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Life & Health reinsurance
| Key figures for Life & Health reinsurance | ||||||
| in EUR million | 2016 | +/- previous year | 2015 | 2014 | 2013 | 20121 |
|---|---|---|---|---|---|---|
| Gross written premium | 7,149.0 | -7.5% | 7,730.9 | 6,458.7 | 6,145.4 | 6,057.9 |
| Net premium earned | 6,432.4 | -0.9% | 6,492.4 | 5,411.4 | 5,359.8 | 5,425.6 |
| Investment income | 638.9 | -9.9% | 709.2 | 614.2 | 611.5 | 685.1 |
| Claims and claims expenses | 5,480.3 | + 0.4% | 5,459.0 | 4,636.2 | 4,305.7 | 4,023.5 |
| Change in benefit reserve | 80.5 | -20.4% | 101.1 | 28.6 | 146.5 | 529.4 |
| Commissions | 1,032.6 | -3.9% | 1,075.1 | 946.4 | 1,169.0 | 1,098.0 |
| Own administrative expenses | 202.0 | +2.4% | 197.3 | 175.7 | 156.7 | 144.1 |
| Other income / expenses | 67.1 | +86.9% | 35.9 | 25.1 | (42.9) | (36.7) |
| Operating result (EBIT) | 343.3 | -15.3% | 405.1 | 263.8 | 150.5 | 279.0 |
| Net income after tax | 252.9 | -12.7% | 289.6 | 205.0 | 164.2 | 222.5 |
| Earnings per share in EUR | 2.10 | -12.7% | 2.40 | 1.70 | 1.36 | 1.84 |
| Retention | 90.4% | 84.2% | 83.9% | 87.7% | 89.3% | |
| EBIT margin2 | 5.3% | 6.2% | 4.9% | 2.8% | 5.1% | |
| 1 Adjusted pursuant to IAS 8 2 Operating result (EBIT) / net premium earned |
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Life and health reinsurance contributed 44% (previous year: 45%) of Group gross premium in the financial year just ended. One of our two business groups, Life & Health reinsurance plays a key part in the success of our Group: in the first place through its positive stabile business results and, secondly, through its diversification with property and casualty reinsurance. The consistency and enduring nature of its partnership-based business relations are particular hallmarks of life and health reinsurance. Thanks to our global network and our know-how, we retain our ability to shape developments and especially to drive innovations in the markets. The profitability and quality of the generated business nevertheless remain our overriding priority.
Total business
All in all, the financial year just ended developed in line with our expectations. Conditions in the individual markets were often very dynamic.
In Germany many of our activities are concentrated on the implications of the Solvency II regime implemented on 1 January 2016. Fulfilment of the required capital adequacy ratio posed a major challenge for German life insurers. Yet beyond Germany’s borders too – and in fact right across Europe – Solvency II has affected the (re)insurance industry. It was evident that the increase in regulatory requirements constitutes a global trend. Regulators in China, Australia and South Africa have either adopted or are currently planning more rigorous supervisory regimes. For the (re)insurance industry this means a constant need to adapt to changing requirements. Drawing on our global expertise, we engage intensively with the new policies in order to be able to cater to the resulting, country-specific needs of our customers and offer potential reinsurance concepts.
Quite aside from this, our longevity business also developed thoroughly favourably. International inquiries about longevity protection continued to increase in the financial year just ended.
Furthermore, topics such as digitisation and online insurance sales – which are preoccupying the worldwide insurance industry as a whole – played a prominent role in our talks with clients. We have explored these issues and the potential business opportunities in depth and already embarked on a number of activities.
As a reinsurer, we grow particularly strongly wherever the insurance market is growing. We have therefore focused closely on leveraging new business potentials outside of traditional (re)insurance by entering into partnerships with start-up companies – such as fintechs – as a strategic investment. For companies such as these equipped with innovative ideas, the robustly capitalised Hannover Re – with its long-standing, international experience – represents an attractive partner. Partnerships such as these create an optimal platform for addressing, in particular, the members of a generation who are both tech-savvy and attach great importance to their health and quality of life: given how difficult such individuals are to reach via the traditional distribution channels of the life insurance industry, we seek to play an active part in these trends.
