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
The actuarial interest rates relevant for the portfolio in calculating the
provision for future policy benefits and the provision for outstanding
claims are as follows:
Discount rates used for provisions – Primary insurance (gross)
Life Health Total
All figures in €m * 31.12.2006 31.12.2006 31.12.2006 Prev. year
No guaranteed interest rate 4,633 835 5,468 5,854
Discount rate 2.5% 1,619 30 1,649 1,418
Discount rate 2.5–3.0% 19,096 5 19,101 16,219
Discount rate 3.0–3.5% 25,945 168 26,113 24,748
Discount rate 3.5–4.0% 13,658 428 14,086 16,013
Discount rate 4.0–4.5% 34 2,031 2,065 3,129
Discount rate 4.5–5.0% 30 15,143 15,173 14,256
Discount rate > 5.0% 121 – 121 –
Total 65,136 18,640 83,776 81,637
* After elimination of intra-Group transactions across segments.
This involves matching the provisions with suitable investments,
albeit not always over durations that fully correspond to the respective
settlement periods of the liabilities. In the case of a discrepancy
between the durations of the investments and liabilities (”duration
mismatch”), the main risk lies in the fact that if interest rates fall
markedly over the remaining settlement period of the liabilities, the
return on the reinvested assets may be lower than the discount rates
and thus necessitate further expenses. But a complete duration
matching of liabilities with fixed-interest investments would not be
expedient, because if interest rates rise, policyholders might make
increasing use of their surrender rights (see below), resulting in a
liquidity requirement for premature payouts.
Other market risks and embedded derivatives
In reinsurance, other market risks are generally ruled out through
suitable treaty design. In the few exceptional cases where reinsurance
contracts contain embedded derivatives, these are usually
hedged by means of suitable capital market instruments.
In primary insurance, the risks to be considered in this context –
besides the interest-rate guarantee – are particularly risks from unitlinked
life insurance and the lump-sum option in the case of deferred
pension policies. Other embedded derivates are financially insignificant.
For the unit-linked insurance contracts in our portfolios, the investment
risk lies completely with the policyholder, meaning that there is
no direct market risk. Appropriate product design ensures that the
necessary premium portions for payment of a guaranteed minimum
benefit on occurrence of death are always based on the current fund
assets. Hence, this guaranteed minimum benefit does not represent
an embedded derivative in the accounting sense.
202
The lump-sum option in the case of deferred annuities is an embedded
derivative which, however, is itself an insurance contract for
accounting purposes. There is no direct interest-rate sensitivity or
market sensitivity here, since the exercise of the option by the policyholder
is always determined to a crucial extent by individual factors
and relates to the insurance components. In addition, the exercise
of the option can be influenced by the way the insurer structures
bonuses. This option is specifically taken into account when applying
the liability adequacy test prescribed by IFRS 4 to underwriting liabilities.
Lapse risks
In reinsurance, a lapse risk derives from the indirect transfer of lapse
risks from cedants and can largely be eliminated through appropriate
treaty design. Any residual risk is assessed by means of productspecific
portfolio analyses and is taken into account in pricing. A
financial risk from extraordinary termination of reinsurance contracts
is generally ruled out through appropriate contract design.
In life primary insurance, the reported provision for future policy
benefits in the case of contracts with a surrender option is generally
at least as high as the relevant surrender value. Therefore, lapse
rates are not included in the calculation of the technical provisions.
Surrender values are taken into account in the amortisation of
deferred acquisition costs and the calculation of provisions in health
primary insurance. The underlying assumptions are regularly
checked. The policyholder’s right in some contracts to maintain the
contract with a waiver of premium and an adjustment of the guaranteed
benefits constitutes a partial lapse and is taken into account in
the calculations analogously.