4.4 Legal risk - Scor
4.4 Legal risk - Scor
4.4 Legal risk - Scor
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(e) Risks linked to collateral requirements<br />
The availability and cost of collateral, including letters of credit to represent the Group commitments, asset trusts and other<br />
credit facilities, could adversely affect SCOR’s operations and financial condition.<br />
Regulatory reserve requirements in various jurisdictions in which SCOR operates may be significantly higher than the<br />
reserves required under IFRS. A regulation in the U.S. (NAIC Model Regulation XXX or Valuation of Life Insurance Policies<br />
Model Regulation), commonly referred to as Regulation XXX (or Triple X) and adopted by most U.S. states as at 1 January<br />
2000, requires a relatively higher level of regulatory, or statutory, reserves that U.S. life insurance and life reinsurance<br />
companies must hold on their statutory financial statements for various types of life insurance business, primarily certain<br />
level premium term life products. The reserve requirements under Regulation XXX increase over time and are normally in<br />
excess of reserves required under IFRS in other jurisdictions. The increase and the ultimate level of XXX reserves will<br />
depend upon the mix of business and future production levels in the U.S.<br />
SCOR might overtime retrocede certain XXX-related cash flows and reserves to such affiliated or unaffiliated reinsurers that<br />
are authorized in company‘s domicile or provide collateral of an amount equal to the reinsured reserves. Such collateral<br />
must be provided in the form of withheld funds, NAIC (National Association of Insurance Commissioners) approved<br />
commercial bank letters of credit, the placement of assets in trust for the ceding company’s benefit, or by other means preapproved<br />
by the ceding company’s regulator.<br />
Based on the assumed rate of growth in SCOR’s current U.S. business plan, and the increasing level of XXX reserves<br />
associated with this business, it expects the amount of required XXX reserves, retrocession and required collateral to grow<br />
significantly. With regard to retrocession to affiliates, SCOR would be required to secure such collateral.<br />
In connection with these reserve requirements, SCOR faces the following <strong>risk</strong>s:<br />
• The availability of collateral and the related cost of such collateral in the future could affect the type and volume of<br />
business it reinsures and could increase costs.<br />
• The Group may need to raise additional capital to support higher regulatory reserves, which could increase the<br />
overall cost of capital.<br />
• If its affiliated or not affiliated retrocessionaires, are unable to obtain or provide sufficient collateral to support their<br />
statutory ceded reserves or if regulatory changes lead to change to the current retrocession structures, it may be<br />
required to increase regulatory reserves. In turn, this reserve increase could significantly reduce statutory capital<br />
levels and adversely affect SCOR’s ability to satisfy required regulatory capital levels that apply, unless it is able to<br />
raise additional capital to contribute to its operating subsidiaries.<br />
• Because term life insurance is a particularly price-sensitive product, any increase in insurance premiums charged<br />
on these products by life insurance companies, in order to compensate them for the increased statutory reserve<br />
requirements or higher costs of insurance they face, may result in a significant loss of volume in their life insurance<br />
operations, which could, in turn, adversely affect life reinsurance operations.<br />
SCOR cannot assure investors that it will be able to implement actions to mitigate the effect of increasing regulatory reserve<br />
requirements.<br />
(f) Recapture <strong>risk</strong><br />
Under certain long term reinsurance treaties, ceding companies have the right to totally or partially recapture the book of<br />
business ceded under the reinsurance treaty after a pre-defined number of years after the inception of the treaty. The<br />
exercise of such recapture options may reduce SCOR Global Life’s expected future income.<br />
(g) SCOR is exposed to Guaranteed Minimum Death Benefit (GMDB) products<br />
In connection with its October 2007 acquisition of Converium Holdings AG (“Converium”), SCOR Global Life inherited<br />
certain retrocession liabilities with regard to Guaranteed Minimum Death Benefit (“GMDB”) rider options attached to variable<br />
annuity policies written in the U.S. Its GMDB business indirectly exposes SCOR Global Life to asset <strong>risk</strong> on the variable<br />
annuity policyholders’ funds. SCOR Global Life must pay, in the event of death, the excess of the GMDB over the account<br />
balance or the excess of the GMDB over the cash surrender value, depending on the definition of the underlying<br />
reinsurance agreements. A fall in the value of the variable annuity policies’ funds therefore leads to higher expected claims<br />
amounts. The variable annuity policyholders invest their funds in a wide variety of U.S. equity, other equity, fixed interest,<br />
money market, balanced and other funds. Hence SCOR Global Life is exposed to losses, through higher death claims, if<br />
these funds fall in value. These funds are not held by SCOR Global Life. The assets remain with the originating ceding<br />
companies.<br />
Business of this type which contains a specific economic <strong>risk</strong> in case of financial crisis is not within the usual scope of the<br />
SCOR Global Life underwriting policy. These treaties are all in run-off and, as at 31 December 2012, cover in total<br />
approximately 0.6 million policies written by two cedants. These treaties were issued mainly in the late 1990’s and<br />
incorporate various benefit types.<br />
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