Risk Management @ Hannover Re
Wilhelm Zeller
Chairman of the Executive Board
Hannover Re
Berlin, July 10th, 2007
Reinsurance
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
League table (premium)
WE ARE AMONG THE TOP REINSURERS IN THE WORLD
(2005 figures in million USD1))
Rank Group
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Munich Re
Swiss Re
Berkshire Hathaway2)
Hannover Re
Lloyd's 3)
GE Global Ins. Holdings 4)
XL Re
London Re
RGA Re
Everest Re
Transatlantic Re
Partner Re
Korean Re
SCOR
Odyssey Re
Country
GWP
NPW
D
CH
USA
D
GB
USA
BDA
CDN
USA
BDA
USA
BDA
ROK
F
USA
26,482
23,151
12,486
11,452
9,053
8,565
5,686
4,243
4,222
4,109
3,888
3,665
2,975
2,851
2,627
22,606
21,229
11,646
9,166
6,568
6,697
5,013
3,730
3,867
3,972
3,466
3,616
2,068
2,692
2,302
Top 15 more than USD 106 bn net premium, worldwide > USD 165 bn
1) Source: A.M. Best
3) 64 syndicates (as of Jul 2006)
1
2) GenRe Group; Berkshire Hathaway Re Group (National Indemnity)
4) ERC, GE Re, GE Frankona Group
Reinsurance
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
REINSURANCE IS TRULY INTERNATIONAL...
...but 4 of top five are European
(2005 figures in million USD1))
Rank Group
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Top 15 :
Munich Re
Swiss Re
Berkshire Hathaway2)
Hannover Re
Lloyd's 3)
GE Global Ins. Holdings 4)
XL Re
London Re
RGA Re
Everest Re
Transatlantic Re
Partner Re
Korean Re
SCOR
Odyssey Re
Total EU USD 41 bn,
1) Source: A.M. Best
3) 64 syndicates (as of Jul 2006)
2
Country
GWP
NPW
D
CH
USA
D
GB
USA
BDA
CDN
USA
BDA
USA
BDA
ROK
F
USA
26,482
23,151
12,486
11,452
9,053
8,565
5,686
4,243
4,222
4,109
3,888
3,665
2,975
2,851
2,627
22,606
21,229
11,646
9,166
6,568
6,697
5,013
3,730
3,867
3,972
3,466
3,616
2,068
2,692
2,302
Total Europe USD 62 bn
2) GenRe Group; Berkshire Hathaway Re Group (National Indemnity)
4) ERC, GE Re, GE Frankona Group
Reinsurance
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Property / Casualty
WORLDWIDE DISTRIBUTION OF REINSURANCE
Europe plays major role
Destination
Origin1)2)
P/C USD 131 bn
North America
27%
North America
9%
9%
Bermuda
Switzerland
44%
EU
5%
6%
Japan
Other
43%
Western
Europe
34%
Japan
12%
Other
11%
International
Reinsurance
Market
International level playing field is crucial under Solvency II
1) Property / Casualty Business. Premium figure: Swiss Re
2) Source: Guy Carpenter European Reinsurance Market Report 2005
3
Reinsurance
HR
HR Risk
Risk Mgmt.
Mgmt.
Reserves
WHAT IS THE HIGHEST RISK?
Top 10 Insurance Banana Skins 2007
1. Too much regulation
2. Natural catastrophes
3. Management quality
4. Climate change
5. Managing the cycle
6. Distribution channels
7. Long tail liabilities
8. Actuarial assumptions
9. Longevity assumptions
10. New types of competitors
Source: CSFI/PwC Banana Skins Poll 2007
4
Exposures
Conclusion
Reinsurance
HR
HR Risk
Risk Mgmt.
Mgmt.
Reserves
Exposures
Conclusion
Risk management
WHAT DO WE WANT TO PROTECT?

