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6.2 Technical risks in non-life reinsurance

The underreserving of claims constitutes a significant technical risk. Loss reserves are determined using actuarial methods, primarily based on information provided by our cedants, and supplemented as necessary by additional reserves established on the basis of our own loss assessments. Especially in liability business, reserves are also set aside for claims that have been incurred but not yet reported (IBNR) owing to the long run-off periods for such claims. The additional IBNR reserve established by the Hannover Re Group amounted to EUR 3,236.2 million in the year under review. The IBNR reserve is calculated on a differentiated basis according to risk categories and regions. All in all, the anticipated ultimate loss ratios are calculated in 76 subsegments. The correct measurement of loss reserves for asbestos- and pollution-related claims is a highly complex matter since decades may elapse between causation of the loss and reporting of the claim. Hannover Re's exposure to asbestos-related claims and pollution damage is comparatively slight. The adequacy of these reserves is normally measured using the so-called "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. At the end of the year under review our survival ratio stood at 25.0 years.

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Reserves for asbestos-related claims and pollution damage

Run-off triangles are another tool used to verify our assumptions. Such triangles show the changes over time in the reserves as a consequence of paid claims and in the recalculation of the reserves that are to be established as at each balance sheet date. Adequacy is monitored using actuarial methods (cf. here our explanatory remarks on technical reserves in Section 7.2 "Technical assets and liabilities").

The following catastrophe losses and major claims were of relevance to our company in the financial year:

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Catastrophe losses and major claims

The combined ratio is tracked over time in non-life reinsurance in order to monitor the risk of losses exceeding premiums:

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Combined and catastrophe loss ratio over the past ten years

As part of a holistic analysis of technical risks, the risk deriving from the accepted new business is considered in addition to the reserving risk. The risk capital for the premium and reserving risk per line of business is set out in the chart below. Risk spreading across lines of business is referred to as diversification. In this way we are able to enhance the efficiency of the allocated capital while at the same time reducing the required equity resources. Depending upon the capital required by our business segments and lines and their contribution to diversification, we define the cost of capital to be generated for each business unit.

Within the scope of accumulation control for natural catastrophe risks, the Executive Board defines the appetite for assuming natural hazards risks on the basis of the risk strategy derived from the overall corporate strategy. This specification of the risk appetite takes place once a year and thus constitutes a crucial basis for our underwriting approach in this segment.

For the purpose of risk limitation, maximum underwriting limits (capacities) are stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Adherence to these limits is constantly monitored by Group Risk Management. The Risk Committee, Executive Board and the body responsible for managing non-life reinsurance are regularly updated on the extent to which these capacities are utilised. The limits for the 100- and 250-year aggregate annual loss as well as the utilisation thereof were as follows:

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Natural catastrophes and annual aggregate loss

Furthermore, we establish the portfolio risk for various scenarios (e.g. hurricanes in the US, windstorms in Europe, earthquakes in the US) in the form of probability distributions. The range of tools used for accumulation control is supplemented by the progressive inclusion of realistic extreme loss scenarios.