Nature of risks associated with insurance contracts and financial instruments

Management of credit risks from insurance contracts

Bad debts may arise on receivables due under insurance business. In order to limit this risk we take care to ensure the good credit quality of debtors, as measured on the basis of standard market rating categories. The selection of reinsurers also takes into account internal and external expert assessments, e.g. market information from brokers. Accounts receivable from policyholders and insurance intermediaries are unsecured. The default risk on these receivables is subject to constant monitoring within the scope of our risk management. At stake here are a large number of receivables in relatively modest single amounts, which are due from a diversified array of debtors. Such accounts receivable are normally due from policyholders that do not have a rating. Only commercial clients in excess of certain dimensions are able to obtain external assessments of their credit status.

The insurance intermediaries are either individual brokers or broker organizations, which similarly do not normally have a rating. Default risks in reinsurance business are controlled largely with the aid of system-supported cession management: cession limits are specified for individual retrocessionaires and the remaining available capacities are calculated for short-, medium- and long-term business.

With a view to countering possible delays in or defaults on premium payment in collections directly from policyholders or from intermediaries, each of the Group companies operates an effective collections procedure intended to minimize outstandings. Intermediaries are also subject to credit checks.

Credit risks additionally arise in primary insurance business in connection with accounts receivable from reinsurers and in reinsurance business from recoverables due from retrocessionaires on account of the fact that the gross business written is not always fully retained, but instead portions are (retro)ceded as necessary. In passive reinsurance we pay close attention to a high level of financial soundness on the part of the reinsurer, especially in the case of long-tail accounts. Our reinsurance partners are carefully selected by Security Committees in light of external ratings, their credit status is constantly monitored and – where necessary – appropriate measures are taken to secure receivables.

As the equivalent of the maximum exposure to default risks on the balance sheet date, the book value of financial assets deriving from the insurance business – irrespective of collateral or other agreements that serve to minimize the default risk – was as follows (excluding funds held by ceding companies):

 

31.12.2010 1)

Statement of book values of financial assets deriving from insurance contracts

Industrial Lines

Retail Germany

Retail International

Non-Life Reinsurance

Life/Health Reinsurance

Figures in EUR million

     

Receivables

     

Policy loans

198

2

Accounts receivable from policyholders

290

149

291

61

5

Accounts receivable from insurance intermediaries

272

146

39

298

Accounts receivable from reinsurance business

1,047

57

23

1,330

1,003

Other assets

     

Reinsurance recoverables on technical provisions

2,967

873

254

914

515

Total

4,576

1,423

609

2,603

1,523


1) Presentation after elimination of intra-Group relations between segments

 

31.12.2009 1)

Statement of book values of financial assets deriving from insurance contracts

Industrial Lines 2)

Retail Germany

Retail International

Non-Life Reinsurance

Life/Health Reinsurance

Figures in EUR million

     

Receivables

     

Policy loans

199

2

Accounts receivable from policyholders

370

169

228

45

3

Accounts receivable from insurance intermediaries

138

157

41

277

Accounts receivable from reinsurance business

430

47

16

1,480

941

Other assets

     

Reinsurance recoverables on technical provisions

2,980

888

234

1,595

265

Total

3,918

1,460

521

3,397

1,209


1) Presentation after elimination of intra-Group relations between segments
2) Adjusted on the basis of IAS 8

The funds held by ceding companies represent the cash and securities deposits furnished by Group companies to cedants that do not trigger any cash flows and cannot be realized by cedants without the consent of our companies. The durations of these deposits are matched to the corresponding provisions. In the event of default on such a deposit the technical provision is reduced to the same extent. The credit risk is therefore limited; with this in mind, it was not shown in the above table.

With respect to business ceded, we reduce the default risk on accounts receivable from reinsurers by carefully selecting reinsurers through our Group’s internal reinsurance broker Protection Reinsurance Intermediaries AG and reviewing their credit status on the basis of opinions from internationally respected rating agencies.

In the three primary insurance segments the claims arising out of passive reinsurance, i.e. the cession of our assumed risks – the reinsurance recoverables – were unchanged year-on-year at EUR 4.1 billion. The resulting reinsurance recoverables on unpaid claims totaled EUR 3.1 (3.0) billion.

The ratings of the counterparties for the reinsurance recoverables on unpaid claims were as follows on the Group level:

 

AAA

AA

A

BBB

< BBB

No rating

%

           

Reinsurance recoverables on technical provisions

2 (11)

40 (23)

44 (54)

— (1)

— (—)

14 (11)

86 (88)% of our reinsurers are rated A or better. In determining the ratings, allowance has already been made for any collateral received – such as deposits or letters of credit.

The accounts receivable from passive reinsurance business in the three primary insurance segments (after deduction of value adjustments) amounted to EUR 740 (389) million. As at the balance sheet date more than 60 (67)% of these accounts receivable were rated A or better.

In the two reinsurance segments the claims due from retrocessions amounted to EUR 1.4 (1.9) billion as at the balance sheet date. Altogether 92 (96)% of retrocessionaires have an investment grade rating. Of these, almost 92 (94)% are rated A or better. The large proportion of reinsurers with top ratings reflects our policy of avoiding default risks in this area wherever possible.

