4.4 Legal risk - Scor

(iv) 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, create 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) Behavioral 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.
(i)
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 on 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.
(ii) 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
• choose and exercise a policy option which allows to increase the policyholder’s expected benefit.
This might lead to a portfolio composition which differs from the one assumed during pricing and might imply lower than
expected profits for both the direct insurer and reinsurer.
(iii) Resale
In general, for most individual life covers, the policyholder and the insured person are identical. The pricing of these policies
is based on this assumption. However, there is a trend, especially in the U.S., where policyholders who can no longer afford
or for other reasons do not want to continue to pay the premiums, are selling their polices and the eventual death benefit to
third parties who continue to pay the premium. These “stranger owned life insurance,” or STOLI policies, lead to deviations
between actual and expected lapse rates which can be a risk to the insurer and reinsurer of the cover.
(c) Catastrophe risks
As previously indicated, natural or man-made catastrophic events can cause very significant material damages affecting the
Non-Life activities of the Group. In addition, such events could cause multiple deaths and serious injuries which could
potentially seriously impact the Life activities of SCOR, particularly under contracts covering groups of employees working at
the same location.
(d) Risks linked to the types of guarantees
Certain life insurance products include guarantees, most frequently with respect to premium rates, insurance benefits, and
surrender or maturity values, or guarantees with regard to interest accrued on reserves or policyholder funds. Other
guarantees may exist, for example, with regard to automatic adjustments of benefits or options applied in annuity policies.
Such guarantees may be explicitly or implicitly covered by the reinsurer under the reinsurance contract and if so expose the
reinsurer to the risk of adverse developments which increase the value of the guarantee and thereby necessitate respective
increases in benefit reserves.
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