7.2 Technical assets and liabilities
Technical assetsThe retrocessionaires' portions of the technical provisions are based on the contractual agreements of the underlying reinsurance treaties. For further details please refer to our comments on the technical provisions in this section as well as to the explanatory remarks in Section 6 "Management of technical and financial risks".
SFAS 60 "Accounting and Reporting by Insurance Enterprises" requires that acquisition costs be capitalised as assets and amortised via the statement of income in proportion to the earned premium.
In the case of reinsurance treaties for unit-linked life insurance policies classified as "universal life-type contracts" pursuant to SFAS 97, the capitalised acquisition costs are amortised on the basis of the estimated gross profit margins from the reinsurance treaties, making allowance for the period of the insurance contracts. A discount rate based on the interest for medium-term government bonds was applied to such contracts. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
In life and health reinsurance the deferred acquisition costs associated with life and annuity policies with regular premium payments are determined in light of the period of the contracts, the expected surrenders, the lapse expectancies and the anticipated interest income.
In non-life reinsurance acquisition costs directly connected with the acquisition or renewal of contracts are deferred for the unearned portion of the premium.
Excel download (20 KB)Development of deferred acquisition costs
| Figures in EUR thousand | 2008 | 2007 |
|---|---|---|
| Net book value at 31 December of the previous year | 1,807,143 | 1,980,102 |
| Currency translation at 1 January | (100,923) | (94,434) |
| Balance at 1 January of the year under review | 1,706,220 | 1,885,668 |
| Changes in consolidated group | (77) | – |
| Additions | 538,673 | 408,643 |
| Amortisations | 411,062 | 491,650 |
| Portfolio entries/exits | 12,551 | (128) |
| Currency translation at 31 December | 14,478 | 4,610 |
| Net book value at 31 December of the year under review | 1,860,783 | 1,807,143 |
For further explanatory remarks please see Section 3.2 "Summary of major accounting policies". The age structure of the accounts receivable which were unadjusted but considered overdue as at the balance sheet date is presented below:
Excel download (18 KB)Age structure of overdue accounts receivable
| Figures in EUR thousand | 2008 | 2007 | ||
|---|---|---|---|---|
| Three months to one year | More than one year | Three months to one year | More than one year | |
| Accounts receivable | 55,986 | 79,077 | 92,345 | 64,535 |
Within the scope of our management of receivables we expect to receive payment of accounts receivable within three months of the date of creation of the debit entry – a period for which we also make allowance in our risk analysis. Please see our comments in Section 6.5 "Credit risks". The default risks associated with accounts receivable under reinsurance business are determined and recognised on the basis of case-by-case analysis. The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review:
Excel download (20 KB)Value adjustments on accounts receivable
| Figures in EUR thousand | 2008 | 2007 |
|---|---|---|
| Changes in value adjustments | ||
| Cumulative value adjustments at 31 December of the previous year | 127,733 | 76,626 |
| Currency translation | (2,011) | 5,839 |
| Cumulative value adjustments after currency translation | 129,744 | 70,787 |
| Value adjustments in the year under review | 46,949 | 52,534 |
| Write-ups | 26,203 | 18,709 |
| Allocation/reversal | (24,917) | 23,121 |
| Cumulative value adjustments at 31 December of the year under review | 125,573 | 127,733 |
| Gross book value of accounts receivable at 31 December of the year under review | 2,927,335 | 2,653,604 |
| Value adjustments | 125,573 | 127,733 |
| Net book value of accounts receivable at 31 December of the year under review | 2,801,762 | 2,525,871 |
In addition, we took specific value adjustments on reinsurance recoverables on unpaid claims in the year under review. We would refer the reader to the corresponding remarks on the loss and loss adjustment expense reserve in this section. With regard to the credit risks resulting from technical assets we would also refer the reader to our comments in Section 6 "Management of technical and financial risks"
Technical reserves
In order to show the net technical provisions remaining in the retention the following table compares the gross provisions with the corresponding retrocessionaires' shares shown as assets.