The accounts receivable from insurance business that were overdue but not impaired at the balance sheet date can be broken down as follows:

 

31.12.2010

31.12.2009

 

> 3 months
< 1 year

> 1 year

> 3 months
< 1 year

> 1 year

Figures in EUR million

       

Accounts receivable from policyholders

59

14

112

8

Accounts receivable from insurance intermediaries

44

22

31

21

Accounts receivable from reinsurance business

445

305

232

148

Total

548

341

375

177

The overdue receivables from insurance business are composed of accounts receivable that had not been paid by the due date and were still outstanding as at the balance sheet date. The presentation dispenses with the short duration range of “1 day to 3 months” in view of the different processes used throughout the Group in this regard. Responsibility for receivables management within the Group is borne locally by the individual subsidiaries. The receivables management process – reflecting the underlying business risks – consequently varies (inter alia differing treatment of receivables at risk of default (derecognition or value adjustment); differing points in time when receivables management is activated and differing tools used in receivables management). Only once a receivable is overdue by more than 90 days do the aforementioned reasons become insignificant, hence making Group-wide observations possible.

The primary insurers had accounts receivable from policyholders and insurance intermediaries in primary insurance business that were overdue by more than 90 days as at the balance sheet date totaling EUR 73 (120) million and EUR 66 (52) million respectively. These figures were equivalent to levels of 9 (15)% and 9 (9)% respectively. The combined average default rate over the past three years was 2.3 (2.5)%. The accounts receivable from passive reinsurance business with arrears of more than 90 days amounted to altogether EUR 325 (229) million, corresponding to a level of 41 (46)%. The annual default rate was 1.0 (1.5)%.

Relative to the Non-Life Reinsurance and Life/Health Reinsurance segments, which are represented by the companies of the Hannover Re Group, EUR 149 (151) million – or 4.3 (5.2)% – of our accounts receivable from reinsurance business totaling EUR 3.5 (2.9) billion were older than 90 days as at the balance sheet date and in some cases impaired. The average default rate over the past three years was unchanged year-on-year at 0.2%.

Of our total reinsurance recoverables, 31.7% were secured by deposits or letters of credit – a level virtually unchanged from the previous year. In the case of most of our retrocessionaires we also function as reinsurer, meaning that a potential normally exists for offsetting against our own liabilities.

Value adjustments were not taken on accounts receivable from insurance business insofar as the default risk associated with the assets is reduced by collateral (such as letters of credit, cash deposits, securities deposits).

The adjusted receivables can be broken down as follows:

 

31.12.2010

31.12.2009

Analysis of individually adjusted financial assets deriving from insurance contracts

Risk provision

Thereof 2010

Book value after risk provision

Risk provision

Thereof 2009

Book value after risk provision

Figures in EUR million

           

Accounts receivable from policyholders

25

–8

796

33

–1

815

Accounts receivable from insurance intermediaries

21

–36

755

57

–20

613

Accounts receivable from reinsurance business

57

–52

3,460

110

–21

2,914

Total

103

–96

5,011

200

–42

4,342

In the year under review risk provision of EUR 52 million for accounts receivable from reinsurance business was released. This risk provision is no longer needed because in the previous year we significantly reduced the remaining credit risks through the securitization of default risks resulting from reinsurance recoverables.

The value adjustments on accounts receivable from insurance business that we recognize in separate adjustment accounts developed as follows in the year under review:

Development of value adjustments on accounts receivable from insurance business

2010

2009

Figures in EUR million

   

Cumulative value adjustments at 31.12. of the previous year

200

242

Change in consolidated group

Value adjustments in the financial year

7

25

Write-ups

91

63

Allocation (+)/Release (–)

–3

Exchange rate fluctuations

3

–1

Other changes

–16

Cumulative value adjustments at 31.12. of the year under review

103

200

The default risks on financial assets deriving from insurance contracts were determined on the basis of individual analyses. Any existing collateral was taken into account. The proportion of impaired receivables stood at 2 (5)%.

Specifically, the annual impairment rates were as follows:

Impairment rates

31.12.2010

31.12.2009

31.12.2008

31.12.2007

%

       

Accounts receivable from policyholders

3.1

3.9

4.0

4.0

Accounts receivable from insurance intermediaries

2.6

8.5

11.2

8.6

Accounts receivable from reinsurance business

1.6

3.6

4.2

7.3

The annual default rates were as follows:

Default rates

31.12.2010

31.12.2009

31.12.2008

31.12.2007

%

       

Accounts receivable from policyholders

1.6

1.8

4.2

2.1

Accounts receivable from insurance intermediaries

1.1

2.2

2.7

1.8

Accounts receivable from reinsurance business

0.2

0.2

0.1

0.3

The net gains/losses on financial instruments from insurance contracts were:

2010

Interest income

Interest expense

Value adjustment

Write-ups

Total

Figures in EUR million

         

Funds held by ceding companies

425

2

427

Funds held under reinsurance treaties

145

–145

Reinsurance recoverables on
technical provisions

–2

23

25

Total

425

145

–2

25

307

2009

Interest income

Interest expense

Value adjustment

Write-ups

Total

Figures in EUR million

         

Funds held by ceding companies

447

1

3

449

Funds held under reinsurance treaties

207

–207

Reinsurance recoverables on technical provisions

10

33

23

Total

447

207

11

36

265