Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
Combined ratios for the last ten years
Insurance risk: Life and health
Risk management processes
In life insurance and reinsurance, biometric, lapse and
interest-guarantee risks are especially relevant. The calculation
of underwriting provisions is based on “biometric”
actuarial assumptions, i.e. on assumptions with regard to
mortality and disablement, which also take future trends
into account. In primary insurance, the assumptions are
determined by the requirements of the supervisory authorities
or institutes of actuaries, depending on the specific
national regulations, and include appropriate safety margins
determined by our actuaries.
In reinsurance, we calculate the biometric risk mainly
on the basis of tables relating to mortality and claims
development, published by national actuarial associations.
These tables are modified in accordance with the experience
observed in the reinsured portfolios and with the
assistance of our Centre of Competence for Biosciences to
reflect future trends. Lapse risks can be reduced in insurance
and reinsurance by means of suitable product and
contract design. We estimate the residual lapse risk by
means of product-specific portfolio analyses and take this
into account in our pricing.
As far as the interest-guarantee risk in primary life
insurance is concerned, the guaranteed actuarial interest
rate applicable at the time a policy is established is used in
calculating the actuarial reserve for that policy. Should
capital market interest rates fall to a very low level for a
prolonged period, our primary life and health insurers
might not be able to earn the required guaranteed interest
rate.
In reinsurance, we exclude the interest-guarantee risk
in many cases through suitable treaty design or by a backto-back
micro hedge of the risk.
Furthermore, as a matter of principle, we use marketconsistent
assumptions for determining the technically
risk-adequate price for each contract.
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Management report_Risk report
All figures in % 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Including natural catastrophes 92.6 111.7 98.9 96.5 123.7 ** 136.9 * 116.2 119.7 105.2 102.0
Excluding natural catastrophes 91.3 92.3 93.9 94.7 120.3 ** 135.3 * 114.1 108.0 101.2 100.7
* Thereof World Trade Center and reserve strengthening at American Re: 24.3%.
** Thereof World Trade Center and reserve strengthening at American Re: 17.1% .
Risk exposures
The notes to the consolidated financial statements include
a differentiated analysis of how the parameters determining
the underwriting items of the balance sheet affect the
risks in life insurance and reinsurance. This presentation is
in compliance with IFRS 4 accounting requirements.
For our life reinsurance and primary life and health
insurance business, our embedded value disclosure
provides details of the sensitivity of the embedded value
and the value added by new business to factors such as
changes in mortality/morbidity, lapse rates, expenses,
interest rates, and equity and property market value
changes. The disclosure follows the Additional Guidance
on European Embedded Value Disclosures as published
by the CFO Forum, an organisation of the Chief Financial
Officers of large insurance companies, in September 2005.
As soon as the European Embedded Values for 2006
have been calculated, they will be published on our website
on 4 May 2007. Last year’s disclosure of the European
Embedded Value from 9 May 2006, available on our website,
shows that the most significant risk for reinsurance is
the risk of future mortality being less favourable than that
assumed in our valuation bases. For primary insurance,
the most significant risk is the risk of falls in interest rates
for a prolonged period, although this risk has been significantly
although not completely mitigated through the large
swaption transactions entered into by the ERGO life companies
during 2005 and 2006.
Operational risks
Operational risks comprise the risks of losses as a result of
inadequate processes, technical failure, human error or
external events. These include criminal acts committed by
employees or third parties, insider trading, infringements
of antitrust law, business interruptions, inaccurate processing
of transactions, non-compliance with reporting
obligations or disagreements with business partners.