7.3 Funds held/contract deposits and contracts without sufficient technical risk
IFRS 4 in conjunction with SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" requires insurance contracts that transfer a significant technical risk from the ceding company to the reinsurer to be differentiated from those under which the risk transfer is of merely subordinate importance. Hannover Re adopts the same approach in its recognition of funds held / contract deposits by separating funds held under insurance contracts with a significant risk transfer from contract deposits in respect of which the risk transfer is of subordinate importance.
Funds held
Funds held under insurance contracts that satisfy the requirements of both IFRS 4 and SFAS 113 in relation to the risk transfer from the ceding company to the reinsurer are recognised under this item.
The funds held by ceding companies totalling EUR 9,776.1 million (EUR 8,610.6 million) represent the cash and securities deposits furnished by our company to our cedants that do not trigger any cash flows and cannot be used by cedants without our consent. The durations of these deposits are matched to the corresponding provisions. In the event of default on such a deposit our reinsurance commitment is reduced to the same extent. The rise in funds held by ceding companies was attributable principally to increased new business in the area of non-traditional life reinsurance.
The funds held under reinsurance treaties totalling EUR 566.0 million (EUR 956.9 million) represent the cash and securities deposits furnished to our company by our retrocessionaires that do not trigger any cash flows and cannot be used without the consent of our retrocessionaires. The durations of these deposits are matched to the corresponding shares of the reinsurers in the technical provisions. If such a share no longer exists the corresponding funds held are reduced to the same extent.
Contract deposits
Hannover Re reports contract deposits under insurance contracts that satisfy the test of a significant risk transfer to the reinsurer as required by IFRS 4 but fail to meet the risk transfer required by US GAAP under the items "Contract deposits". Since the risk transfer under these transactions is of subordinate importance, these contracts were recognised using the "deposit accounting" method and hence eliminated from the technical account. The compensation elements for risk assumption booked to income under these contracts were netted under other income/expenses. The payment flows resulting from these contracts were reported in the cash flow statement under operating activities. The balances were shown as contract deposits on the assets and liabilities sides of the balance sheet, the fair values of which corresponded approximately to their book values.
The contract deposits on the assets side fell by EUR 327.3 million in the year under review from EUR 616.1 million to EUR 288.8 million. The decrease was attributable principally to the expiry of certain contracts in the area of non-traditional life reinsurance.
The contract deposits on the liabilities side increased by EUR 1,477.6 million in the year under review from EUR 3,668.8 million to EUR 5,146.4 million. The contract deposits item on the liabilities side encompasses balances deriving from non-traditional life insurance contracts that are to be carried as liabilities. The rise was due principally to growth in new business in the area of non-traditional life reinsurance.