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 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 sig-
nificant 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.
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