Munich Re Group Annual Report 2006 (PDF, 1.8

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.
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