Holdings AG (“Converium”), SCOR Global Life inherited
certain retrocession liabilities with regard to Guaranteed Minimum Death Benefit (GMDB) rider options attached to variable
annuity policies written in the U.S.
Its GMDB business indirectly exposes SCOR Global Life to asset risk on the variable annuity policyholders’ funds. SCOR
Global Life must pay, in the event of death, the excess of the GMDB over the account balance or the excess of the GMDB
over the cash surrender value, depending on the definition of the underlying reinsurance agreements. A fall in the value of
the variable annuity policies’ funds therefore leads to higher expected claims amounts. The variable annuity policyholders
invest their funds in a wide variety of U.S. equity, other equity, fixed interest, money market, balanced and other funds.
Hence SCOR Global Life is exposed to losses, through higher death claims, if these funds fall in value. Note that these
funds are not held by SCOR Global Life. The assets remain with the originating ceding companies.
Business of this type is not within the usual scope of the SCOR Global Life underwriting policy. These treaties are all in runoff
and, as at 31 December 2012, cover in total approximately 0.6 million policies written by two cedants. These treaties
were issued mainly in the late 1990’s and incorporate various benefit types.
Different types of Guaranteed Minimum Death Benefits are covered, including:
• Return of premium: The GMDB is the amount of total deposits adjusted for partial withdrawals, if any.
• Ratchet: After a given number of years, the GMDB is adjusted to the current account balance, if greater. Most
common is a 1-year ratchet, meaning that the GMDB is adjusted annually on the policy's anniversary date.
• Roll-up: The GMDB increases each year from the initial premium adjusted for later deposits and partial
withdrawals, as the case may be, by a fixed percentage. Rollup guarantees reinsured under SCOR Global Life's
agreements grant an annual accumulation percentage between 3% and 7%. In many products, especially for
higher rollup percentages, an upper limit applies (e.g. 200% of the paid policyholder premium adjusted for later
deposits and partial withdrawals).
• Reset: After a given number of years, the GMDB is adjusted to the current account balance. This means that the
GMDB can be reduced but often not below the paid-up premium (adjusted for later deposits and partial
withdrawals).
Guarantees that increase over time are, for a majority of the assumed business, only applied up to a certain age. This
implies that SCOR Global Life will be released from the risk when the beneficiary reaches this age limit.
There are some risks which are specific to the GMDB portfolio. Due to the nature of the product, the remaining liability is
influenced by developments on the financial markets, particularly changes in the price of equities and fixed income
securities, fluctuations in interest rates, and the implied volatility on equity options. The liability is also dependent on
policyholder behavior, particularly on the exercise of partial withdrawal options, but also on other aspects, such as lapse
behavior and the use of options to choose the underlying funds.
As a retrocessionaire, SCOR Global Life is exposed to uncertainties concerning data received from its retrocedants and the
original ceding companies and also due to the inherent reporting lag. SCOR Global Life is also exposed to risks inherent to
the model used for the assessment of the liability under its portfolio.
There can be no assurance that SCOR’s GMDB portfolios will not deteriorate in the future, which could have a material
adverse effect on SCOR’s business, present and future revenues, net income, cash flows, financial position, and potentially,
on the price of its securities.
(B) LIABILITY ADEQUACY TEST
The liability adequacy test conducted at year end 2012 did not detect any deficiencies for either the Non-Life or Life segment
for the year ended 31 December 2012.
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