Our risk management is meant to
•
protect our capital
•
stabilise and optimise results
•
allow us to profit fully from hard markets
(e.g. after a major loss in the R/I market)
Approaches to
risk management
Risk

Hannover Re
Our risk management is not meant to
•
protect any given year's earnings
•
protect the mere survival of the company
(i.e. new capital to be raised after big catastrophe)
Protect
the…
5
Earnings
Capital
Survival of company
Reinsurance
HR
HR Risk
Risk Mgmt.
Mgmt.
Reserves
Exposures
Conclusion
GROUP RISK MANAGEMENT
Overarching Tools
Chief Risk Officer
Quantitative RM
Qualitative RM
DFA
Main Operating
unit:
GRM DFA
Risk Cockpit
Risk Hierarchy:
Main Operating
unit:
GRM ORR
1. Reserve Risk
2. Exposure Risk
3. Mispricing Risk
4. Investment Risks
5. Other Balance Sheet Risks
6
Reinsurance
HR
HR Risk
Risk Mgmt.
Mgmt.
Reserves
Exposures
Conclusion
CENTRALIZED GROUP RISK MANAGEMENT
Reporting to CEO
CEO
Group Risk Committee
RC
Group Risk Management
GRM
Quantitative and Qualitative RM
7
Reinsurance
HR Risk Mgmt.
Reserves
Reserves
Exposures
Conclusion
Top Risk Example
MULTIPLE RESERVE RISK ASSESSMENTS
From Line to Group, from Gross to Net
Internal Studies
External Studies
LoB*
LoB*
Company
Group
* Line of Business
8
Best
Estimate
Company
Group
Reinsurance
HR Risk Mgmt.
Reserves
Reserves
Exposures
Conclusion
EXTENSIVE USE OF EXTERNAL CONSULTANTS
Enhanced by internal and external peer reviews
 Role of external actuarial consultants on behalf of Hannover Re
•
recommendations for Home Office business segments during book closing
•
actuarial certificate for US/Bermuda operations
•
complete actuarial report for HR Group Non-Life after year-end
 Other external actuaries
9
•
as outsources for Malaysia, Canada, Australia
•
as auditors for branches & subsidiaries
•
as second peer reviewer for Australia (as required by APRA since 2006)
Reinsurance
HR Risk Mgmt.
Reserves
Reserves
Exposures
Conclusion
RESERVING PROCESS AT HR HOME OFFICE
Strong actuarial controls
 Segment matrix of 53 business segments
•
Line of business
•
Geographical split
•
Character of reinsurance (obl-fac, prop-NP)
 Action plan during year
10
•
Actuarial calculations by GRM reserving actuaries
•
Actuarial calculations & recommendations by external consultant
•
Discussions with underwriters & board members
•
Close cooperation with Technical Accounting & Claims department
•
Data checks and actions for improvement
•
Reporting to Actuarial Committee
•
Quarterly review by Risk Committee
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Exposures
Conclusion
COMPONENTS OF CATASTROPHE SIMULATION MODELS
Hazard
Vulnerability
Monetary Loss
Event Generation
Frequency
Intensity
Calculation of
local intensities
Loss
estimations
Exposure
databases
Validation
Treaty conditions
11
Calculation of
insured losses
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Exposures
Conclusion
DATA QUALITY IS KEY TO CATASTROPHE MODELLING
Consistency:
 Detection of accounts that are not part of any portfolio
 Detection of locations found that have no location coverage
 No line of business set
 Unknown currencies found
Geocoding:
 Individual locations with high coverage not geocoded
 Loading necessary for geocoding less than 95%
Completeness:
 Not all perils encoded in exposure
 Construction/Occupancy classes set to default
 Treaty settings specified by cedant may be incorrect
 Structure of exposure
12
Sources for
underestimating
modeled losses
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Exposures
Conclusion
MARKET LOSS ESTIMATES US HURRICANE (A.I.R.)
CATRADER 8.5 Near Term View: Occurrence vs. Aggregate
350
