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 minimum confidence level of 99.5% required under Solvency II.

Irrespective of regulatory reporting requirements, the Hannover Re Group regularly calculates its capitalisation in accordance with Solvency II, i. e. in accordance with the approved internal model (partial model). The capital requirements for market risks, underwriting risks and counterparty default risks are determined on this basis. The capital requirement for operational risks, on the other hand, is calculated according to the parameters of the Solvency II standard formula. The own funds are based on the economic capital, with non-controlling interests not fully recognised as required by Solvency II. The capital adequacy ratio of the Hannover Re Group calculated in accordance with the parameters of Solvency II stood at 221% as at 30 September 2015.

All figures on the risk capital provided below are based on the full internal model of the Hannover Re Group: our excess capital coverage at the target confidence level of 99.97% was very comfortable at 131.5% as at 30 September 2015. Hannover Re is well capitalised and our available capital comfortably exceeds the required capital:

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. Based on 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.