6.7 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 | 2012 | 2011 | |||||
| gross | retro | net | gross | retro | net | ||
| Loss and loss adjustment expense reserve | 21,610,698 | 1,538,215 | 20,072,483 | 20,767,317 | 1,550,587 | 19,216,730 | |
| Benefit reserve | 10,974,570 | 507,257 | 10,467,313 | 10,309,066 | 380,714 | 9,928,352 | |
| Unearned premium reserve | 2,339,809 | 138,373 | 2,201,436 | 2,215,864 | 91,823 | 2,124,041 | |
| Other technical provisions | 214,219 | 2,611 | 211,608 | 207,262 | 7,810 | 199,452 | |
| Total | 35,139,296 | 2,186,456 | 32,952,840 | 33,499,509 | 2,030,934 | 31,468,575 | |
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 | 2012 | 2011 | ||||
| gross | retro | net | gross | retro | net | |
| 1 Including expenses recognised directly in shareholders’ equity | ||||||
| Net book value at 31 December of the previous year | 20,767,317 | 1,550,587 | 19,216,730 | 18,065,395 | 1,025,332 | 17,040,063 |
| Currency translation at 1 January | (116,674) | (21,443) | (95,231) | 227,344 | 17,300 | 210,044 |
| Net book value after currency translation | 20,650,643 | 1,529,144 | 19,121,499 | 18,292,739 | 1,042,632 | 17,250,107 |
| Incurred Claims and claims expenses (net)1 | ||||||
| Year under review | 7,150,177 | 723,377 | 6,426,800 | 6,862,640 | 1,086,852 | 5,775,788 |
| Previous years | 2,621,961 | 182,856 | 2,439,105 | 2,298,146 | 31,760 | 2,266,386 |
| 9,772,138 | 906,233 | 8,865,905 | 9,160,786 | 1,118,612 | 8,042,174 | |
| Less: | ||||||
| Claims and claims expenses paid (net) | ||||||
| Year under review | (2,642,339) | (397,326) | (2,245,013) | (1,756,897) | (276,660) | (1,480,237) |
| Previous years | (6,144,123) | (505,006) | (5,639,117) | (5,119,362) | (374,176) | (4,745,186) |
| (8,786,462) | (902,332) | (7,884,130) | (6,876,259) | (650,836) | (6,225,423) | |
| Changes in consolidated group | – | – | – | 65,772 | – | 65,772 |
| Specific value adjustment for retrocessions | – | 427 | (427) | – | 2,247 | (2,247) |
| Reversal of impairments | – | 3,012 | (3,012) | – | 2,252 | (2,252) |
| Portfolio entries/exits | (3,164) | 5,831 | (8,995) | 18,806 | (239) | 19,045 |
| Currency translation at 31 December | (22,457) | (3,246) | (19,211) | 105,473 | 40,413 | 65,060 |
| Net book value at 31 December of the year under review | 21,610,698 | 1,538,215 | 20,072,483 | 20,767,317 | 1,550,587 | 19,216,730 |
In the year under review specific value adjustments on retrocessions, i.e. on the reinsurance recoverables on unpaid claims, were established in an amount of EUR 0.4 million (EUR 2.2 million) and reversed in the amount of EUR 3.0 million (EUR 2.2 million). On balance, therefore, cumulative specific value adjustments of EUR 0.9 million (EUR 3.5 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 20,071.6 million (EUR 19,213.2 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 to make an exact allocation of claims expenditures to the current financial year or the previous year.
In the 2012 financial year the run-off triangles provided by the reporting units were also shown for the first time after adjustment for the currency effects arising out of translation of the respective transaction currency into the local reporting currency. The run-off triangles of the reporting units delivered in foreign currencies are translated to euro at the current rate on the balance sheet date in order to show run-off results after adjustment for currency effects. In cases where the originally estimated ultimate loss corresponds to the actual ultimate loss in the original currency, it is ensured that after translation to the Group reporting currency (EUR) a run-off result indicated purely by currency effects is not shown.
