4.4 Legal risk - Scor

B. SCOR is exposed to Guaranteed Minimum Death Benefit (GMDB) products
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. These funds are not held by SCOR Global Life. The assets remain with
the originating ceding companies.
Business of this type which contains a specific economic risk in case of financial crisis is not within the usual scope of
the SCOR Global Life underwriting policy. These treaties are all in run-off 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 GMDBs are covered, including return of premium, ratchet, roll-up and reset. 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. See “Section 20.1.6 – Notes to the
financial statements, Note 16 – Contract Liabilities.”
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. More information about GMDB appears in “Section 20.1.6 – Notes to the financial statements,
Note 16 – Contract Liabilities.”
There can be no assurance that SCOR’s GMDB portfolios will not deteriorate in the future, which could have a adverse
effect on SCOR’s business, present and future revenues, net income, cash flows, financial position, and potentially, on
the price of its securities.
See “Section 20 – Note 16, Contract liabilities – A. Guaranteed Minimum Death Benefit (GMDB)” for further information
on risk mitigation actions.
C. SCOR is exposed to risks arising from its U.S. Non-Life subsidiaries
SCOR Non-Life ’s U.S. operations include both on-going and run-off portfolios. The latter principally consists of risks
arising from various classes of insurance and reinsurance business written in the U.S. from the middle of the 1990’s to
2002 by SCOR Reinsurance Company ("SCOR Re U.S.") and General Security National Insurance Company
(“GSNIC”), each a SCOR Group owned insurance company domiciled in the State of New York and in the Bermuda
through Commercial Risk Partners Ltd. (“CRP”), a company absorbed by GSNIC in 2009. There can be no assurance
that SCOR’s U.S. Non-Life subsidiaries will not face financial difficulties in the future. Today, discontinued business
portfolios do not represent a material liability that is any greater than those associated with other entities of the Group.
4.1.5 IF SCOR’S RESERVES PROVE TO BE INADEQUATE, ITS NET INCOME, CASH FLOW AND FINANCIAL
POSITION MAY BE ADVERSELY AFFECTED
SCOR is required to maintain reserves to cover its estimated ultimate liability for losses and loss adjustment expenses
with respect to reported and unreported claims, incurred as at the end of each accounting period, net of estimated
related recoveries. Its reserves are established both on the basis of information it receives from its cedant insurance
companies, particularly their own reserving levels, as well as on the basis of its knowledge of the risks, the studies it
conducts and the trends it observes on a regular basis. As part of the reserving process SCOR reviews, with the
concerned insurers and co-insurers, available historical data and it tries to anticipate the impact of various factors such
as change in laws and regulations and judicial decisions that may tend to affect potential losses from claims, changes in
social and political attitudes that may increase exposure to losses and trends in mortality and morbidity, or evolution in
general economic conditions.
As stated before, the Group’s reserves and policy pricing are based on a number of assumptions and on information
provided by third parties, which, if incorrect and/or incomplete, could have an adverse effect on its business, present and
future revenues, net income, cash flows, financial position, and potentially, on the price of its securities. Despite the
26