in USD bn
300
250
200
150
100
50
0
20 yrs
Occurrence Losses
13
50 yrs
100 yrs
Aggregate Losses
250 yrs
500 yrs
1000 yrs
Reinsurance
HR Risk Mgmt.
Exposures
Exposures
Reserves
Conclusion
AIR MARKET LOSSES US HURRICANE
Long-Term (LT) vs. Near-Term (NT)*
350
in USD bn
300
250
200
150
100
50
0
20 yrs
100 yrs
250 yrs
Occurrence Losses (LT)
Aggregate Losses (LT)
Occurrence Losses (NT)
Aggregate Losses (NT)
*Incl. demand surge
14
50 yrs
500 yrs
1000 yrs
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Exposures
Conclusion
Enhancements in Cat.-Modeling 2006
OVERVIEW OF CALCULATION PROCEDURE
Price calculation
Modeled net loss cost (= technical rate from model)
+
Surcharge for not modeled loss components (demand surge etc.)*
+
Additional peril price / loadings (side peril tools, pareto)
+
Safety Margin
+
Admin. Expenses
+
Cost of Capital Charge
+
Targeted Net Profit
+
Brokerage
= Gross Rate (= quoted price)
*New
15
Non technical
surcharges
Distribution Expenses
Technical
surcharges
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Exposures
Conclusion
Exposure Risk
ORGANIZATION OF EXPOSURE MANAGEMENT
Roles
 Executive Board
•
determines the overall NatCat risk appetite in accordance with the global risk appetite by
defining the maximum allowable use of capital for different return periods of the convoluted
annual exceedance probability NatCat-curve
 Group Risk Committee (RC)
•
Supervision of the overall risk measures and implementation of escalation processes
 Non Life Executive Committee (NLEC)
•
Implementation of the defined risk measures into the underwriting
•
Decision-making body with respect to the capacity management:
- Defines capacity limits by scenario and treaty department/business centre
 Group Risk Management – Aggregate Control Department (GRM AGG)
•
Develops and maintenances tools for reliable aggregate control
•
Runs the aggregate control process and assists the NLEC in capacity management with special
attention to profitability aspects
•
Close cooperation with and actuarial support of Group Protections
 Group Protections
•
16
Informs and consults GRM AGG with respect to all retrocessions
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Exposures
Conclusion
Strong risk management
SEVERAL LEVELS OF PROTECTION SAFEGUARD CAPITAL BASE
1)
Our protection has never been better!
Kepler
Re
Cat.
swaps
~ EUR 0.2 bn.
EURUS
~ EUR 1.9 - 2.2 bn.
protection
Merlin CDO:
EUR 1 bn. of
reinsurance
recoverables
securitised
L/H EBIT
~ EUR 0.1 - 0.2 bn.
~ EUR 0.1 bn.
~EUR 0.2 bn.
Traditional XL protections
Non-Life EBIT
K5 Q/S securitisation
Policyholders' surplus
(shareholders' equity, minorities, hybrid capital)
1) All figures are indicative values for 2007
2) Depending on peril
17
~ EUR 0.2 – 0.4 bn.2)
~EUR 0.7 bn.
~ EUR 0.4 bn. +
expected premium
~ EUR 5.0 bn.
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
TRADEOFF BETWEEN TRANSPARENCY AND PRODUCTIVITY
 Increasing pressure on transparency
•
by shareholders/analysts
•
by rating agencies
•
by supervisors
•
by clients/brokers
 Increasing resources required
18
•
threat: limited availability (e. g. actuaries)
•
increased "unproductive work" required from underwriters
Today
Tomorrow
The day after tomorrow
Cutting-edge R/M + full transparency
Black-box R/M, no transparency
Delighted stakeholders
Disappointed stakeholders
Out of business (no clients)
Out of business (no capital)
State-of-the-art R/M
+ sufficient transparency
Satisfied stakeholders
Satisfied clients
Thank you for your attention!
Back up
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
RISK MANAGEMENT IS KEY
Quantitative and qualitative view

