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 Premiums, loss ratios and combined ratios by class of business 2006 2005 2004 2003 2002 Gross premiums written in €m – Reinsurance – Liability 2,394 2,561 2,606 3,444 3,514 – Accident 713 1,052 1,080 1,293 1,302 – Motor 2,913 2,671 2,890 3,186 3,337 – Marine, aviation, space 1,751 1,654 1,609 1,742 1,896 – Fire 3,763 3,701 3,775 4,874 5,294 – Engineering 1,239 1,299 1,281 1,393 1,443 – Other classes of business 1,778 1,609 1,616 1,987 2,098 – Primary insurance Loss ratio in % – Reinsurance 5,147 5,242 5,202 5,082 4,841 – Liability 81.7 96.6 96.4 84.1 144.4 – Accident 134.0 83.4 82.2 72.8 128.6 – Motor 84.9 71.5 87.6 79.1 84.6 – Marine, aviation, space 67.7 80.8 66.1 60.0 72.7 – Fire 32.2 107.8 54.2 60.3 80.9 – Engineering 56.4 40.0 57.4 64.4 75.8 – Other classes of business 50.9 63.4 47.1 60.3 98.2 – Primary insurance Combined ratio in % – Reinsurance 55.8 58.4 58.1 60.0 62.4 – Liability 110.7 124.8 124.2 112.0 171.2 – Accident 167.7 111.0 115.8 103.8 158.2 – Motor 109.7 94.6 112.7 102.7 107.8 – Marine, aviation, space 91.5 106.6 89.6 84.8 95.0 – Fire 58.8 135.8 81.8 86.5 107.3 – Engineering 87.8 75.3 89.5 94.5 105.2 – Other classes of business 83.4 98.1 75.5 89.6 130.6 – Primary insurance 90.8 93.1 93.0 96.4 99.9 The estimation of technological, social and demographic parameters plays an important part in assessing and pricing risks assumed in all classes of business. Beyond this, in liability insurance and sections of motor insurance, the development of economic and legal parameters is significant, whereas in the lines of business fire and marine, aviation, space and sections of engineering business and primary insurance, a high degree of sensitivity regarding the underlying assumptions about natural catastrophes can play the dominating role. In the latter area, we include expected trends in our considerations when assessing the risks, with special importance given to a precise analysis of climate-related changes in the risk profile. Reserve risks Provisions for outstanding claims are subject to the risk that actual claims settlement may be less than or exceed the amount reserved (reserve risk). Particular attention is given to those situations where the funds dedicated to future claim payments may be inadequate. 204 The measurement of the provisions for outstanding claims is based on historical loss development data for the different classes of business. We use a range of well-established actuarial methods in both reinsurance and primary insurance for this purpose. These methods embed various pricing, coverage and benefit/inflation levels. The actuarial analysis is complemented by studies carried out by our claims and underwriting staff from which we derive foreseeable future trends. As part of our regular results monitoring process, we keep a close eye on trends to ensure that the assumptions underlying the measurement of the provisions always reflect the latest developments. Consequently, in the course of reserve run-off, it may be necessary to revise the original estimates of the claims expenditure required and to adjust the provisions accordingly. We view our level of reserves as sufficient to reflect both our best estimate of our current liabilities and an appropriate consideration of the uncertainty inherent in the estimate. It should, however, be noted that future changes to the provisions cannot be ruled out.
Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts The development of our claims reserves in the past and the corresponding run-off results are shown under (21) “Provisions for outstanding claims”. A particular sensitivity exists in classes of business with long runoff periods. This characteristic applies especially to casualty insurance, where liabilities often manifest themselves with a considerable time-lag. In addition, changes in court verdicts, new loss categories, medical inflation and modifications in general life expectancy can alter the valuation of reserves. The following section discusses the main areas in the current reserve portfolio where management has identified the uncertainty to be the greatest. Asbestos insurance liabilities currently emanating predominantly from the US and some European counties are an area of concern for the entire insurance and reinsurance industry. Naturally this also applies to the Munich Re Group. Since the mid-eighties, industrial insurers writing business worldwide have found themselves being confronted with asbestos-related injury losses from policies taken out decades before. In particular, these include claims under product liability policies in the USA which manifest themselves after a Provisions for asbestos and environmental claims latency period of as long as 30 to 50 years. In response, we have posted provisions for claims under long-cancelled general liability policies which provided coverage according to the then-applicable legal environment. Significant time lags between major events leading to insurance claims are exacerbated when it comes to reinsurance claims. Loss notification often involves a long “chain”: exposure to the loss, manifestion of an injury, filing of a lawsuit against a defendant, adjudication of the suit, reporting and payment of an insurance recovery and then, finally, notification to the reinsurer. Therefore, besides monitoring these developments on a claim-by-claim level, we also monitor the development from an industry perspective, as this may be considered an important early indicator. In the course of 2006, we saw rapidly emerging evidence that the surge in asbestos claims filings that the US industry has experienced in recent years will impact our Munich Re America book of business. Therefore, we have reallocated €465m to asbestos claims reserves from previously held unallocated risk margins at Munich Re Group level. Altogether, the provisions concerned are as follows: 31.12.2006 Prev. year All figures in €m * Gross Net Gross Net Asbestos 1,932 1,545 1,466 1,168 Environment * The previous year’s figures have been adjusted to take account of currency translation differences. 440 377 485 409 Other loss scenarios which are highly influenced by the continuously evolving practice of jurisprudence under tort law currently include toxic mould, sexual misconduct and construction defects. We will continue to monitor trends and to respond to the emergence of new information as appropriate. Given the unpredictable nature of court decisions and other loss-affecting factors in the markets concerned, however, it will continue to be difficult to make accurate estimates of future development. In the area of bodily injury losses, the Group carries a significant amount of reserves for individual claims where the claimant is severely injured and is in need of a high degree of individual, specialised medical treatment and care. US workers´ compensation business and motor liability business in some European countries are particularly affected by such claims. In both cases, coverage is provided for permanent disability cases where the claimant is expected to live for a considerable length of time and requires significant medical attention. Accordingly, the loss provisions are highly sensitive to inflation in the medical sector and to general life expectancy. Historical loss development data still embed past coverage and benefit/inflation levels. As such, historical loss patterns that are relied upon for traditional actuarial analysis may not be truly reflective of future emergence; future reported and paid loss amounts are compared to projected amounts to check the appropriateness of current and future loss development patterns. Interest-rate risks Economically, 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 balance sheet terms, the interest-rate risk affects the provisions for outstanding claims only to the extent that the estimated reserve values are discounted. 205
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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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