The counterparty default risk consists primarily of the risk of complete or partial failure of the counterparty and the associated default on payment. The following table shows the required risk capital for counterparty defaults with a confidence level of 99.5%.
|Required risk capital 1 counterparty default risk|
|in EUR million||31.12.2018||31.12.2017|
|Counterparty default risk||312.6||282.0|
Since the business that we accept is not always fully retained, but instead portions are Retroceded as necessary, the counterparty default risk is also material for our company in reinsurance transactions. Our retrocession partners are carefully selected and monitored in light of credit considerations in order to keep the risk as small as possible. This is also true of our broker relationships, which entail a risk inter alia through the potential loss of the premium paid by the cedant to the broker. We minimise these risks, among other things, by reviewing all broker relationships with an eye to criteria such as the existence of professional indemnity insurance, payment performance and proper contract implementation. The credit status of retrocessionaires is continuously monitored. On the basis of this ongoing monitoring a Security Committee decides on measures where necessary to secure receivables that appear to be at risk of default. This process is supported by a Web-based risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, the selection of reinsurers takes into account not only the minimum ratings of the rating agencies Standard & Poor’s and A.M. Best but also internal and external expert assessments (e. g. market information from brokers). Overall, retrocessions conserve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e. g. following a major loss event. Regular visits to our retrocessionaires give us a reliable overview of the market and put us in a position to respond quickly to capacity changes. The following table shows how the proportion of assumed risks that we do not retrocede (i. e. that we run in our retention) has changed in recent years:
|Gross written premium retained|
|Hannover Re Group||90.7||90.5||89.3||87.0||87.6|
|Property and casualty reinsurance||90.7||89.7||88.5||89.3||90.6|
|Life and health reinsurance||90.7||91.7||90.4||84.2||83.9|
Alongside traditional retrocessions in property and casualty reinsurance we also transfer risks to the capital market.
Counterparty default risks are also relevant to our investments and in life and health reinsurance, among other things because we prefinance acquisition costs for our ceding companies. Our cedants, retrocessionaires and broker relationships as well as our investments are therefore carefully evaluated and limited in light of credit considerations and are constantly monitored and controlled within the scope of our mine system of limits and thresholds.
Lastly, short-term deposits at system of limits and thresholds. Lastly, short-term deposits at system of limits and thresholds.
Lastly, short-term deposits at banks are also at risk of counterparty default.
69.6% of our recoverables from reinsurance business are secured by deposits or letters of credit. For the majority of our retrocessionaires we also function as reinsurer, meaning that in most cases recoverables can potentially be set off against our own liabilities. In terms of the Hannover Re Group’s major companies, EUR 241.8 million (6.1%) of our accounts receivable from reinsurance business totalling EUR 3,975.8 million were older than 90 days as at the balance sheet date.
The average default rate from retrocessions over the past four years was 0.09%.
Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 2,084.6 million (EUR 1,651.3 million) as at the balance sheet date.
The following chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires.
The amount of assets subject to collateral arrangements is well below 60% of Hannover Re’s total assets. This statement is relevant for the calculation of the counterparty default risk with respect to Hannover Re.
As the parent company, Hannover Re provides a guarantee to clients for the small number of low-risk structured transactions. In this context, it guarantees the payment of liabilities by Hannover Re under these specific transactions in the event that the subsidiary is unable to meet its assumed obligations. Since each of these guarantees is associated with a specific transaction and formulated in such a way that each potential payment can only arise once per corporate entity of Hannover Re (i. e. either at the subsidiary itself as part of the transaction or at Hannover Re as a consequence of the guarantee), the existence of a guarantee on the part of Hannover Re has no effect on the underwriting risk from Hannover Re’s property & casualty or life & health reinsurance business.