Insurance risks

Life underwriting risks include biometric risks arising from events related to mortality and mortality trends, to morbidity, disability and longevity, as well as risks related to trends in lapses and expenses related to contracts in place.

The Group companies life portfolios have a prevailing component of saving contracts, but there are also pure risk covers (death plus riders, such as accident, disability, dread disease, etc.) and some annuity portfolios, with the presence of the longevity risk.

The risks related to policies with a prevailing saving component and with minimum interest rate guarantee are adequately measured in a prudent way in the pricing process in accordance with the particular situation of the local financial markets, and taking also into account any relevant regulatory constraint.

In order to better manage risks and costs associated with embedded options included in the above products, the Group is continuing to pursue the policy, already undertaken in previous years, of redefining the structure of related financial guarantees.

In this perspective the structure of the product has been redefined, connecting in many cases the level and the recognition of guarantees with the length of staying inside the contract.

The table below shows the distribution of insurance provisions of life gross direct business by level of financial guarantee.

Life insurance provisions: financial guarantee
  Gross direct insurance
(€ million) 31.12.2012 31.12.2011
Liabilities with guaranteed interest 237,274 234,606
between 0% and 1% 49,440 43,828
between 1% and 3% 98,823 94,079
between 3% and 4% 53,909 56,729
between 4% and 5% 31,366 36,716
between 4% and 5% 3,737 3,254
Provisions without guaranteed interest 55,113 60,377
Provisions matched by specific assets 7,556 8,152
Total 299,944 303,135

The total insurance provisions include the gross direct amount of mathematical provisions, which amount to € 231,673 million (€ 231,588 million at 31 December 2011), the provisions for policies where the investment risk is borne by the policyholders and for pension fund, which amount to € 41,048 million (€ 46,804 million at 31 December 2011), the ageing provision for life segment, which amount to € 9,627 million (€ 9,073 million at 31 December 2011), and financial liabilities related to investment contacts, which amount to € 17,597 million (€ 15,670 million at 31 December 2011).

Year end 2011 figures included technical provisions and investment contracts financial liabilities belonging to Migdal Group, that were mainly recorded as provisions without guaranteed interest and, for a residual amount, as liabilities with guaranteed interest between 3% and 5%.

The insurance provisions above are grouped in three macro classes:

  • contracts with a minimum guarantee level: this group considers both yearly cliquet and at event (death and maturity) guarantees;
  • contracts without interest guarantee: in this category, together with standard unit linked policies are also included contract whose benefits and premiums can be adjusted by Companies in order to mitigate interest rate risk. With regard to this second class of contracts, comparative information have been consistently restated;
  • contracts matched by specific assets: this category includes contracts where the liabilities are totally matched by specific assets.

The table above shows a progressive shift of the exposures towards ‘less than 3%’ guarantee classes, also due to the new business. It also shows a slight increase of ‘in addition to 5%’ class related to the portfolio management of extra-European Group companies where the nominal rates are higher than those in the Eurozone. Lastly, the amount of provisions without guaranteed interest showed an increase amounting to € 55,113 million (€ 60,337 million as at 31 December 2011) due to the disposal of Migdal group. On equivalent consolidation area these provisions would increase.

From a quantitative point of view regarding the life underwriting risk and according to the parameters indicated by the CFO Forum, the Group performs the following Embedded Value sensitivities:

  • maintenance expenses -10%: sensitivity to a 10% decrease of maintenance expenses;
  • lapse rate -10%: sensitivity to a 10% decrease of lapse rates;
  • mortality/morbidity for risk business -5%: sensitivity to a 5% decrease of mortality/morbidity for all product lines except annuities (e.g. term assurance, whole life, annuity during the accumulation period);
  • mortality for annuity business -5%: sensitivity to a 5% decrease of mortality for annuity business only (e.g. annuities in payment).
Gross direct premiums by line of business and by geographical area
31.12.2012 (€ million)  Savings and Pension Protection Unit/index linked Total
Italy 11,624 222 515 12,360
France 6,564 1,745 912 9,221
Germany 6,909 4,103 3,298 14,309
Central and Eastern Europe 1,019 244 428 1,691
Rest of Europe 2,338 824 2,639 5,801
Spain 988 185 9 1,183
Austria 189 134 834 1,157
Switzerland 627 248 252 1,127:
Other Europe 534 257 1,544 2,335
Rest of World 1,192 631 53 1,876
Total 29,645 7,768 7,844 45,258
31.12.2011 (€ million) Savings and Pension Protection Unit/index linked Total
Italy 11,513 207 604 12,324
France 6,161 1,374 1,260 8,795
Germany 6,034 4,061 3,439 13,533
Central and Eastern Europe 1,009 223 445 1,677
Rest of Europe 2,217 739 2,601 5,558
Spain 850 188 14 1,051
Austria 169 114 819 1,102
Switzerland 660 241 276 1,177
Other Europe 539 196 1,493 2,229
Rest of World 1,204 519 1,391 3,114
Total 28,137 7,124 9,740 45,002