Risk capital

In the interests of our shareholders and clients we strive to ensure that our risks remain commensurate with our capital resources. Our quantitative risk management provides a uniform framework for the evaluation and steering of all risks affecting the company as well as of our capital position. In this context, the internal capital model is the central tool and constitutes a stochastic enterprise model. It covers all subsidiaries and business groups of the Hannover Re Group. The core variable in risk and enterprise management is the economic equity, which is calculated according to market-consistent measurement principles and also constitutes the basis for calculating the own funds under Solvency II. Hannover Re’s internal capital model reflects all risks that influence the development of the economic equity. These are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange rates and inflation indices, but also insurance-specific indicators such as the mortality of a particular age group within our portfolio of insureds in a particular country or the number of natural catastrophes in a certain region and the insured loss amount per catastrophe. The specification of the probability distributions for the risk factors draws upon historical and publically available data as well as on the internal data resources of the Hannover Re Group. This process is further supplemented by the know-how of internal and external experts. The fit of the probability distributions is regularly checked by our specialist departments, although more importantly it is also verified in the context of the regular, company-wide use of the capital model when assessing risks and allocating the cost of capital. Hannover Re calculates the required risk capital as the Value at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a oneyear ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the confidence level of 99.5% required under Solvency II. For its capitalisation under Solvency II Hannover Re has set as a limit a capital adequacy ratio of 180% and as a threshold a capital adequacy ratio of 200%.

The capitalisation prescribed by regulatory requirements diverges from the capitalisation shown in accordance with the Hannover Re Group’s internal capital model. Since approval was given last year to use the model for operational risks, the difference rests solely in the Solvency II stipulations that non-controlling interests cannot be fully recognised. The solvency ratio calculated in accordance with Solvency II stood at 260.3% as at 31 December 2017.

Hannover Re is thus well capitalised and our available capital comfortably exceeds the required capital, both from the economic and the regulatory perspective:

The figures shown above refer to the Hannover Re Group. In addition, Hannover Rück SE is also subject to regulatory capital requirements, which in accordance with Solvency II reporting were clearly fulfilled as at 31 December 2017 with a solvency ratio of 267.1% (the audit procedures conducted by the independent auditor in relation to Solvency II reporting have still to be completed). In this context, the internal operational risk model which is undergoing the regulatory approval process was used to determine the risk margin and the indicators in relation to the solvency capital requirement for Hannover Rück SE. The solvency ratio of Hannover Rück SE is normally higher than the solvency ratio of the Hannover Re Group because there are no restrictions with regard to the use of own funds attributable to non-controlling interests.

We hold additional capital above all to meet the requirements of the rating agencies for our target rating and to be able to act flexibly on business opportunities. We strive for a rating from the rating agencies most relevant to our industry that facilitates and secures our access to all reinsurance business worldwide. Hannover Re is analysed by the rating agencies Standard & Poor’s (S & P) and A.M. Best as part of an interactive rating process. The current financial strength ratings are assessed as “AA-” (Very Strong, stable outlook) by Standard & Poor’s and “A+” (Superior, stable outlook) by A.M. Best. Standard & Poor’s evaluates Hannover Re’s risk management as “Very Strong”, the best possible rating.

In awarding these ratings the agencies highlighted the company’s very good risk management, the consistent and systematic implementation of corporate strategy by management and its excellent capital resources. Hannover Re’s internal capital model was also subjected to expert appraisal. As a result of this review, Standard & Poor’s factors the results of the Hannover Re Group’s internal capital model into the determination of the target capital for the rating.