Excel download (20 KB)Technical provisions
| Figures in EUR thousand | 2008 | 2007 | ||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Loss and loss adjustment expense reserve |
16,932,069 | 2,079,168 | 14,852,901 | 16,553,888 | 2,471,585 | 14,082,303 |
| Benefit reserve | 5,913,075 | 159,151 | 5,753,924 | 6,143,460 | 255,076 | 5,888,384 |
| Unearned premium reserve | 1,333,856 | 29,733 | 1,304,123 | 1,186,382 | 92,322 | 1,094,060 |
| Other technical provisions | 156,996 | 9,928 | 147,068 | 183,725 | 5,574 | 178,151 |
| Total | 24,335,996 | 2,277,980 | 22,058,016 | 24,067,455 | 2,824,557 | 21,242,898 |
The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. Additional IBNR reserves are established for losses that have been incurred but not as yet reported. Technical provisions were discounted at interest rates of between 6.5% and 8.5% (6.5% and 8.2%) with respect to a certain group of contracts relating to the Hannover Re Advanced Solutions division. The interest rates are determined by the contractual agreements. The period from inception to expiry of such contracts is at least four years. The discounted amount totalled EUR 0.2 million (EUR 3.3 million). The discounted provisions as at year-end 2008 amounted to EUR 4.2 million (EUR 25.9 million).
The development of the loss and loss adjustment expense reserve is shown in the following table. Commencing with the gross reserve, the change in the reserve after deduction of the reinsurers' portions is shown in the year under review and the previous year.
Excel download (20 KB)Loss and loss adjustment expense reserve
| Figures in EUR thousand | 2008 | 2007 | ||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Net book value at 31 December of the previous year | 16,553,888 | 2,471,585 | 14,082,303 | 17,596,325 | 3,048,496 | 14,547,829 |
| Currency translation at 1 January | (84,534) | 44,227 | (128,761) | (1,189,614) | (265,602) | (924,012) |
| Reserve at 1 January of the year under review | 16,469,354 | 2,515,812 | 13,953,542 | 16,406,711 | 2,782,894 | 13,623,817 |
| Incurred claims and claims expenses (net)1) | ||||||
| Year under review | 4,039,386 | 451,563 | 3,587,823 | 3,704,393 | 329,803 | 3,374,590 |
| Previous years | 1,202,333 | 65,689 | 1,136,644 | 2,065,334 | 421,135 | 1,644,199 |
| 5,241,719 | 517,252 | 4,724,467 | 5,769,727 | 750,938 | 5,018,789 | |
| Less: | ||||||
| Claims and claims expenses paid (net) | ||||||
| Year under review | (1,079,533) | (386,532) | (693,001) | (1,675,688) | (135,737) | (1,539,951) |
| Previous years | (3,817,633) | (550,663) | (3,266,970) | (3,988,628) | (971,697) | (3,016,931) |
| (4,897,166) | (937,195) | (3,959,971) | (5,664,316) | (1,107,434) | (4,556,882) | |
| Change in consolidated group | 3,867 | 2,609 | 1,258 | – | – | – |
| Specific value adjustment for retrocessions | – | 20,212 | (20,212) | – | (27,061) | 27,061 |
| Portfolio entries / exits | (9,337) | – | (9,337) | (4,094) | 291 | (4,385) |
| Currency translation at 31 December | 123,632 | 902 | 122,730 | 45,860 | 17,835 | 28,025 |
| Net book value at 31 December of the year under review | 16,932,069 | 2,079,168 | 14,852,901 | 16,553,888 | 2,471,585 | 14,082,303 |
| 1) Including expenses recognised directly in shareholders' equity | ||||||
In the year under review specific value adjustments on retrocessions, i.e. on the reinsurance recoverables on unpaid claims, were on balance established in an amount of EUR 20.2 million (previous year: reversal of EUR 27.1 million). Consequently, cumulative specific value adjustments of EUR 46.7 million (EUR 26.4 million) were recognised in these reinsurance recoverables as at the balance sheet date. The total amount of the net reserve before specific value adjustments, to which the following remarks apply, was EUR 14,806.2 million (EUR 14,055.9 million) as at the balance sheet date.
The table below shows the net loss reserve (loss and loss adjustment expense reserve) for non-life reinsurance in the years 1998 to 2008 as well as the run-off of the reserve (so-called run-off triangle). To some extent the loss and loss adjustment expense reserves are inevitably based upon estimations that entail an element of uncertainty. The difference between the previous year's and current estimates is reflected in the net run-off result. In addition, owing to the fact that the period of some reinsurance treaties is not the calendar year or because they are concluded on an underwriting-year basis, it is frequently impossible in reinsurance business to make an exact allocation of claims expenditures to the current financial year and the previous year. Consequently, the development of earlier years - and especially the immediately preceding year - may be distorted. In our assessment, therefore, informative analyses can only be performed after the elapse of at least two years. The development of the euro relative to the most relevant foreign currencies is also a significant influencing factor in this context. In particular, despite the opposing effects of other major foreign currencies, the appreciation of +5.0% in the US dollar against the euro compared to the previous year led to a slight increase in the loss and loss adjustment expense reserve on a euro basis.
