4.4 Legal risk - Scor

On the other hand, an increase in interest rates and/or fluctuations in the capital markets could lead to a fall in the market
value of fixed income securities SCOR holds. In the case of a need for cash the Group may be obliged to sell fixed income
securities, possibly resulting in capital losses to the Group.
SCOR analyzes the impact of a major change in interest rates on each of its portfolios and at the global level and identifies
the unrealized capital loss that would result from a rise in interest rates. The instantaneous unrealized capital loss is
measured for a uniform increase of 100 basis points in rates or in the event of a distortion of the structure of the yield curve.
Portfolio sensitivity analysis to interest rate changes is an important risk measurement and management tool which may
lead to decisions for reallocation or hedging.
However, there can be no assurance that its risk management measures and sensitivity analysis will be sufficient to protect
the Group against all the risks related to variations in interest rates.
(ii)
Interest rate risks on financial debt
Financial debt is not carried at fair value. For the Group, interest rate risk is limited to the interest paid on variable rate debt.
(iii) Interest rate risks on insurance liabilities
The Group has certain life insurance contracts which are sensitive to fluctuations in interest rates.
Life
Although in general all long term liabilities are discounted, in most cases there is no immediate accounting impact from a
100 basis point change in interest for the following reasons:
• For the German, Italian, Swiss and Austrian markets, valuation interest rates are typically locked-in at the minimum
interest rate guaranteed by the ceding companies on the deposited assets covering the liabilities.
• For the business written in the U.K., Scandinavia, U.S. (traditional, non-savings products), and France (excluding
Long Term Care), valuation interest rates are locked-in based on a prudent estimate of the expected rate earned
on assets held less a provision for adverse deviation.
There is no requirement for a material change in reserves for life products with guaranteed minimum death benefit (GMDB)
in the event of a 100 basis point change in interest rates.
For Long Term Care products in France, ceding companies use valuation rates established by French regulators which are
based on a prudent proportion of the moving average of long-term government rates. The bulk of the reserves are
deposited. The interests on these deposits are often linked to the assets of the ceding companies and minimum interest
rates on deposits are at least the valuation rate. Ceding companies are usually doing a proper matching of assets and
liabilities. Hence a 100 basis point decrease in interest rates would have no significant impact.
Non-Life
There are no material amounts of discounted reserves in the Non-Life portfolio which would result in interest sensitivities.
Additionally, for lines of business where there are interest sensitivities at the level of the ceding company and for which no
direct information on these sensitivities is submitted to SCOR level (e.g., the bodily injury portion of automobile), SCOR
considers that the information provided by the ceding company is not necessarily representative of the evolution in interest
rates. The IBNR calculations performed by SCOR using methods other than the loss ratio method do not represent a
material portion of the recorded reserves and therefore the sensitivity is not considered material.
(c) Valuation risk
Valuation risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in
market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the
market.
The Group’s valuation exposure relates to financial assets and financial liabilities whose values will fluctuate as a result of
changes in market prices, principally investments in equity securities.
(i)
Valuation risk on investments
The majority of the Group’s investments are in debt securities. For investments made in equity securities, the Group’s
objective is to develop and manage a high-quality diversified portfolio. The equity portfolio is regularly monitored.
All investments, whether held directly or in mutual funds, are aggregated and valued on a regular basis. This approach
allows for the monitoring of changes in the portfolio and the identification of investments with higher than average volatility.
The Group’s exposure is reviewed at regular Investment Committee meetings.
SCOR is also exposed to equity price risk. A widespread and sustained decline in the equity markets could result in an
impairment of SCOR’s equity portfolio. Such impairment could affect the Group’s net income.
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