In the year under review we generated gross premium of EUR 7,149.0 million (EUR 7,730.9 million) in life and health reinsurance, a decline of 7.5%; the decrease was 4.3% adjusted for exchange rate effects. The determining factor here was the exceptional premium growth booked in 2015. The level of retained premium stood at 90.4% (84.2%). Net premium earned reached EUR 6,432.4 million (EUR 6,492.4 million), equivalent to growth of 2.2% after adjustment for exchange rate effects.
In view of the low level of interest rates, investment income in life and health reinsurance contracted – as expected – yearon- year and totalled EUR 638.9 million (EUR 709.2 million). The share of the income attributable to assets under own management amounted to EUR 330.8 million (EUR 334.3 million), while the contribution made by income from securities deposited with ceding companies came in at EUR 308.1 million (EUR 374.9 million).
The operating result (EBIT) in life and health reinsurance fell short of the previous year’s figure at EUR 343.3 million (EUR 405.1 million); this was due in particular to the elimination of a one-off effect in the amount of EUR 39 million. We are satisfied with this very solid result, since it reflects the sustainable profitability and quality of the underlying portfolio. Group net income for life and health reinsurance contracted by 12.7% to EUR 252.9 million (EUR 289.6 million).
We report below on developments in life and health reinsurance in greater detail. The reporting is structured according to our internal risk management system and hence is split into the categories of financial solutions and risk solutions. For the purposes of differentiation by biometric risks, the category of risk solutions is further divided into longevity, mortality and morbidity. In the final section on underwriting services we provide a summary account of our extensive range of services that go above and beyond pure risk transfer.
Financial solutions
The financial solutions reporting category encompasses reinsurance solutions that focus on the management of our clients’ solvency and capital position. They can take many different forms and are always tailored to the individual customer. Additional elements may, for example, be the optimisation of liquidity management or the (pre)financing of our customers’ new business. The decisive criterion is that while biometric risks are transferred in principle, this does not constitute the primary motivation for the reinsurance coverage. The focus of these product solutions is on optimising and supporting the financial situation of our clients. The central importance of financial solutions business is reflected not only in the business volume – which has been growing year by year and which we write successfully in all parts of the world – but also in our long-standing experience and broad-ranging expertise. Our international teams work closely with our customers on individual, complex reinsurance structures optimally tailored to their varying requirements.
Our US subsidiary played a vital part in the success of our financial solutions business. Complex reinsurance solutions designed to optimise solvency and provide capital and reserve relief are a key driver of the Value of New Business in the United States. Numerous new contracts were once again written in the financial year just ended, and particularly in future reporting periods these will deliver an appreciable profit contribution.
Financial solutions business in Asia developed less vigorously than had been anticipated in some areas, although on balance the positive effects outweigh the negative. We view European markets with similar satisfaction. Stimulated by the requirements of Solvency II, we saw increased demand in the year under review for reinsurance solutions geared both to providing capital relief and covering longevity risks. In our domestic German market, in particular, customers showed considerable interest in reinsurance financing solutions that reduce the supplementary reserves needed for life products promising guaranteed returns in excess of an official reference rate (“Zinszusatzreserve”). We were particularly pleased to successfully close the first contracts protecting against the risk of excessive policyholder lapse rates on the basis of Solvency II requirements.
Altogether, gross premium of EUR 961.2 million (EUR 1,271.3 million) was generated in the financial solutions reporting category. This corresponds to a share of 13.4% of the total gross premium income booked in life and health reinsurance. The operating result (EBIT) came in at EUR 168.0 million (EUR 203.2 million).
Longevity
We classify reinsurance business under which the longevity risk constitutes the primary risk as longevity business. This consists principally of traditional annuity policies, pensions blocks taken out for new business and so-called enhanced annuities, which guarantee annuitants with a pre-existing condition a higher annuity payment for their remaining shortened life expectancy. By far the bulk of our portfolio is made up of business that is already in the pay-out phase.
