5.7 Technical provisions
In order to show the net technical provisions remaining in the retention the following table compares the gross provisions with the corresponding retrocessionaires’ shares, which are shown as assets in the balance sheet.
| Technical provisions in EUR thousand | ||||||
|---|---|---|---|---|---|---|
| 2010 | 2009 | |||||
| gross | retro | net | gross | retro | net | |
| Loss and loss adjustment expense reserve | 18,065,395 | 1,025,332 | 17,040,063 | 17,425,293 | 1,747,991 | 15,677,302 |
| Benefit reserve | 8,939,190 | 347,069 | 8,592,121 | 7,952,640 | 104,868 | 7,847,772 |
| Unearned premium reserve | 1,910,422 | 83,224 | 1,827,198 | 1,512,840 | 47,651 | 1,465,189 |
| Other technical provisions | 184,528 | 1,831 | 182,697 | 148,827 | 400 | 148,427 |
| Total | 29,099,535 | 1,457,456 | 27,642,079 | 27,039,600 | 1,900,910 | 25,138,690 |
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.
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.
| Loss and loss adjustment expense reserve in EUR thousand | ||||||
|---|---|---|---|---|---|---|
| 2010 | 2009 | |||||
| gross | retro | net | gross | retro | net | |
| 1 Including expenses recognised directly in shareholders‘ equity | ||||||
| Net book value at 31 December of the previous year | 17,425,293 | 1,747,991 | 15,677,302 | 16,932,069 | 2,079,168 | 14,852,901 |
| Currency translation at 1 January | 1,084,548 | 121,769 | 962,779 | 25,107 | (19,838) | 44,945 |
| Reserve at 1 January of the year under review | 18,509,841 | 1,869,760 | 16,640,081 | 16,957,176 | 2,059,330 | 14,897,846 |
| Reclassification pursuant to IFRS 5 | (1,306,483) | (827,314) | (479,169) | - | - | - |
| Incurred claims and claims expenses (net)1 | ||||||
| Year under review | 6,971,047 | 512,650 | 6,458,397 | 4,786,057 | 213,776 | 4,572,281 |
| Previous years | 765,975 | 218,902 | 547,073 | 1,942,699 | (22,302) | 1,965,001 |
| 7,737,022 | 731,552 | 7,005,470 | 6,728,756 | 191,474 | 6,537,282 | |
| Less: | ||||||
| Claims and claims expenses paid (net) | ||||||
| Year under review | (2,491,229) | (230,553) | (2,260,676) | (2,314,135) | (130,610) | (2,183,525) |
| Previous years | (4,481,203) | (520,687) | (3,960,516) | (3,921,412) | (392,354) | (3,529,058) |
| (6,972,432) | (751,240) | (6,221,192) | (6,235,547) | (522,964) | (5,712,583) | |
| Specific value adjustment for retrocessions | - | 2,100 | (2,100) | - | 10,423 | (10,423) |
| Reversal of impairments | - | 23,107 | (23,107) | - | 32,604 | (32,604) |
| Portfolio entries/exits | 133,254 | (5,673) | 138,927 | 9,801 | (19) | 9,820 |
| Currency translation at 31 December | (35,807) | (12,760) | (23,047) | (34,893) | (2,011) | (32,882) |
| Net book value at 31 December of the year under review | 18,065,395 | 1,025,332 | 17,040,063 | 17,425,293 | 1,747,991 | 15,677,302 |
In the year under review specific value adjustments on retrocessions, i.e. on the reinsurance recoverables on unpaid claims, were reversed in an amount of EUR 21.0 million (previous year: reversed in an amount of EUR 22.2 million). Consequently, cumulative specific value adjustments of EUR 3.5 million (EUR 24.5 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 17,036.6 million (EUR 15,652.8 million) as at the balance sheet date.
Run-off of the net loss reserve in the non-life reinsurance segment
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. The run-off triangles are therefore shown after adjustment for effects associated with the additional premium.
The development of the euro relative to the most relevant foreign currencies is also a significant influencing factor in the analysis of run-off triangles. In particular, the depreciation of 7.5% in the euro against the US dollar compared to the previous year led to an 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 following table shows the net loss reserve (loss and loss adjustment expense reserve) for non-life reinsurance in the years 2000 to 2010 as well as the run-off of the reserve (so-called run-off triangle). The figures reported for the 2000 balance sheet year also include the amounts for previous years that are no longer shown separately in the run-off triangle. The run-off results shown reflect the changes in the ultimate loss arising in the 2010 financial year for the individual run-off years.