The run-off triangles show the run-off of the reserve established as at each balance sheet date, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years. The run-off of the reserve for individual occurrence years is not shown in this regard, but rather the run-off of the reserve constituted annually in the balance sheet as at the balance sheet date.
Excel download (23 KB)Net loss reserve and its run-off
| Figures in EUR million | 1998 31.12. |
1999 31.12. |
2000 31.12. |
2001 31.12. |
2002 31.12. |
2003 31.12. |
2004 31.12. |
2005 31.12. |
2006 31.12. |
2007 31.12. |
2008 31.12. |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Loss and loss adjustment expense reserve (from balance sheet) | 5,913.1 | 7,012.5 | 8,482.0 | 12,182.7 | 12,863.4 | 13,462.2 | 13,120.7 | 14,295.9 | 13,279.8 | 12,718.2 | 13,354.1 |
| Cumulative payments for the year in question and previous years | |||||||||||
| One year later | 1,448.3 | 1,583.3 | 2,108.2 | 2,242.2 | 2,118.1 | 3,622.7 | 4,495.8 | 3,051.1 | 2,664.8 | 2,476.2 | |
| Two years later | 2,230.6 | 2,497.7 | 3,111.9 | 3,775.1 | 5,024.4 | 7,322.2 | 6,611.0 | 5,072.2 | 4,389.8 | ||
| Three years later | 2,711.7 | 3,226.2 | 4,174.2 | 6,032.1 | 7,764.8 | 8,780.2 | 7,590.1 | 6,204.5 | |||
| Four years later | 3,186.5 | 3,897.6 | 5,745.1 | 8,588.5 | 8,909.0 | 9,518.8 | 8,356.3 | ||||
| Five years later | 3,561.1 | 5,119.7 | 7,581.3 | 9,399.8 | 9,467.1 | 10,101.6 | |||||
| Six years later | 4,341.1 | 6,146.0 | 8,114.1 | 9,786.1 | 9,896.7 | ||||||
| Seven years later | 4,816.5 | 6,509.9 | 8,405.2 | 10,122.4 | |||||||
| Eight years later | 5,122.7 | 6,785.1 | 8,610.9 | ||||||||
| Nine years later | 5,311.4 | 6,915.0 | |||||||||
| Ten years later | 5,409.6 | ||||||||||
| Loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve | |||||||||||
| End of year | 5,913.1 | 7,012.5 | 8,482.0 | 12,182.7 | 12,863.4 | 13,462.2 | 13,120.7 | 14,295.9 | 13,279.8 | 12,718.2 | 13,354.1 |
| One year later | 6,363.0 | 7,525.6 | 9,421.6 | 11,604.4 | 11,742.7 | 13,635.5 | 14,433.1 | 13,074.2 | 12,365.8 | 12,171.4 | |
| Two years later | 6,539.5 | 7,750.5 | 8,878.0 | 10,477.4 | 11,844.8 | 14,236.6 | 13,532.6 | 12,366.0 | 11,868.5 | ||
| Three years later | 6,512.1 | 7,311.6 | 8,186.1 | 10,743.8 | 12,373.3 | 13,596.5 | 13,061.2 | 11,977.1 | |||
| Four years later | 6,232.7 | 6,769.4 | 8,354.1 | 11,543.6 | 11,730.7 | 13,307.4 | 12,770.8 | ||||
| Five years later | 5,772.0 | 6,820.9 | 9,102.6 | 11,051.2 | 11,666.2 | 13,122.5 | |||||
| Six years later | 5,694.2 | 7,368.0 | 8,755.6 | 11,164.1 | 11,686.0 | ||||||
| Seven years later | 6,036.4 | 7,142.1 | 8,864.3 | 11,219.1 | |||||||
| Eight years later | 5,841.2 | 7,212.2 | 8,935.7 | ||||||||
| Nine years later | 5,860.7 | 7,267.8 | |||||||||
| Ten years later | 5,901.8 | ||||||||||
| Net run-off result of the loss reserve | (41.1) | (55.6) | (71.4) | (55.0) | (19.9) | 184.9 | 290.4 | 388.9 | 497.9 | 546.7 | |
| Of which currency exchange rate differences | (13.0) | (19.1) | (17.1) | 27.8 | 30.8 | 10.4 | (1.9) | 14.6 | 33.1 | 24.5 | |
| Net run-off result excluding cur- rency exchange rate differences | (54.0) | (74.7) | (88.5) | (27.1) | 10.9 | 195.3 | 288.5 | 403.5 | 530.9 | 571.3 | |
| As percentage of original loss reserve | (0.9) | (1.0) | (1.0) | (0.2) | 0.1 | 1.5 | 2.2 | 3.3 | 4.3 | 4.5 |
Duration of the technical reserves
IFRS 4.38 in conjunction with 4.39(d) requires information which helps to clarify the amount and timing of cash flows expected from reinsurance contracts. In the following tables we have shown the future maturities of the technical reserves and broken them down by the expected remaining durations. As part of our duration analysis we have directly deducted the deposits put up as security for these reserves, since the cash inflows and outflows from these deposits are to be allocated directly to the ceding companies. For further explanation of the recognition and measurement of the reserves please see Section 3.2 "Summary of major accounting policies".