The run-off triangles show the run-off of the net loss reserve (loss and loss adjustment expense 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 for the non-life reinsurance business group in the years 2002 to 2012 as well as the run-off of the reserve (so-called run-off triangle). The figures reported for the 2002 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 2012 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 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in EUR million | 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 |
31.12. 2011 |
31.12. 2012 |
|
| Loss and loss adjustment expense reserve (from balance sheet) | ||||||||||||
| 12,523.0 | 13,186.7 | 12,658.8 | 13,324.6 | 16,573.8 | 12,814.4 | 13,673.5 | 14,012.6 | 15,257.0 | 16,699.0 | 17,308.0 | ||
| Cumulative payments for the year in question and previous years | ||||||||||||
| One year later | 2,350.7 | 3,378.2 | 4,188.5 | 1,568.7 | 2,566.6 | 2,511.4 | 2,984.5 | 2,811.7 | 2,490.2 | 3,173.2 | ||
| Two years later | 5,184.9 | 6,908.7 | 5,335.4 | 3,583.0 | 4,315.7 | 4,319.4 | 4,637.9 | 4,060.2 | 4,152.2 | |||
| Three years later | 7,844.8 | 7,629.2 | 6,314.6 | 4,733.8 | 5,647.6 | 5,446.1 | 5,407.4 | 4,895.2 | ||||
| Four years later | 8,478.6 | 8,368.7 | 7,095.8 | 5,856.2 | 6,455.8 | 6,004.7 | 6,004.0 | |||||
| Five years later | 9,039.2 | 8,963.4 | 7,890.8 | 6,487.6 | 6,858.4 | 6,446.7 | ||||||
| Six years later | 9,477.5 | 9,607.5 | 8,352.5 | 6,809.4 | 7,203.3 | |||||||
| Seven years later | 10,047.8 | 9,957.1 | 8,626.7 | 7,081.6 | ||||||||
| Eight years later | 10,316.6 | 10,179.1 | 8,836.0 | |||||||||
| Nine years later | 10,473.8 | 10,357.9 | ||||||||||
| Ten years later | 10,613.7 | |||||||||||
| 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 | 12,523.0 | 13,186.7 | 12,658.8 | 13,324.6 | 16,573.8 | 12,814.4 | 13,673.5 | 14,012.6 | 15,257.0 | 16,699.0 | 17,308.0 | |
| One year later | 10,830.9 | 12,809.5 | 13,378.9 | 14,349.9 | 12,363.3 | 12,479.4 | 13,484.6 | 13,918.5 | 14,562.6 | 16,376.9 | ||
| Two years later | 10,629.7 | 13,290.8 | 14,428.4 | 10,996.1 | 11,951.1 | 12,101.0 | 12,703.1 | 12,825.7 | 14,079.3 | |||
| Three years later | 10,966.2 | 14,240.6 | 11,847.0 | 10,566.5 | 11,705.9 | 11,916.7 | 12,690.1 | 12,228.2 | ||||
| Four years later | 11,642.5 | 12,219.0 | 11,466.0 | 10,454.9 | 11,518.9 | 11,717.8 | 12,182.3 | |||||
| Five years later | 10,218.5 | 12,017.5 | 11,438.1 | 10,285.3 | 10,961.0 | 11,359.3 | ||||||
| Six years later | 10,307.4 | 12,075.9 | 11,287.8 | 9,746.2 | 10,682.9 | |||||||
| Seven years later | 10,395.3 | 11,932.4 | 11,789.5 | 9,543.5 | ||||||||
| Eight years later | 10,282.5 | 12,438.5 | 11,657.2 | |||||||||
| Nine years later | 11,290.3 | 12,346.8 | ||||||||||
| Ten years later | 11,208.6 | |||||||||||
| Change relative to previous year | ||||||||||||
| net run-off result | 81.6 | 10.0 | 40.6 | 70.5 | 75.4 | 80.4 | 149.4 | 89.6 | (114.1) | (161.3) | ||
| As percentage of original loss reserve | 0.7 | 0.1 | 0.3 | 0.5 | 0.5 | 0.6 | 1.1 | 0.6 | (0.7) | (1.0) | ||
The run-off profit of altogether EUR 322.1 million in the 2012 financial year derives, as in the previous year, above all from positive run-offs of reserves in the areas of credit/surety, marine/aviation and short-tail property business.
