Non-life underwriting risk

Pricing risk | Reserving risk | The underwriting policy

Risks arising from the non-life underwriting are classified as pricing risk (or subscription) and reserve risk. The Group is also exposed to catastrophe risks.

Pricing risk

The pricing risk derives from the possibility that premiums are not sufficient to cover future claims, contracts expenses and extreme volatility events.

In order to quantify this risk, the Group assesses its exposure to attritional claims, large claims and catastrophes, gross and net of reinsurance, for the most relevant part of its portfolio.

Regarding this risk, the Group:

  • has developed stochastic or deterministic bottom-up simulation models, which are validated by sensitivity analyses and stress tests;
  • determines for frequency risks, large risks and catastrophe risks (such as earthquake, flood, windstorm, etc.) possible loss scenarios and risk capital requirements, also in consideration of reinsurance structures (proportional, excess of loss, etc.), net retention and cover;
  • adopts, also for evaluating reinsurance cessions, models that are consistent with Value Based Management principles, which consider value creation estimated from risk capital as the metric to be used to evaluate the efficiency and adequacy of the solutions to be chosen.

Reinsurance structures are based on a detailed risk analysis that allows identifying, for each class of business, the structure type, the retention level and the total amount of cover needed to mitigate exposures from single risks and, for some classes, events that derive from the accumulation of risks existing within a portfolio.

Treaty reinsurance provides a risk transfer mechanism for the greatest portion of each portfolio, while facultative reinsurance is used to cover individual additional exposure peaks.

Regarding treaty reinsurance, the most important lines of business are best covered by excess of loss contracts, which allow setting precise retentions for each class. This makes it possible to retain those risks that are marked by a lower volatility and higher expected returns.

In this field, the Group has significantly changed its strategy and business model for the purchase of the contractual reinsurance: coordination and governance of the Parent Company has been further strengthened, entrusting to it the role of the single reinsurer of other Italian and foreign companies.

As a result, the new model expects that the Parent Company subscribes – at market conditions – all the major treaties of the subsidiaries with less exeptions justified by particular regulatory or market conditions. This approach allows to manage the reinsurance cycle more efficiently than in the past because it gives the possibility to adjust the levels of the Parent Company risk retention through its retrocession treaties, retaining more risk in the hard market phases and less risk in the soft market phases.

The placement of facultative reinsurance is instead managed by the individual companies, as it is a type of protection strongly related to individual risk assessment carried out by the underwriting unit.

Reinsurance counterparties are chosen in accordance to the criteria defined by the Corporate Centre (as described in paragraph 4.2).

With specific reference to the Parent Company, these principles have been confirmed by the Board of Directors on 24 February 2012 and the structures in place during the year in course reflect the new business model for the purchase of the contractual reinsurance described above both in the structures and levels of retention.up.png

Reserving risk

Reserving risk relates to the uncertainty in reserves run-off and considers the possibility that insurance provisions are not sufficient to meet the final obligations towards policyholders and injured parties.

The assessment is closely related to the valuation of  technical provisions, in particular to the uncertainty of the claims provisions in respect to their expected value. Consequently, the risk assessment properly considers the reserving processes, by using claim triangles and all other relevant information collected and analyzed according to specific guidelines.

The following table shows the cumulative claim payments and the ultimate cost of claims by accident year and their development from 2003 to 2012. The ultimate cost includes paid losses, outstanding reserves on reported losses, estimated reserves for IBNR claims and ULAE. The amounts refer to direct business gross of reinsurance and recoveries (the latter amounting to € 586.2 million in 2012).

The difference between the ultimate cost of claims and the cumulative paid losses for calendar year 2012 constitutes the claim reserve for accident years 2003 to 2012. The reserve reported in the balance sheet also includes a residual claim reserve that is composed almost exclusively by the accident years not reported in the development triangle.

The observed trend in the ultimate cost for generations 2003-2012 indicates the adequate level of prudence adopted by the Generali Group in its reserving policy.