In the financial year just ended the United Kingdom continued to be not only the world’s largest but also its most competitive longevity market. Particularly in this market, the implementation of Solvency II has increased the capital requirements for annuity insurance business, hence prompting a surge in demand for commensurate reinsurance protection. There are even some instances where individual customers have withdrawn entirely from the longevity market. It is therefore exceptionally pleasing to report that in the United Kingdom we were able to successfully launch our new product with deferred annuity payments aimed specifically at older generations.
Worldwide, too, demand for reinsurance solutions to protect against the longevity risk has risen in response to increased regulatory reporting and risk management requirements in the international insurance industry as well as the parallel increase in life expectancy. Substantial, long-term commitments are putting primary insurers under ever greater strain. Yet most insurance companies have hitherto had little or no experience with the transfer of longevity risks, and what is more there is already considerable global competition. We engage in intensive discussions with our customers, in which we contribute our robust, wide-ranging expertise in order to devise bespoke reinsurance structures for them.
On a global level the gross premium for longevity business totalled EUR 1,482.4 million (EUR 1,482.1 million) in the financial year just ended. The operating result (EBIT) amounted to EUR 25.7 million (EUR 54.0 million). Bearing in mind our deliberately prudent reserving policy, the result is entirely in line with our expectations.
Mortality und Morbidity
The biometric risks of mortality and morbidity are often joint elements of a business relationship in international (re)insurance business, and in some cases they are even covered under the same reinsurance treaties. We therefore measure the profit contribution made by these two reporting categories on a consolidated basis. Consequently, only the significant developments of the past year in the two reporting categories are discussed separately.
Mortality
Mortality-exposed business forms the core of our traditional life and health reinsurance portfolio. We provide reinsurance solutions that protect our customers against the risk that the actually observed mortality may diverge negatively from the originally expected mortality.
US mortality business is an important market for our company. We are a sought-after business partner and we offer the entire spectrum of mortality-oriented reinsurance solutions. Part of our existing business has fared more poorly than anticipated and also affected the result for the year under review. Nevertheless, the US life insurance market is distinguished by its considerable power of innovation, which consistently generates new business potential. In the financial year just ended we wrote substantial volumes of new business, thereby all but offsetting the aforementioned negative effect.
The Latin American market proved to be extremely competitive in the financial year just ended. It is therefore all the more gratifying that we were able to successfully renew our large treaties with existing customers, especially in our company’s key markets of Mexico, Colombia, Peru and Chile. On European markets, too, we were able to at least maintain – and here and there even improve – our current market position. In Italy, for example, we significantly grew our portfolio, primarily in the bancassurance sector. Bearing in mind the comparatively poor result posted in 2015, the business development in France was very positive: our branch in Paris generated a pleasing profit from its new business and the total result has also returned to its accustomed level. In addition, new business in Africa and the Middle East also developed favourably.
The gross premium in the mortality reporting category amounted to EUR 3,080.9 million (EUR 3,561.6 million). Altogether, it accounted for 43.1% (46.1%) of the total gross premium income booked in life and health reinsurance.
Morbidity
In the morbidity reporting category we group together the business that covers the risk of deterioration in a person’s state of health due to disease, injury or infirmity. A hallmark of this business is the wide range of possible combinations of different covered risks, including for example strict (any occupation) disability, occupational disability and various forms of long-term care insurance. A specialist team of staff stands ready to support our entities worldwide, thereby enabling our local customers to optimally benefit from our global expertise.
