4.4 Legal risk - Scor

(e) Risks linked to collateral requirements
The availability and cost of collateral, including letters of credit to represent the Group commitments, asset trusts and other
credit facilities, could adversely affect SCOR’s operations and financial condition.
Regulatory reserve requirements in various jurisdictions in which SCOR operates may be significantly higher than the
reserves required under IFRS. A regulation in the U.S. (NAIC Model Regulation XXX or Valuation of Life Insurance Policies
Model Regulation), commonly referred to as Regulation XXX (or Triple X) and adopted by most U.S. states as at 1 January
2000, requires a relatively higher level of regulatory, or statutory, reserves that U.S. life insurance and life reinsurance
companies must hold on their statutory financial statements for various types of life insurance business, primarily certain
level premium term life products. The reserve requirements under Regulation XXX increase over time and are normally in
excess of reserves required under IFRS in other jurisdictions. The increase and the ultimate level of XXX reserves will
depend upon the mix of business and future production levels in the U.S.
SCOR might overtime retrocede certain XXX-related cash flows and reserves to such affiliated or unaffiliated reinsurers that
are authorized in company‘s domicile or provide collateral of an amount equal to the reinsured reserves. Such collateral
must be provided in the form of withheld funds, NAIC (National Association of Insurance Commissioners) approved
commercial bank letters of credit, the placement of assets in trust for the ceding company’s benefit, or by other means preapproved
by the ceding company’s regulator.
Based on the assumed rate of growth in SCOR’s current U.S. business plan, and the increasing level of XXX reserves
associated with this business, it expects the amount of required XXX reserves, retrocession and required collateral to grow
significantly. With regard to retrocession to affiliates, SCOR would be required to secure such collateral.
In connection with these reserve requirements, SCOR faces the following risks:
• The availability of collateral and the related cost of such collateral in the future could affect the type and volume of
business it reinsures and could increase costs.
• The Group may need to raise additional capital to support higher regulatory reserves, which could increase the
overall cost of capital.
• If its affiliated or not affiliated retrocessionaires, are unable to obtain or provide sufficient collateral to support their
statutory ceded reserves or if regulatory changes lead to change to the current retrocession structures, it may be
required to increase regulatory reserves. In turn, this reserve increase could significantly reduce statutory capital
levels and adversely affect SCOR’s ability to satisfy required regulatory capital levels that apply, unless it is able to
raise additional capital to contribute to its operating subsidiaries.
• Because term life insurance is a particularly price-sensitive product, any increase in insurance premiums charged
on these products by life insurance companies, in order to compensate them for the increased statutory reserve
requirements or higher costs of insurance they face, may result in a significant loss of volume in their life insurance
operations, which could, in turn, adversely affect life reinsurance operations.
SCOR cannot assure investors that it will be able to implement actions to mitigate the effect of increasing regulatory reserve
requirements.
(f) Recapture risk
Under certain long term reinsurance treaties, ceding companies have the right to totally or partially recapture the book of
business ceded under the reinsurance treaty after a pre-defined number of years after the inception of the treaty. The
exercise of such recapture options may reduce SCOR Global Life’s expected future income.
(g) 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.
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