Reinsurers offer various risk mitigation products

Reinsurers are part of worldwide financial markets stability considerations

•
Quantitative question No. 1: Sufficient capital:?
•
Qualitative question No. 1: Strong risk management processes ?
Quantitative answers:
•
•
21
1
-
Global (IFRS)
-
Local (HGB, US-GAAP)
Solvency Systems (Supervisors, Rating Agencies)
-
Standard Models (NAIC RBC, CAR, BCAR)
-
Internal Models
Qualitative answers:
•
ERM systems / qualitative checks
•
Market discipline / transparency
Pillar I
Pillar II
Pillar III
Solvency II

Accounting Systems
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
Solvency II prerequisite
STRICTLY REQUIRED: ECONOMIC VIEW
Capital requirements for reinsurers and their clients must reflect business reality

Reinsurers fully support risk capital schemes based on economic principles

Major economic contribution of reinsurers: Worldwide diversification


•
Capital intense peak exposurers can be mitigated through worldwide spread
•
Diversification benefits go to direct insurers the same way as insureds benefit from
diversification efforts of their direct insurers (principle of insurance)
Risk based solvency schemes therefore must reflect
•
Diversification achieved by reinsurers for their capital requirements
•
Capital relief for direct insurers achieved through reinsurance schemes
No artificial "barriers" for international business
•
Same risks should be treated with same capital requirements
•
Total Group approach
•
Available premium from all business segments = first layer of protection !
Reinsurer and their clients look for "fair treatment"
22
2
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
REINSURANCE IS TO PROTECT INSURER´S CAPITAL
Capital intense local peak exposures can be mitigated through reinsurance
€ 100 m 1/200 year event
Cal. EQ exposure
€ 100 m 1/200 year event
European wind exposure
€ 4 m premium each ->
€ 96 m capital each
Independence means: both
events happening in the same
year = 1/40.000 year event
(neglectible under Solvency II
standards)
23
3
Reinsurer combining both exposures
and both premiums needs € 92 m
capital only to balance exposures
with a non-exceedance probability
of 99,9975%
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
DIVERSIFICATION REALLY MATTERS
Especially for international operations like reinsurers



Several types of diversification must be considered 1)
•
Within risk types (e.g. insurance risk from lines of business) (Level 1)
•
Across risk types (e. g. between insurance risk and asset risk) (Level 2)
•
Across entities (Level 3)
•
Across regulatory jurisdictions / geographies (Level 4)
Credit must be given wherever effective management of diversification can
be demonstrated and stress tested
•
Simple factor models normally fail
•
Full or partial use of internal models (esp. for nat.cat.) will help
•
"Double counting of risk" must be avoided
For practical purposes a lead supervisor concept is necessary
Risks are anything but linear!
1) Source: CRO Forum: A framework for incorporating diversification in the solvency assessment of insurers
24
4
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
KEY SOLVENCY II ASPECTS: SCR / MCR CALCULATION
From an international reinsurers' standpoint
 Total Group approach
•
Available income is the "first line of defence"
- Full premiums incl. expected risk margins and profits
- Investment Income
•
SCR/MCR* requirements should attach beyond full income (operating ratios > 100)
 Appropriate recognition of mitigation instruments without restrictions
•
Reinsurance / retrocession
•
Securitisations / Risk swaps
•
Asset liability management (ALM) and capital market instruments (e. g. hedging)
 Sticking to the selected risk measure!
•
If a 1/200 probability over a one year time horizon guides the SCR it should be the
guiding measure for the combination of all risks group wide!
•
"Adding up" various 1/200 approaches does not work
"Economic approach" rules out "prudency on prudency"
* SCR (Solvency Capital Requirement), MCR (Minimum Capital Requirement)
25
5
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
KEY SOLVENCY II ASPECTS: ELIGIBLE CAPITAL
From an international reinsurers' standpoint
 Full recognition of available capital
•
No artificial restrictions and/or haircuts
•
Risks should be reflected within SCR/MCR* calculation rather than arbitrary rules
applied to certain balance sheet positions
•
Full recognition of hybrid capital
•
Full recognition of "soft capital" (e. g. in reserves), where it can be demonstrated
and stress tested
 Harmonised valuation principles
•
Market values wherever existing
•
Fair values according to market valuation principles (e.g. Cost of Capital approach)
where necessary
 Full recognition of any expected profits that are not considered within
SCR/MCR calculation
Double counting of risk must be avoided
* SCR (Solvency Capital Requirement), MCR (Minimum Capital Requirement)
26
6
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
ACTUARIAL SUPPORT FOR ALL PARTS OF THE GROUP
Various layered controls
Majority Shareholder reserve study (annually)
(by external consultant on behalf of TALANX)
Group-wide non-life reserve study on annual basis
(by external consultant on behalf of Hannover Re)
Recommendations
for year-end
(by consultant)
Home Office Calculations
by GRM reserving actuaries
27
7
Peer Reviews & internal calculations
by Group Risk Management (GRM)
5 branches / subsidiaries
by external actuaries
6 branches subsidiaries
by HR Group actuaries
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
Risk No. 2: Exposures
PROCESSES GROUP RISK MANAGEMENT - MODELLING
Evaluation, Quality Assurance, Licensing, IT-Coordination
Training, Communication, Education
Data-Quality-Support, Quotation Service, Hotline-Support
Preparation of Model-Databases for Accumulation Controlling
PML-Evaluation, Nat.-Cat.-Research
28
8
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
VENDOR-MODELS LICENSED BY HANNOVER RE
RMS
RISKLINK
Exposure Input:
• Excel / Access
• Vendor-Data
formats
• UNICEDE/2
• UNICEDE/upx
ALM
DLM
AIR
CLASIC/2
AIR
CATRADER/2
Hannover Re Side Peril Tools
29
9
Result Output:
• EP-curve
• PML
• Event Loss Table
• Scenarios per peril
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
EXPERTISE OF MODEL VENDORS COMPANIES
30
10

