Annual Report 2003 - Hannover Re

Management report
risk report
Strategic risks
Strategic risks have a bearing on our corporate
objectives. They derive primarily from an
imbalance between the defined corporate strategy
and the constantly fluctuating business environment.
Value and cost drivers must be transparent
if strategic corporate objectives are to be
achieved. This is only possible with optimal organisational,
decision-making and reporting
structures. Risk management coordinates the
activities and thereby supports the controlling
of opportunities and risks. In order to survive in
the fierce competitive environment we regularly
review our strategy and adjust our structures
and processes accordingly. Every three years we
subject the assumptions underlying our corporate
strategy to detailed scrutiny. The most recent
strategy review, which was conducted in
2002, incorporated the views of employees from
various levels within the Group both at home
and abroad.
Controlling of technical
risks for both the overall
portfolio and specific
business groups
Technical operating risks
Every insurance company is faced with the
problem of first having to collect fixed premiums
from all policyholders and only later knowing
the claims payments it will have to make. In
other words, the technical risk is that the actual
claims expenses can diverge from the expected
amount and exceed the total available premium
income (including security funds). Possible reasons
here may be an incorrect risk assessment
or risk spread, excessive interdependencies between
risks or default on the part of retrocessionaires.
Hannover Re uses various mechanisms
– both for the portfolio as a whole and for
specific business groups – to control technical
risks.
The loss reserves in property and casualty
reinsurance are determined on an actuarial basis.
These reserves are established for claims that
have been incurred and reported to the insurer,
but whose amount has not yet been fixed and
therefore cannot be paid yet. There are also
claims which only materialise later and which
the policyholder consequently reports to the insurer
– and the insurer subsequently to the
reinsurer – some time after they are incurred.
Reserves also have to be constituted for these
so-called IBNR (incurred but not reported) claims
since often years or even decades elapse until
the final run-off of such claims. This is especially
true of liability claims. Uncertainties in reserving
are thus unavoidable, not least because reinsurers
find themselves at the end of the information
chain and ultimately depend on the data provided
by ceding companies. The IBNR reserve additionally
established by the Hannover Re Group
amounted to EUR 1,504.3 million in the year
under review. The IBNR reserve is calculated according
to a breakdown into risk categories and
regions. The anticipated ultimate loss ratios are
calculated in altogether 53 subsegments.
Recent years have witnessed an accumulation
of lawsuits around the world due to bodily
injuries resulting from the use of asbestos. Hannover
Re's exposure to asbestos- and pollutionrelated
claims is, however, relatively slight. We
have only accepted business on the US market
since the seventies, and even then very modest
volumes only. In addition, we have already commuted
numerous existing exposed treaties. In
view of the increased risks related to asbestos
and pollution claims we nevertheless further reinforced
our reserves: in 2003 we boosted our
own additional reserves by 20.7%. The relative
level of these reserves is measured using the socalled
"survival ratio". This ratio expresses how
many years the reserves would cover if the average
level of paid claims over the past three years
were to continue. As at the end of the year under
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