Claims development
(€ mln)  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total
Cumulative claim payments                      
at the end of accident year 4,644 4,822 5,119 5,328 5,726 6,031 6,248.3 6,087 5,709 5,837  
one year later 7,776 8,150 8,616 9,034 9,759 10,275 10,321 10,103 9,508    
two years later 8,674 9,124 9,625 10,113 10,886 11,405 11,534 11,248      
threes years later 9,170 9,613 10,123 10,597 11,456 11,958 12,133        
four years later 9,487 9,878 10,382 10,910 11,797 12,296          
five years later 9,699 10,052 10,584 11,123 12,010            
six years later 9,841 10,214 10,743 11,284              
seven years later 9,971 10,343 10,860                
eight years later 10,090 10,437                  
nine years later 10,169                    
Estimate of ultimate cumulative claims costs:                      
at the end of accident year 11,627 12,041 12,318 12,928 13,507 14,036 14,208 13,999 13,438 13,753 131,860
one year later 11,284 11,720 12,232 12,798 13,429 13,850 14,037 13,805 13,237    
two years later 11,078 11,488 11,963 12,554 13,200 13,652 13,919 13,646      
threes years later 10,947 11,350 11,792 12,397 13,061 13,572 13,874        
four years later 10,937 11,241 11,716 12,314 12,995 13,532          
five years later 10,845 11,176 11,648 12,238 12,947            
six years later
10,808 11,124 11,602 12,212              
seven years later 10,773 11,083 11,581                
eight years later 10,749 11,070                  
nine years later 10,736                    
Estimate of ultimate cumulative claims costs at reporting date 10,736 11,070 11,581 12,212 12,947 13,532 13,874 13,646 13,237 13,753 126,591
Cumulative payments to date -10,169 -10,437 -10,860 -11,284 -12,010 -12,296 -12,133 -11,248 -9,508 -5,837 -107,212
Provision recognised in the balance sheet 566.9 632.2 720.6 927.2 937.0 1,236.5 1,741 2,397 3,729 7,916 20,804
Provision not included in the claims development table 
                    6,254
Total provision included in the balance sheet                     26,734

The differences with the amounts published in previous reporting periods are mainly due to changes in exchange rates, the disposal of Migdal Group and the transfer of a French health portfolio from P&C to life and health segment.up.png

The underwriting policy

In the non-life branches, the Group underwriting embraces all lines of business, while targeting the development of retail and small/medium enterprise business, both in Property and Casualty.

The focus is mainly on products characterized by low or medium volatility, with only a minor and selective presence in market segments such as, for example, energy and accepted reinsurance.

The underwriting guidelines are particularly prudent with reference to emerging risks (electromagnetic fields, genetically modified organisms, nanotechnologies, etc.), while asbestos related covers are generally excluded.

The underwriting activity is geographically diversified, although mainly concentrated in continental Europe, which accounts for 93.1% of direct gross written premiums.

The following table shows the concentration of non-life direct gross written premiums split by line of business and geographical area.

Property&Casualty indicators by country
31.12.2012
(€ million)
Motor Non motor Personal Non motor Commercial/
Industrial
Non motor Accident/
Health(*)
Total
Italy 3,174 878 1,851 1,303 7,207
France 1,077 1,472 779 97 3,425
Germany 1,185 1,289 270 529 3,272
Central and Eastern Europe 918 345 618 519 2,400
Rest of Europe 1,604 1,047 944 678 4,273
Spain 385 417 372 173 1,347
Austria 331 188 3 163 686
Switzerland 534 320 351 147 1,353
Other Europe 353 122 218 195 888
Rest of World 920 33 418 153 1,524
Total 8,879 5,064 4,881 3,278 22,102

(*)Life segment includes health insurance with life features

 

31.12.2011
(€ million)
Motor Non motor Personal Non motor Commercial/
Industrial
Non motor Accident/
Health(*)
Total
Italy 3,264 861 1,917 1,313 7,356
France 1,113 1,439 757 477 3,785
Germany 1,093 1,211 282 472 3,058
Central and Eastern Europe 1,011 348 553 309 2,220
Rest of Europe 1,554 993 977 650 4,174
Spain 368 387 413 171 1,338
Austria 526 311 345 144 1,325
Switzerland 316 187 3 150 656
Other Europe 344 108 216 185 854
Rest of World 872 56 457 114 1,499
Total 8,906 4,908 4,943 3,336 22,092

(*) Life segment includes health insurance with life features

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