Excel download (20 KB)Maturities of the technical reserves
| Figures in EUR thousand | 2008 | |||||
|---|---|---|---|---|---|---|
| Loss and loss adjustment expense reserves |
Benefit reserve | |||||
| Gross | Retro | Net | Gross | Retro | Net | |
| Due in one year | 4,550,519 | 632,338 | 3,918,181 | 140,488 | 2,335 | 138,153 |
| Due after one through five years | 6,548,143 | 871,076 | 5,677,067 | 211,262 | 35,046 | 176,216 |
| Due after five through ten years | 2,346,469 | 243,109 | 2,103,360 | 308,077 | 2,154 | 305,923 |
| Due after ten through twenty years | 1,869,407 | 190,691 | 1,678,716 | 481,841 | 4,403 | 477,438 |
| Due after twenty years | 985,265 | 54,036 | 931,229 | 423,293 | 3,182 | 420,111 |
| 16,299,803 | 1,991,250 | 14,308,553 | 1,564,961 | 47,120 | 1,517,841 | |
| Deposits | 632,266 | 134,666 | 497,600 | 4,348,114 | 112,031 | 4,236,083 |
| Total | 16,932,069 | 2,125,916 | 14,806,153 | 5,913,075 | 159,151 | 5,753,924 |
| Figures in EUR thousand | 2007 | |||||
|---|---|---|---|---|---|---|
| Loss and loss adjustment expense reserves | Benefit reserve | |||||
| Gross | Retro | Net | Gross | Retro | Net | |
| Due in one year | 4,273,520 | 784,908 | 3,488,612 | 96,918 | 1,149 | 95,769 |
| Due after one through five years | 6,102,419 | 965,745 | 5,136,674 | 204,984 | 6,561 | 198,423 |
| Due after five through ten years | 2,040,895 | 267,452 | 1,773,443 | 311,282 | 32,723 | 278,559 |
| Due after ten through twenty years | 1,884,577 | 261,773 | 1,622,804 | 602,423 | 10,077 | 592,346 |
| Due after twenty years | 1,496,619 | 62,866 | 1,433,753 | 375,428 | 5,750 | 369,678 |
| 15,798,030 | 2,342,744 | 13,455,286 | 1,591,035 | 56,260 | 1,534,775 | |
| Deposits | 755,858 | 155,280 | 600,578 | 4,552,425 | 198,816 | 4,353,609 |
| Total | 16,553,888 | 2,498,024 | 14,055,864 | 6,143,460 | 255,076 | 5,888,384 |
The average duration of the loss and loss adjustment expense reserves was 5.5 years (6.1 years), or 5.7 years (6.4 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average duration of 14.2 years (13.2 years) – or 14.4 years (13.3 years) on a net basis.
The average duration of the reserves is determined using actuarial projections of the expected future payments. A payment pattern is calculated for each homogenous category of our portfolio – making allowance for the business sector, geographical considerations, treaty type and the type of reinsurance – and applied to the outstanding liabilities for each underwriting year and run-off status.
The payment patterns are determined with the aid of actuarial estimation methods and adjusted to reflect changes in payment behaviour and outside influences. The calculations can also be distorted by major losses, and these are therefore considered separately using reference samples or similar losses. The payment patterns used can be compared year for year by contrasting the projected payments with the actual amounts realised.