In Central and Eastern Europe we are engaged in an intensive dialogue with primary insurance customers with a view to promoting the development of the private health insurance sector in these regions. In the United Kingdom we are already an established and sought-after reinsurance partner. This market is, however, notable for its exceptionally competitive and price-sensitive environment. Solid profitability is therefore a fundamental prerequisite for the acquisition of new business. Our book of US health reinsurance clearly outperformed our expectations and plays a major part in our total morbidity portfolio. The development of the Asian market was also extremely gratifying: we enjoyed brisk demand for reinsurance solutions for health insurance business and were thus able to roll out numerous new critical illness products here in cooperation with our local customers. The scope of coverage provided by the individual products is entirely new to these markets and enables policyholders to obtain enhanced and more all-round insurance protection. In India we are also involved in what are known as mass health schemes. Aimed particularly at more deprived sections of the population, these government-sponsored health insurance schemes open up access to a basic form of coverage.
The dynamic growth observed in Asia demonstrates the considerable demand existing in these increasingly ageing, large populations. In these markets we are seeing a steady rise in demand for products designed to protect against disease, disability and the need for long-term care.
Our worldwide morbidity business generated a gross premium volume of EUR 1,624.6 million (EUR 1,415.9 million) in the financial year just ended.
Taken together, the two reporting categories of mortality and morbidity produced gross premium of EUR 4,705.5 million (EUR 4,977.5 million). This gave rise to an operating result (EBIT) of EUR 149.5 million (EUR 147.8 million).
Underwriting services
Our relations with our customers are grounded on a partnership- based exchange. In the financial year just ended it was very evident that services above and beyond pure risk transfer have increased enormously in importance and are now considered by life insurers to be a major component of the business relationship.
Demand for automated underwriting processes was especially strong in the context of the digitisation of customer communication. Our own underwriting systems, specifically hr | ReFlex und hr | Quirc, enable us to optimally cover local and market- specific customer requirements. Thanks to its modular structure, hr | ReFlex can be adjusted with the utmost flexibility to fit the individual customer’s particular situation. The system makes standardised and consistent underwriting decisions, thereby reducing the operational risk. Furthermore, hr | ReFlex offers detailed management evaluation options that facilitate targeted analysis and constant monitoring. An undogmatic and quickly implemented alternative, hr | Quirc is a particularly interesting option for developing markets. It has been used in South Africa for several years with considerable success.
First launched in 2015, we actively pressed ahead with the roll-out of our automated underwriting system hr | ReFlex in 2016. For example, we were able to successfully implement hr | ReFlex at customers in Norway, Sweden, France and America. In the United States, for example, it has been honoured with the distinction of “Most Transformative Solution”. A host of international clients have signalled their interest in this underwriting system. In the coming year numerous implementations are already planned at notable primary insurance customers. Not only that, we are continuing with our marketing efforts and expect to see a further rise in interest around the world. We consider the integration of policyholders into the underwriting process to be crucially important. Accessible from anywhere and capable of concluding insurance contracts in a quick and uncomplicated manner – these are the essential criteria for future (re)insurance solutions. Along with these implementation activities, we also entered into cooperation arrangements with (online) platforms specialising in insurance products in the 2016 financial year. This secures access for us to the valuable group of customers who take their health and quality of life seriously and tend to keep a constant eye on their bio-signs using mobile, wearable technology. It is especially important to raise awareness of insurance products among this generation. Such partnerships offer a superb basis for addressing the needs of these younger generations, in particular. In addition, they enable us – as a reinsurer – to access the underlying insurance business. Combining the application process with the lifestyle habits of policyholders facilitates a more appropriate and individual risk assessment. For policyholders, this is reflected in premiums and benefits that are customised to their needs. There is an unmistakeable trend towards life insurance products increasingly taking on a more direct lifestyle relevance, with the actual insurance product merely constituting one component rather than being the exclusive focus.
As a traditional reinsurer we assume biometric risks from life insurers. In view of developments on capital markets and the more exacting requirements imposed by Solvency II in relation to the coverage of capital market risks, many insurance companies have signalled a need to pass on not only the biometric risk but also capital market risks. In order to ensure that we remain able to offer our customers the accustomed support in all situations, we have acquired minority interests in two companies specialising in the transfer of capital market risks.
Our customers are the absolute focus of our attention in every situation. A long-term and expert partner, we always make every effort to anticipate current and future requirements in the international (re)insurance markets.