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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 our central tool. The internal capital model of the Hannover Re Group is a stochastic enterprise model. It covers all subsidiaries and business groups of the Hannover Re Group. The central variable in risk and enterprise management is the economic capital, 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 capital. 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 one-year 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.
The capitalisation prescribed by regulatory requirements diverges from the capitalisation shown in accordance with the Hannover Re Group’s internal capital model. In the first place, non-controlling interests cannot be fully recognised according to Solvency II parameters, while on the other hand the sub-risk comprised of operational risks is calculated according to the parameters of the Solvency II standard formula. The solvency ratio calculated in accordance with Solvency II stood at 230.2% as at 31 December 2016.
Hannover Re is well capitalised and our available capital comfortably exceeds the required capital, both from the economic and the regulatory perspective:
| Available capital and required risk capital | |||||||||||||||||||
| in EUR million | 31.12.2016 (economic) | 31.12.2016 (Solvency II) |
30.9.2015 (economic) |
30.9.2015 (Solvency II) |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Available economic capital/Eligible capital | 13,484.9 | 12,859.2 | 12,614.7 | 11,956.3 | |||||||||||||||
| Confidence level | 99.97% | 99.5% | 99.5% | 99.97% | 99.5% | 99.5% | |||||||||||||
| Required risk capital/Solvency capital requirement | 10,381.7 | 5,149.5 | 5,585.9 | 9,593.0 | 5,126.3 | 5,402.7 | |||||||||||||
| Excess capital | 3,103.2 | 8,335.4 | 7,273.3 | 3,021.7 | 7,488.4 | 6,553.6 | |||||||||||||
| Capital adequacy ratio | 129.9% | 261.9% | 230.2% | 131.5% | 246.1% | 221.3% | |||||||||||||
The figures shown above refer to the Hannover Re Group. In addition, Hannover Rück SE is also subject to regulatory capital requirements; these were clearly fulfilled with a solvency ratio of 242.6 % as at 31 December 2016. 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 this regard particular mention was made of 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.