Liabilities in liability and motor reinsurance traditionally have long durations, sometimes in excess of 20 years, while liabilities in property business are settled within the first ten years.
The benefit reserve is established for life, annuity, personal accident and health reinsurance contracts. Based on the duration of these contracts, long-term reserves are constituted for life and annuity policies and predominantly shortterm reserves are set aside for health and personal accident business.
The benefit reserve is calculated on the basis of the following parameters:
- interest income;
- lapse rates;
- mortality and morbidity rates.
The values for the first two components differ according to the country concerned, product type, investment year etc. The mortality and morbidity rates used are chosen on the basis of national tables and the insurance industry standard. Empirical values for the reinsured portfolio, where available, are also taken into consideration. In this context insights into the gender, age and smoker structure are incorporated into the calculations, and allowance is also made for factors such as product type, sales channel and the frequency of premium payment by policyholders.
At the inception of every reinsurance contract, assumptions about the three parameters are made and locked in for the purpose of calculating the benefit reserve. At the same time, safety / fluctuation loadings are built into each of these components. In order to ensure at all times that the originally chosen assumptions continue to be adequate throughout the contract, checks are made on a regular – normally annual – basis in order to determine whether these assumptions need to be adjusted ("unlocked').
The benefit reserve is established in accordance with the principles set out in SFAS 60. The provisions are based on the Group companies' information regarding mortality, interest and lapse rates.
Excel download (19 KB)Development of the benefit reserve
| Figures in EUR thousand | 2008 | 2007 | ||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Net book value at 31 December of the previous year |
6,143,460 | 255,076 | 5,888,384 | 6,109,154 | 447,537 | 5,661,617 |
| Currency translation at 1 January |
(483,382) | (3,106) | (480,276) | (324,136) | (3,763) | (320,373) |
| Reserve at 1 January of the year under review | 5,660,078 | 251,970 | 5,408,108 | 5,785,018 | 443,774 | 5,341,244 |
| Changes | 454,040 | 32,698 | 421,342 | 436,704 | 38,770 | 397,934 |
| Portfolio entries / exits | (147,315) | (125,628) | (21,687) | (58,727) | (227,707) | 168,980 |
| Currency translation at 31 December |
(53,728) | 111 | (53,839) | (19,535) | 239 | (19,774) |
| Net book value at 31 December of the year under review |
5,913,075 | 159,151 | 5,753,924 | 6,143,460 | 255,076 | 5,888,384 |
The unearned premium reserve derives from the deferral of ceded reinsurance premium. The unearned premium is determined by the period during which the risk is carried and established in accordance with the information supplied by ceding companies. In cases where no information was received, the unearned premium was estimated using suitable methods. Premium paid for periods subsequent to the date of the balance sheet was deferred from recognition within the statement of income.
Excel download (19 KB)Development of unearned premium reserve
| Figures in EUR thousand | 2008 | 2007 | ||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Net book value at 31 December of the previous year |
1,186,382 | 92,322 | 1,094,060 | 1,581,034 | 339,096 | 1,241,938 |
| Currency translation at 1 January | (16,191) | (499) | (15,692) | (131,539) | (32,980) | (98,559) |
| Reserve at 1 January of the year under review |
1,170,191 | 91,823 | 1,078,368 | 1,449,495 | 306,116 | 1,143,379 |
| Changes in consolidated group | 1,866 | 1,328 | 538 | – | – | – |
| Changes | 113,480 | (59,193) | 172,673 | (298,490) | (227,511) | (70,979) |
| Portfolio entries / exits | 31,608 | 94 | 31,514 | (664) | (108) | (556) |
| Currency translation at 31 December | 16,711 | -4,319 | 21,030 | 36,041 | 13,825 | 22,216 |
| Net book value at 31 December of the year under review |
1,333,856 | 29,733 | 1,304,123 | 1,186,382 | 92,322 | 1,094,060 |
The adequacy of the technical liabilities arising out of our reinsurance treaties is reviewed as at each balance sheet date. As part of the adequacy test for technical liabilities the anticipated future contractual payment obligations are compared with the anticipated future income. Hannover Re adopts the "loss recognition" method set out under US GAAP. Should the result of the test indicate that the anticipated future income will not be sufficient to fund future payments, the entire shortfall is recognised in income by first writing off capitalised acquisition costs corresponding to the shortfall. Any remaining difference is constituted as an additional provision.