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 future maturities of the technical provisions broken down by the expected remaining times to maturity. As part of 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 | 2012 | |||||
| Loss and loss adjustment expense reserves |
Benefit reserve | |||||
| gross | retro | net | gross | retro | net | |
| Due in one year | 6,235,411 | 426,631 | 5,808,780 | 657,514 | 101,659 | 555,855 |
| Due after one through five years | 8,355,362 | 590,629 | 7,764,733 | 432,281 | 36,429 | 395,852 |
| Due after five through ten years | 3,084,720 | 190,742 | 2,893,978 | 634,063 | 51,381 | 582,682 |
| Due after ten through twenty years | 2,076,465 | 119,868 | 1,956,597 | 794,098 | 40,280 | 753,818 |
| Due after twenty years | 1,076,778 | 64,067 | 1,012,711 | 719,028 | 20,899 | 698,129 |
| 20,828,736 | 1,391,937 | 19,436,799 | 3,236,984 | 250,648 | 2,986,336 | |
| Deposits | 781,962 | 147,201 | 634,761 | 7,737,586 | 256,609 | 7,480,977 |
| Total | 21,610,698 | 1,539,138 | 20,071,560 | 10,974,570 | 507,257 | 10,467,313 |
| Maturities of the technical reserves | ||||||
|---|---|---|---|---|---|---|
| in EUR thousand | 2011 | |||||
| Loss and loss adjustment expense reserves |
Benefit reserve | |||||
| gross | retro | net | gross | retro | net | |
| Due in one year | 5,912,679 | 503,588 | 5,409,091 | 391,718 | 58,747 | 332,971 |
| Due after one through five years | 8,089,293 | 537,465 | 7,551,828 | 505,571 | 52,150 | 453,421 |
| Due after five through ten years | 3,121,946 | 212,126 | 2,909,820 | 546,495 | 12,739 | 533,756 |
| Due after ten through twenty years | 2,054,096 | 146,595 | 1,907,501 | 855,499 | 7,709 | 847,790 |
| Due after twenty years | 971,863 | 72,145 | 899,718 | 677,604 | 4,703 | 672,901 |
| 20,149,877 | 1,471,919 | 18,677,958 | 2,976,887 | 136,048 | 2,840,839 | |
| Deposits | 617,440 | 82,175 | 535,265 | 7,332,179 | 244,666 | 7,087,513 |
| Total | 20,767,317 | 1,554,094 | 19,213,223 | 10,309,066 | 380,714 | 9,928,352 |
The average maturity of the loss and loss adjustment expense reserves was 5.1 years (5.1 years), or 5.1 years (5.1 years) after allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 12.0 years (12.8 years) – or 12.4 years (13.2 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 outside 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 year for year by contrasting the projected payments with the actual amounts realised. Liabilities in liability and motor reinsurance traditionally have long durations, 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 duration 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, lapse rates and mortality/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 | 2012 | 2011 | ||||
| gross | retro | net | gross | retro | net | |
| Net book value at 31 December of the previous year | 10,309,066 | 380,714 | 9,928,352 | 8,939,190 | 347,069 | 8,592,121 |
| Currency translation at 1 January | 49,603 | (124) | 49,727 | 150,726 | 901 | 149,825 |
| Net book value after currency translation | 10,358,669 | 380,590 | 9,978,079 | 9,089,916 | 347,970 | 8,741,946 |
| Changes | 545,318 | 16,035 | 529,283 | 619,849 | (1,611) | 621,460 |
| Portfolio entries/exits | 76,266 | 113,211 | (36,945) | 527,657 | 29,144 | 498,513 |
| Reclassification | (103) | – | (103) | – | – | – |
| Currency translation at 31 December | (5,580) | (2,579) | (3,001) | 71,644 | 5,211 | 66,433 |
| Net book value at 31 December of the year under review | 10,974,570 | 507,257 | 10,467,313 | 10,309,066 | 380,714 | 9,928,352 |
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 | 2012 | 2011 | ||||
| gross | retro | net | gross | retro | net | |
| Net book value at 31 December of the previous year | 2,215,864 | 91,823 | 2,124,041 | 1,910,422 | 83,224 | 1,827,198 |
| Currency translation at 1 January | (8,542) | (986) | (7,556) | 19,890 | 454 | 19,436 |
| Net book value after currency translation | 2,207,322 | 90,837 | 2,116,485 | 1,930,312 | 83,678 | 1,846,634 |
| Changes | 146,108 | 58,957 | 87,151 | 269,222 | (5,644) | 274,866 |
| Portfolio entries/exits | 31 | (98) | 129 | 2 | 35 | (33) |
| Currency translation at 31 December | (13,652) | (11,323) | (2,329) | 16,328 | 13,754 | 2,574 |
| Net book value at 31 December of the year under review | 2,339,809 | 138,373 | 2,201,436 | 2,215,864 | 91,823 | 2,124,041 |
The adequacy of the technical liabilities arising out of our reinsurance treaties is reviewed as at each balance sheet date. In the context of the adequacy testing of technical liabilities (liability adequacy test pursuant to IFRS 4 in conjunction with loss recognition test as per US GAAP) the anticipated future contractual payment obligations are compared with the anticipated future income. 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.