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| Net loss reserve and its run-off in the non-life reinsurance segment Figures in EUR million | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | 31.12.2009 | 31.12.2010 | |
1 The net loss reserve of EUR 15,255.3 million shown in the run-off triangle for the 2010 balance sheet year includes the assets held for sale and liabilities related to assets held for sale of Clarendon Insurance Group, Inc. in an amount of EUR 479.2 million. |
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| Loss and loss adjustment expense reserve (from balance sheet) | |||||||||||
| 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 | 13,779.6 | 15,255.31 | |
| Cumulative payments for the year in question and previous years | |||||||||||
| One year later | 2,108.2 | 2,242.2 | 2,118.1 | 3,622.7 | 4,495.8 | 3,051.1 | 2,664.8 | 2,476.2 | 2,927.9 | 2,803.6 | |
| Two years later | 3,111.9 | 3,775.1 | 5,024.4 | 7,322.2 | 6,611.0 | 5,072.2 | 4,389.8 | 4,249.6 | 4,573.2 | ||
| Three years later | 4,174.2 | 6,032.1 | 7,764.8 | 8,780.2 | 7,590.1 | 6,204.5 | 5,696.0 | 5,370.9 | |||
| Four years later | 5,745.1 | 8,588.5 | 8,909.0 | 9,518.8 | 8,356.3 | 7,306.3 | 6,500.7 | ||||
| Five years later | 7,581.3 | 9,399.8 | 9,467.1 | 10,101.6 | 9,136.7 | 7,934.9 | |||||
| Six years later | 8,114.1 | 9,786.1 | 9,896.7 | 10,733.6 | 9,596.4 | ||||||
| Seven years later | 8,405.2 | 10,122.4 | 10,456.6 | 11,081.6 | |||||||
| Eight years later | 8,610.9 | 10,533.4 | 10,724.3 | ||||||||
| Nine years later | 8,891.4 | 10,734.5 | |||||||||
| Ten years later | 9,023.6 | ||||||||||
| 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 | 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 | 13,779.6 | 15,255.3 |
| One year later | 9,421.6 | 11,604.4 | 11,742.7 | 13,635.5 | 14,433.1 | 13,074.2 | 12,365.8 | 12,171.4 | 13,264.9 | 14,303.4 | |
| Two years later | 8,878.0 | 10,477.4 | 11,844.8 | 14,236.6 | 13,532.6 | 12,366.0 | 11,868.0 | 11,925.7 | 13,263.4 | ||
| Three years later | 8,186.1 | 10,743.8 | 12,373.3 | 13,596.5 | 13,061.2 | 11,977.1 | 11,645.0 | 12,040.5 | |||
| Four years later | 8,354.1 | 11,543.6 | 11,730.7 | 13,307.4 | 12,770.8 | 11,772.7 | 11,670.3 | ||||
| Five years later | 9,102.6 | 11,051.2 | 11,666.2 | 13,122.5 | 12,618.0 | 11,768.5 | |||||
| Six years later | 8,755.6 | 11,164.1 | 11,686.0 | 13,053.9 | 12,578.0 | ||||||
| Seven years later | 8,864.2 | 11,219.1 | 11,707.0 | 12,987.5 | |||||||
| Eight years later | 8,935.7 | 11,261.7 | 11,669.9 | ||||||||
| Nine years later | 8,933.0 | 11,166.3 | |||||||||
| Ten years later | 8,865.6 | ||||||||||
| Net run-off result of the loss reserve | |||||||||||
| 67 | 28 | (58) | 29 | (26) | (36) | (29) | (90) | 116 | (525) | ||
| Of which currency exchange rate differences | 94 | 27 | 28 | 42 | 47 | 69 | 66 | 89 | 139 | 138 | |
| Net run-off result excluding currency exchange rate differences | |||||||||||
| 161 | 55 | (30) | 72 | 21 | 33 | 36 | - | 255 | (388) | ||
| As percentage of original loss reserve | 1.8 | 0.5 | (0.3) | 0.5 | 0.2 | 0.3 | 0.3 | - | 1.9 | (2.8) | |
The result for the run-off years in the 2010 financial year was EUR 214.8 million. This is equivalent to 1.4% of the original reserve.
The improved run-off result relative to the previous year can be attributed to positive run-offs of reserves for major losses (especially Hurricanes “Gustav” and “Ike” and the attack on the World Trade Center in New York) as well as proportional reinsurance business from the German market.
Maturities of the technical reserves
IFRS 4 “Insurance Contracts” 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 technical provisions broken down by the expected remaining times to maturity. In our maturity 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”.
