Annual Report 2010 - Hannover Re

3.3 Segmentation
Hannover Re‘s segmental report is based on IFRS 8 “Operating
Segments” and on the principles set out in German
Accounting Standard No. 3 “Segment Reporting” (DRS 3) of
the German Accounting Standards Board as well as the requirements
of DRS 3–20 “Segment Reporting of Insurance
Enterprises”.
The segmentation in non-life reinsurance and life/health reinsurance
and the segment information presented follow the
system used for internal reporting purposes, on the basis of
which the full Executive Board regularly evaluates the performance
of the segments and decides on the allocation of
resources to the segments.
During the financial year no material changes occurred in the
organisational structure that could have influenced the composition
of the segments. Since the performance indicators
used to steer the segments correspond to the system according
to which the consolidated financial statement is prepared,
a separate reconciliation of the segment results with the Group
result is not provided.
3.4 Major discretionary decisions and estimates
In the consolidated financial statement it is to some extent
necessary to make estimates and assumptions which affect
the assets and liabilities shown in the balance sheet, the information
on contingent claims and liabilities as at the balance
sheet date and the disclosure of income and expenses during
the reporting period. Key facts and circumstances subject
to such assumptions and estimates include, for example, the
recoverability of contingent reinsurance liabilities, the valuation
of derivative financial instruments as well as assets and
liabilities relating to employee benefits. The actual amounts
may diverge from the estimated amounts.
Measurement of the obligations existing in this connection is
carried out using a separate process, which is based largely
on contract-specific estimates.
For further details, for example concerning the modelling of
natural catastrophe scenarios and the assumptions relating to
asbestos and pollution risks, the reader is referred to our comments
in the risk report on page 60 et seq. We would further
refer to our explanatory remarks on the technical reserves in
Section 3.2 “Summary of major accounting policies” and Section
5.7 “Technical provisions”.
In order to measure the “ultimate liability” in non-life business
the expected ultimate loss ratios are calculated for all
lines. Actuarial methods such as the “chain ladder” method
provide the starting point for these calculations. The best possible
estimated future settlement amount is recognised in the
balance sheet. The development until completion of the runoff
is projected on the basis of statistical triangles from the
original notifications of ceding companies. In this context it
is generally assumed that the future rate of inflation of the
loss run-off will be analogous to the average rate of the past
inflation contained in the data. The more recent underwriting
years in actuarial projections are of course subject to greater
uncertainty, although this can be considerably reduced with
the aid of a variety of additional information on improvements
in the rates and conditions of the business written and on loss
trends. The amounts arrived at as the difference between the
ultimate losses and the reported losses are set aside as the
IBNR reserve for losses that have been incurred but are not
yet known or have still to be reported.
By analysing a broad range of observable information it is
possible to classify losses as major individual loss events.
In life business too the calculation of reserves and assets is
crucially dependent on actuarial projections of the covered
business. So-called model points are defined according to the
type of business covered. The main distinguishing criter ia are
the age, sex and (non-)smoker status of the insured, tariff, policy
period, period of premium payment and amount of insurance.
The portfolio development is simulated for each model
point, in which regard the key input parameters are either
predefined by the tariff (e.g. allowance for costs, amount of
premium, actuarial interest rate) or need to be estimated (e.g.
mortality or disability rates, lapse rates). These assumptions
are heavily dependent on country-specific parameters and on
the sales channel, quality of the cedant‘s underwriting and
claims handling, type of reinsurance and other framework
conditions of the reinsurance treaty. The superimposition
of numerous model points gives rise to a projection, which
incorp orates inter alia assumptions concerning the port folio
composition and the commencement of covered policies within
the year. Such assumptions are estimated at the inception of
a reinsurance treaty and subsequently adjusted to the actual
projection.
122 NOTES 3.4 Major discretionary decisions and estimates
Hannover Re Group annual report 2010