Technical risks in life and health reinsurance
In life and health reinsurance biometric risks are of special importance to our company. This term refers to all risks directly connected with the life of an insured person, such as miscalculation of mortality, life expectancy, morbidity and occupational disability. Since we also prefinance our cedants' new business acquisition costs, lapse and catastrophe risks – e.g. with an eye to pandemics – are of significance too.
We reduce these potential risks with a broad range of risk management measures. For example, the reserves in life and health reinsurance are calculated in accordance with actuarial principles using secure biometric actuarial bases and with the aid of portfolio information provided by our clients. Through our own quality assurance we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e.g. use of mortality and disability tables, assumptions regarding the lapse rate etc.). New business is written in all regions in compliance with internationally applicable Global Underwriting Guidelines, which set out detailed rules governing the type, quality, level and origin of risks. These global guidelines are revised every two years and approved by the Executive Board. They are supplemented by countryspecific special underwriting guidelines that cater to the special features of individual markets. In this context the quality standards set for the portfolio reduce the potential counterparty risk stemming from an inability to pay or deterioration in the credit status of cedants. We review the risk feasibility of new business activities and of the assumed international portfolio on the basis of a series of regularly performed, holistic analyses, inter alia with an eye to the lapse risk. Quality is further assured – especially at the level of the subsidiaries – by the actuarial reports and documentation required by local regulators. A key tool of our value-based management and risk management in the area of life and health reinsurance is the European Embedded Value (EEV). This is calculated as the present value of future earnings from the worldwide life and health reinsurance portfolio plus the allocated capital. In this context appropriate allowance is made for all risks underlying the covered business. Since the 2006 financial year the EEV has been calculated on a market-consistent basis. In future, this Market Consistent Embedded Value (MCEV) is to be established on the basis of the principles of the CFO Forum published in June 2008. We publish the MCEV on our Internet website at the same time as the quarterly report for the first quarter. The interest guarantee risk, which is important in life business in the primary insurance sector, is of only minimal risk relevance to our business owing to the structure of our contracts.