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 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.
Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts Risk minimisation measures In reinsurance, biometric risks are controlled by means of a risk-adequate underwriting policy. Risks are restricted through appropriate treaty design, specifically by limiting the coverage in the case of nonproportional business. In particular, the underwriting of longevity risks from reinsured portfolios is strictly limited. Interest-rate and other market risks are frequently ruled out by depositing the provisions with the cedant, with a guaranteed rate of interest from the deposit. In individual cases, these risks are also hedged by means of suitable capital market instruments. In primary insurance, there is substantial risk minimisation through product design. For the most part, prudent actuarial assumptions are used in fixing the guaranteed benefits, in addition to which policyholders are granted a performance-related participation in surplus. More than 99% of the amount shown under (20) “Provision for future policy benefits” is apportionable to such contracts. Given the relevant margins in the actuarial assumptions, it is also possible to fulfil the future guaranteed obligations without adjusting the provisions in the case of moderate changes in assumptions. In addition, the provision for deferred premium refunds and portions of the provision for premium refunds based on national regulations, shown under (22) “Other technical provisions”, is of great significance for risk-balancing in the case of adverse developments. In health primary insurance, substantial risk minimisation is also provided for by the premium adjustment clause underlying most longterm contracts. Impact on equity and the consolidated income statement In the liability adequacy test pursuant to IFRS 4, we regularly test the technical provisions and deferred acquisition costs to ensure they are appropriate. An adjustment is made if such tests show that the original provisions for adverse deviation allowed for in the biometric actuarial assumptions, or in the assumptions for discounting provisions and for lapses, have been exhausted. Particularly in primary insurance, the possibilities of adjusting participation in surplus are taken into account. If an adjustment is required, we recognise any deficit as an expense in the consolidated income statement. (37) Risks from insurance contracts in the property-casualty segment Of particular importance in this segment is the estimation risk with regard to the amount of the expected claims expenditure for future claims from current insurance contracts (premium risk) and for claims already incurred (reserve risk). In estimating claims expenditure, we also take cost increases into account. Besides this, there is an interest-rate risk for parts of the portfolio. The basis for measuring the risk assumed is an estimate of the claims frequency to be expected for a portfolio of contracts. In addition, an estimation of the claims amount is necessary, from which a mathematical distribution of the expected losses is derived. The result of these two steps is an estimation of the expected overall claims in a portfolio. A third element comprises the expected cash flows to settle claims incurred, a process which frequently extends over several years. Premium risks The degree of exposure to estimation risks differs according to class of business and also between primary insurance and reinsurance. On the basis of the loss ratios and combined ratios of recent years, conclusions can be drawn about the historical volatilities in the different classes of business and about possible interdependencies. The differences in volatility are due equally to fluctuations in claims burdens and fluctuations in the respective market price level for the covers granted. 203
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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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