Insurance risks

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.

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
(€ million)  2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Totale
Cumulative claim payments                      
at the end of accident year 4,644 4,822 5,120 5,328 5,726 6,032 6,248 6,088 5,709 5,838  
one year later 7,777 8,151 8,617 9,035 9,759 10,276 10,321 10,103 9,508    
two years later 8,675 9,124 9,625 10,113 10,886 11,405 11,534 11,248      
three years later 9,170 9,614 10,124 10,598 11,457 11,958 12,133        
four years later 9,487 9,879 10,382 10,910 11,797 12,296          
five years later 9,699 10,052 10,584 11,124 12,011            
six years later 9,842 10,214 10,744 11,285              
seven years later 9,971 10,343 10,861                
eight years later 10,091 10,438                  
nine years later 10,170                    
Estimate of ultimate cumulative claims costs:                      
at the end of accident year 11,628 12,042 12,318 12,928 13,507 14,037 14,208 13,999 13,439 13,754 131,860
one year later 11,284 11,721 12,232 12,799 13,429 13,851 14,037 13,806 13,237    
two years later 11,078 11,488 11,963 12,554 13,200 13,653 13,919 13,646      
three years later 10,947 11,350 11,792 12,397 13,061 13,573 13,874        
four years later 10,937 11,241 11,716 12,314 12,996 13,533          
five years later 10,845 11,177 11,648 12,239 12,948            
six years later 10,808 11,125 11,603 12,212              
seven years later 10,774 11,084 11,581                
eight years later 10,749 11,070                  
nine years later 10,737                    
Estimate of ultimate cumulative claims costs at reporting date 10,737 11,070 11,581 12,212 12,948 13,533 13,874 13,646 13,237 13,754 126,592
Cumulative payments to date -10,170 -10,438 -10,861 -11,285 -12,011 -12,296 -12,133 -11,248 -9,508 -5,838 -107,213
Provision recognised in the balance sheet 567 632 721 927 937 1,237 1,741 2,398 3,729 7,916 20,804
Provision not included in the claims development table                     6,255
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.

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.