Munich Re Group Annual Report 2006 (PDF, 1.8

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Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts Disclosures on the uncertainties of future cash flows from insurance contracts (36) Risks from insurance contracts in the life and health segment Of primary importance in this segment are biometric risks, interestrate risks and lapse risks. The measurement of technical provisions and deferred acquisition costs is based on biometric calculation tables, i.e. on assumptions with regard to mortality, disablement and morbidity, and on the respective contract- or plan-specific discount rates and actuarial interest rates. Besides this, measurement includes assumptions regarding the lapse rate and profit sharing. In addition, other market risks from unit-linked contracts and risks from embedded derivatives have to be taken into account. The quantitative structure of our business is shown in the notes to the consolidated balance sheet under (20) “Provision for policy benefits”. The biometric assumptions used for measuring insurance contracts in our portfolios are regularly reviewed on the basis of updated 200 Biometric risks Our portfolios’ degree of exposure to biometric risks depends on the type of insurance contracts: Product category Life primary insurance Features Important risks – Endowment and – Long-term contracts with a death benefit Mortality (short term): term life insurance – In most cases, a lump-sum payment on termination – Increase in claims expenditure due to exceptional, – Actuarial assumptions fixed when contract is concluded; premium adjustments not possible one-off circumstances Mortality (long term): – Increase in expected expenditure due to sustained rise in mortality in the portfolio – Annuity insurance – In most cases, guaranteed lifetime annuity payment Longevity: – Actuarial assumptions mainly fixed when contract is – Increase in expenditure for annuities due to concluded; premium adjustments not possible sustained rise in life expectancy in the portfolio – Disability insurance – Long-term contracts with a guaranteed limited Disablement: annuity in the event of disablement – Increased expenditure due to rise in the number of cases – Actuarial assumptions fixed when contract is concluded; of disablement in the portfolio or a reduction in the premium ajustments not possible average age at which the insured event occurs Life reinsurance – Largely long-term contracts under which mainly Longevity: – Increased expenditure due to rise in the average duration of annuity period Mortality (short term): mortality and morbidity risks are assumed from – Increase in claims expenditure due to exceptional, cedants one-off circumstances Mortality (long term): – Increase in claims expenditure due to sustained rise in mortality in cedants’ portfolios Health primary insurance – Largely long-term contracts guaranteeing assumption Disablement: – Increased expenditure for disability insurances in cedants’ portfolios Morbidity (primarily short term): of costs for medical treatment. Provisions are established – Increase in medical costs that cannot be absorbed for covering increased costs on ageing through premium adjustments – Variable actuarial assumptions; premium adjustment – Increase in claims expenditure due to exceptional, possible if there are sustained changes in the cost structure one-off events Health reinsurance – In most cases, short-term contracts under which morbidity Morbidity (short term): risks are assumed from cedants – Increase in costs of medical treatment within the risk period – Increase in claims expenditure due to exceptional, one-off events portfolio information. Especially in primary insurance, this includes considering country-specific reviews by supervisory authorities. We also take account of market standards when checking the adequacy of biometric actuarial assumptions and the trend assumptions included in them. This verification of the assumptions and adequacy
Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts of the trend factors may result in a change in the provision for adverse deviation allowed for in the actuarial assumptions. This does not directly affect the value of the technical provisions or the deferred acquisition costs as long as there is sufficient provision for adverse deviation. In the view of the actuaries responsible, the biometric actuarial assumptions used by us are deemed to be sufficient and contain adequate provision for adverse deviation. For annuity insurance contracts, the longevity risk plays an especially significant role. In primary insurance, the provisions for adverse deviation in our portfolio of annuity insurance policies have decreased in the past. If the longevity trend intensifies further compared with assumptions, additional amounts may have to be allocated to the provision for future policy benefits in the future. The longevity risk in our reinsurance portfolio has significantly less weight than in primary insurance. In the health segment, we are proceeding on the assumption that there will be further advances in medical treatment, potentially giving rise to higher costs. If it is foreseeable that the assumptions behind the calculation are permanently inadequate to cover expenses for claims, it is possible to adjust premiums for long-term contracts, thus limiting the financial and balance-sheet effects of permanent changes in morbidity. However, such biometric risks may accumulate or be aggravated as a result of interventions by legislators or courts in the distribution of risks and rewards underlying the contracts concluded between the parties to insurance. For example, in the proposed German health reform, the rules envisaged for the portability of ageing reserves or the option for clients to switch to a “basic policy” could significantly disrupt the proven system of collective risk balancing between policyholders and the reasonable balance of interests between insurance companies and their insureds. Discount rates used for provisions – Reinsurance (gross) Interest-rate risks Interest-rate risks have to be taken into account in both reinsurance and primary insurance. A distinction must be made between risks of changes in interest rates on the one hand and interest-rate guarantee risks on the other. Risks of changes in interest rates would result from the discounting of the provision for future policy benefits and of parts of the provision for outstanding claims. In accordance with accounting valuation rules, the discount rate is fixed at contract commencement and will generally not be adjusted during the term of the contract. To this extent, the accounting valuation of the technical provisions is not directly dependent on the level of the market interest rates. Economically, however, an interest-rate risk derives from the need to earn a return on the investments covering the provision that is commensurate with the discount rate used in measuring the provision. In reinsurance, such an interest-rate risk can frequently be ruled out through suitable treaty design. For many treaties, the interest on technical provisions is secured by an inflow of investment income from deposits retained that is guaranteed by the ceding company. For the remaining portion of the €16,534m (19,281m) total provision for future policy benefits and provision for outstanding claims, we use the following discount rates: All figures in €m 31.12.2006 Prev. year Discount rate 2.5% 12 3 Discount rate 2.5–3.5% 661 296 Discount rate 3.5–4.5% 490 479 Discount rate 4.5–5.5% 2,242 2,513 Discount rate 5.5–6.5% 1,099 1,116 Discount rate 6.5–7.5% 330 340 Discount rate > 7.5% 101 100 Total 4,935 4,847 For the whole portfolio, including that part where we use high discount rates for historical reasons, we check by means of the liability adequacy test as per IFRS 4 that the expected income from the investments covering the technical provisions is sufficient to meet future obligations. In life primary insurance, an implicit or explicit interest-rate guarantee is granted for the majority of contracts, based on an actuarial interest rate applying at the time the contract is concluded. An appropriate minimum return needs to be earned in the long term from the investment result (possibly also with assistance from the underwriting result) for the contractually guaranteed benefits. In health primary insurance, an actuarial interest rate is also used for calculating the provision for future policy benefits, but this rate can generally be altered by way of premium adjustment. 201
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Munich Re Group Annual Report 2006
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The Munich Re Group Our operations
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Munich Re Group in 2006 Tireless an
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