talanx group annual report 2011 en

Overall assessment of
the economic situation
Non-financial
performance indicators
Corporate Governance Remuneration report Events of special
significance
connection with guaranteed surrender values. A rapidly rising
interest rate level, for example, may create hidden obligations. If
contracts are terminated prematurely, the policyholders would be
entitled to the guaranteed surrender values but would not share
in any hidden losses incurred. Upon disposal of the corresponding
investments the hidden losses would have to be borne by the
life insurers, and in theory it is possible that the fair market value
of the investments would not suffice to cover the guaranteed surrender
values. As a further factor, the change in the distribution of
acquisition costs in compliance with the amended Insurance Contract
Act leads to higher surrender values in the initial phase. The
Group reduces the interest guarantee risk primarily by constantly
monitoring the asset portfolios and capital markets and taking
appropriate countermeasures. To some extent interest rate hedging
instruments such as swaptions, book yield notes and forward
purchases are also used. For a large part of our life insurance portfolio
the interest guarantee risk is reduced through contractual
provisions that enable the surplus distributions paid in addition
to the guaranteed interest rate to be adjusted to the situation on
the capital market. Under unit-linked life insurance policies, the
investment risks are borne by policyholders, who also profit from
the associated opportunities. However, the investment risks could
be shifted back onto the life insurers as a consequence of adverse
legal developments.
The protracted low level of interest rates poses a risk especially to
the life insurers within the Group that draw up financial statements
according to German HGB in that provisions for interest
payments may need to be boosted. The Federal Ministry of Finance
(BMF) has amended the Mathematical Provisions Ordinance
(Deckungsrückstellungsverordnung) to change the reporting and
regulatory requirements on allocations to the provisions. The
amendment came into effect in March 2011. After that, provisions
must be set up for an insurance portfolio with an actuarial interest
rate of 4% as soon as the longterm average market interest rate
drops beneath 4%. On the basis of the planning assumptions and
further interest-rate analyses, this leads to a need to allocate additional
provisions in the 2012 financial year. To broaden the safety
margins in the regulatory legacy portfolio, some allocations have
already been made in the 2011 financial year.
The biometric risks described above are especially important in
life and health reinsurance, particularly in the context of catastrophic
events such as pandemics. Reserves in life and health
reinsurance are based mainly on the information provided by
our ceding companies. The plausibility of these figures is checked
using reliable biometric actuarial bases. Further quality assurance
Risk report Forecast and
opportunities report
measures ensure that the reserves calculated by the ceding companies
in accordance with local financial reporting principles and
assumptions satisfy all requirements with respect to the calculation
methods used and assumptions made (e.g. use of up-to-date
mortality and morbidity tables, assumptions regarding the lapse
rate). The Group writes new business in all regions in compliance
with globally applicable underwriting guidelines which set out
detailed rules governing the type, quality, level and origin of risks
and are revised annually. Specific underwriting guidelines give
due consideration to the particular features of individual markets.
By monitoring compliance with these underwriting guidelines,
the Group minimises the credit risk associated with the potential
insolvency or deterioration in the financial status of cedants.
Whenever new business activities are launched or international
portfolios taken over, regular reviews and holistic analyses are
performed (e.g. with a focus on lapse risks). In life and health reinsurance,
owing to the structure of the contracts, the interest rate
risk which is so important in the primary life business by virtue of
the guarantees given is of little relevance.
A key risk management tool in the areas of life insurance and
life/health reinsurance is systematic monitoring of the Market
Consistent Embedded Value (MCEV). Sensitivity analyses highlight
the areas where the Group is exposed and provide pointers as to
which areas to focus on from the risk management perspective.
Default risks under insurance business
Receivables due under insurance business always entail a risk of
default. This applies specifically to receivables due from reinsurers,
retrocessionaires, policyholders and insurance agents. Value adjustments
or write-downs on receivables would be the result.
The Group counteracts the risk of default by reinsurers and retrocessionaires
by carefully selecting these with the aid of expertly
staffed Credit Committees, constantly monitoring their credit status
and – where necessary – taking appropriate measures to secure receivables.
Depending upon the nature and the expected run-off period
of the reinsured business and subject to a required minimum
capital adequacy, reinsurers and retrocessionaires are selected on
the basis of our own credit assessments and the minimum ratings
assigned by the rating agencies Standard & Poor’s and A. M. Best. A
rating information system has been implemented for inclusion of
the rating data.
Talanx Group. Annual Report 2011
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