Annual Report 2010 - Hannover Re

Strategic risks derive from the risk of an imbalance between
the corporate strategy and the constantly changing general
business environment. Such an imbalance might be caused,
for example, by incorrect strategic policy decisions or a failure
to consistently implement the defined strategies. We therefore
regularly review our corporate strategy and risk strategy and
adjust our processes as and when required.
A good corporate reputation is an indispensable prerequisite
for our core business as a reinsurer. It often takes decades to
build up a positive reputation, yet this reputation can be damaged
or even destroyed within a very brief space of time. Management
of this risk is made possible by our set communication
channels, a professional approach to corporate
communications, tried and tested processes for defined crisis
scenarios as well as our established Code of Conduct.
The liquidity risk refers to the risk of being unable to convert
investments and other assets into cash in order to meet our
financial obligations when they become due. The liquidity risk
consists of the refinancing risk, i.e. the necessary cash cannot
be obtained or can only be raised at increased costs, and the
market liquidity risk, meaning that financial market transactions
can only be completed at a poorer price than expected
due to a lack of market liquidity. Our regular liquidity planning
and the liquid asset structure of our investments are core elements
of our ability to manage this risk. These mechanisms
ensure that Hannover Re is able to meet its payment obligations
at all times. We manage the liquidity risk inter alia by
allocating a liquidity code to every security. Adherence to the
limits defined in our investment guidelines for each liquidity
class is subject to daily control. The spread of investments
across the various liquidity classes is recorded in the monthly
investment reports and managed/monitored by way of appropriate
limits. Roughly half of our investment holdings under
own management can be liquidated on any trading day without
a mark-down, a reflection of the high liquidity of our portfolio.
Assessment of the risk situation
The above remarks describe the diverse spectrum of risks to
which we, as an internationally operating reinsurance company,
are exposed as well as the steps taken to manage and
monitor them. The specified risks can potentially have a significant
impact on our assets, financial position and net income.
Yet consideration solely of the risk aspect does not fit
our holistic conception of risk, since risks always go hand-inhand
with opportunities. Our effective management and monitoring
tools as well as our organisational and operational
structures ensure that we are able to identify our risks in a
timely manner and maximise our opportunities. For additional
information on the opportunities and risks associated with
our business please see the Forecast contained in the management
report.
The implementation of Solvency II effective 1 January 2013
will, among other things, place more exacting regulatory demands
on risk management. Hannover Re has long adopted a
risk-based and value-based management approach of the type
which regulators will then require. We began to make our
preparations for the requirements of Solvency II at an early
stage: this includes participation in all Quantitative Impact
Studies (QIS) and entering the pre-application phase for approval
of an internal capital model. We see Solvency II as an
opportunity for the convergence of international regulatory
and internal corporate approaches.
Solvency II will also result in considerably increased compliance
costs, principally in connection with extensive reporting
and documentation requirements. Just how high these additional
costs will be depends upon the interpretation of the
Framework Directive by regulators.
In the previous year we reported that, contrary to a very clear
opinion expressed by tax attorneys, the revenue authority was
of the view that not inconsiderable investment income generated
by the Hannover Re Group’s reinsurance subsidiaries
domiciled in Ireland was subject to taxation of foreign sourced
income at the parent companies in Germany on the basis of
the provisions of the Foreign Transactions Tax Act. Insofar as
tax assessments to this effect had already been received, appeals
were filed – also with respect to the amounts already
recognised as a tax expense. After our opinion had been confirmed
in full by the court of the first instance in 2009, we
regarded as slight the risk that tax assessments containing
taxation of foreign sourced investment income generated by
Irish companies at the parent companies would be upheld.
In October 2010 the Federal Fiscal Court (BFH) subsequently
confirmed the lower-court decision. In the first quarter of 2011
we received amended tax assessments from the revenue authority
for some years; further amended tax assessments have
been announced.
Based on our currently available insights arrived at from a
holistic analysis of the risk situation, the Executive Board of
Hannover Re cannot at present discern any risks that could
jeopardise the continued existence of our company in the
short or medium term or have a material and lasting effect on
our assets, financial position or net income.
Management report
Hannover Re Group annual report 2010
opportunity and risk report Management report
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