6.1 Quantitative risk management using the internal capital model
Hannover Re's risk management makes use of appropriate quantitative simulation models. The purpose of risk quantification – using the internal capital model – is inter alia to calculate the risk capital and determine the diversification effect. We also use the model to perform scenario analyses.
In determining our capital requirement we proceed on the assumption that an AA rating is equivalent to a default probability of 0.03%. The breakdown of the risk capital is as follows:
Excel download (19 KB)Internal capital model1)
| Figures in EUR million | 2008 | 2007 |
|---|---|---|
| Risk | ||
| Technical risk in non-life reinsurance | 3,559.2 | 3,593.8 |
| Technical risk in life and health reinsurance | 663.2 | 662.5 |
| Investment risk | 1,730.4 | 1,709.7 |
| Diversification effect | 2,415.8 | 2,356.8 |
| Hannover Re Group | 3,537.1 | 3,609.2 |
| 1) for the 99.97% VaR | ||
As part of our holistic approach to risk management across all business groups, we take into account numerous relevant scenarios. In addition, we analyse extreme scenarios, determine their effect on key balance sheet variables and performance indicators, evaluate them in relation to the planned figures and identify alternative courses of action.
Excel download (20 KB)Market scenarios
| Figures in EUR million | Effect on forecast shareholders' equity |
|
|---|---|---|
| 2008 | 2007 | |
| Rise in the overall interest rate curve, from 200 basis points for the three-month interest rate to 100 basis points for the 10-year interest rate (with a linear interpolation between the two) |
(480.3) | (485.8) |
| Parallel upward shift in the overall interest rate curve by +100 basis points |
(423.7) | (401.3) |
| Decline of 35% in equities | (6.0) | (584.8) |
| European currency crisis (1992)1) | (295.2) | (262.3) |
| Property crash associated with interest rate rise1) | (492.7) | (401.3) |
| Stock market crash (2000/2001)1) | 4.1 | (697.4) |
| 1) Stress associated with the risk factors for these scenarios as specified by the Swiss Solvency Test | ||
Stress tests for natural catastrophes after retrocessions
| Figures in EUR million | Effect on forecast net income |
|
|---|---|---|
| 2008 | 2007 | |
| 100-year loss California earthquake | (260.2) | (222.9) |
| 100-year loss European windstorm | (203.3) | (109.8) |
| 100-year loss US windstorm | (279.4) | (291.5) |
| 100-year loss Japanese windstorm | (97.7) | (95.1) |
| 100-year loss Tokyo earthquake | (217.6) | (243.2) |