| Maturities of the technical reserves in EUR thousand | ||||||
|---|---|---|---|---|---|---|
| 2010 | ||||||
| Loss and loss adjustment expense reserves | Benefit reserve | |||||
| gross | retro | net | gross | retro | net | |
| Due in one year | 5,253,835 | 261,749 | 4,992,086 | 143,307 | 8,639 | 134,668 |
| Due after one through five years | 6,808,647 | 378,545 | 6,430,102 | 366,402 | 46,992 | 319,410 |
| Due after five through ten years | 2,758,919 | 153,552 | 2,605,367 | 301,596 | 8,890 | 292,706 |
| Due after ten through twenty years | 1,864,722 | 92,180 | 1,772,542 | 757,943 | 5,216 | 752,727 |
| Due after twenty years | 909,207 | 41,438 | 867,769 | 545,488 | 2,908 | 542,580 |
| 17,595,330 | 927,464 | 16,667,866 | 2,114,736 | 72,645 | 2,042,091 | |
| Deposits | 470,065 | 101,380 | 368,685 | 6,824,454 | 274,424 | 6,550,030 |
| Total | 18,065,395 | 1,028,844 | 17,036,551 | 8,939,190 | 347,069 | 8,592,121 |
| Maturities of the technical reserves in EUR thousand | ||||||
|---|---|---|---|---|---|---|
| 2009 | ||||||
| Loss and loss adjustment expense reserves | Benefit reserve | |||||
| gross | retro | net | gross | retro | net | |
| Due in one year | 4,580,900 | 434,186 | 4,146,714 | 108,337 | 6,822 | 101,515 |
| Due after one through five years | 6,717,787 | 743,097 | 5,974,690 | 296,293 | 36,811 | 259,482 |
| Due after five through ten years | 2,756,500 | 333,179 | 2,423,321 | 267,938 | 7,600 | 260,338 |
| Due after ten through twenty years | 1,952,551 | 140,255 | 1,812,296 | 452,295 | 5,541 | 446,754 |
| Due after twenty years | 1,035,258 | 49,448 | 985,810 | 329,017 | 4,286 | 324,731 |
| 17,042,996 | 1,700,165 | 15,342,831 | 1,453,880 | 61,060 | 1,392,820 | |
| Deposits | 382,297 | 72,345 | 309,952 | 6,498,760 | 43,808 | 6,454,952 |
| Total | 17,425,293 | 1,772,510 | 15,652,783 | 7,952,640 | 104,868 | 7,847,772 |
The average maturity of the loss and loss adjustment expense reserve was 5.2 years (5.7 years), or 5.3 years (5.8 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 14.4 years (13.0 years) – or 14.7 years (13.3 years) on a net basis.
The average maturity 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 external 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 across years by contrasting the projected payments with the actual amounts realised.
Liabilities in liability and motor reinsurance traditionally have long settlement periods, 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 term of these contracts, long-term reserves are constituted for life and annuity policies and predominantly short-term reserves are set aside for health and personal accident business.
The parameters used to calculate the benefit reserve are interest income and lapse rates as well as mortality and morbidity rates.
The values for the first two components (interest income and lapse rates) 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 FASB ASC 944-40-30 and -35. The provisions are based on the Group companies’ information regarding mortality, interest and lapse rates.
| Development of the benefit reserve in EUR thousand | ||||||
|---|---|---|---|---|---|---|
| 2010 | 2009 | |||||
| gross | retro | net | gross | retro | net | |
| Net book value at 31 December of the previous year | 7,952,640 | 104,868 | 7,847,772 | 5,913,075 | 159,151 | 5,753,924 |
| Currency translation at 1 January | 361,507 | (27,793) | 389,300 | 76,616 | (2,225) | 78,841 |
| Reserve at 1 January of the year under review | 8,314,147 | 77,075 | 8,237,072 | 5,989,691 | 156,926 | 5,832,765 |
| Changes in the consolidated group | - | - | - | 981,850 | - | 981,850 |
| Changes | 694,150 | 41,439 | 652,711 | 580,268 | 17,600 | 562,668 |
| Portfolio entries/exits | (71,410) | 228,346 | (299,756) | 422,752 | (69,815) | 492,567 |
| Currency translation at 31 December | 2,303 | 209 | 2,094 | (21,921) | 157 | (22,078) |
| Net book value at 31 December of the year under review | 8,939,190 | 347,069 | 8,592,121 | 7,952,640 | 104,868 | 7,847,772 |
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.
| Development of the unearned premium reserve in EUR thousand | ||||||
|---|---|---|---|---|---|---|
| 2010 | 2009 | |||||
| gross | retro | net | gross | retro | net | |
| Net book value at 31 December of the previous year | 1,512,840 | 47,651 | 1,465,189 | 1,333,856 | 29,733 | 1,304,123 |
| Currency translation at 1 January | 116,463 | 3,994 | 112,469 | 11,558 | 1,624 | 9,934 |
| Reserve at 1 January of the year under review | 1,629,303 | 51,645 | 1,577,658 | 1,345,414 | 31,357 | 1,314,057 |
| reclassifications pursuant to IFRS 5 | (108) | (85) | (23) | - | - | - |
| Changes | 287,536 | 33,300 | 254,236 | 227,161 | 18,658 | 208,503 |
| Portfolio entries/exits | (3,351) | (1,221) | (2,130) | (35,038) | (189) | (34,849) |
| Currency translation at 31 December | (2,958) | (415) | (2,543) | (24,697) | (2,175) | (22,522) |
| Net book value at 31 December of the year under review | 1,910,422 | 83,224 | 1,827,198 | 1,512,840 | 47,651 | 1,465,189 |
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.