Geophysics

Geologists

Seismologists

Meteorologists

Climate Researchers

Hydrologists

Building Engineers

Actuaries

Programmers

Insurance / Reinsurance Market Experts
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
WINDSTORM HAZARD: NUMERICAL WEATHER PREDICTION

Variation of parameters and initial characteristics leads to a variety of different
storms which are the basis for the stochastic storm catalogue of the models
31
11
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
Exposure Risk
AGGREGATE CONTROL PROCESS
in Detail
 Basis of the aggregate control process are capacities for each major scenario by
business unit and for different return periods derived from the overall risk appetite
•
Capacities will be adjusted before each major renewal by approval of NLEC
 During renewal all data relevant for aggregate control must be entered into our internal
systems by underwriters and modellers
•
GRM AGG monitors encoding of data and development of aggregates on a regular basis using
special approximation methods
 After renewal GRM AGG calculates aggregates and prepares detailed reports
•
•
•
Aggregates gross and net for all major scenarios for different return periods using modelled
portfolio results from vendor models where possible
Deterministic aggregates gross and net on basis of Realistic Disaster Scenarios
Annual exceedance probability curves for rating agency models and internal DFA-model by
stochastic simulation with ReMetrica
 Before renewal of retro protections GRM AGG supports Group Protections in
•
•
32
12
pricing for offered retrocession products and optimization the retrocession structure
Actuarial support for securitizations
Reinsurance
HR Risk Mgmt.
Reserves
Exposures
Conclusion
Conclusion
Exposure Risk
AGGREGATE CONTROL PROCESS
Aggregate Reporting by GRM AGG to ...
 Risk Committee
• utilization of the overall risk measure as defined by the Executive Board and S&P Net Gap
• Realistic Disaster Values for the main peak perils gross and net
• Severe breach of rules regarding capacities and enconding standards
 Non Life Executive Committee
• Gross and net aggregates on scenario basis by business unit and information about over-utilization
of capacities
• Realistic Disaster Values for the main peak perils gross and net
 Business Units
• Capacity utilization during renewal by intranet
• Detailed aggregate reports after renewal for KonTrag, Renewal Reports and local supervisory
authorities
 GRM DFA
•
Convoluted Annual Exceedance probability curve on RDS basis as input for the internal DFA-model
 Group Protections
•
Aggregate curves by scenario and convoluted as information for brokers/retrocessionaires/investors
 Corporate Communications
•
All relevant aggregate information requested for the rating process
 Hannover Re Risk Cockpit and Talanx
33
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