Insurance risks

Risks arising from 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 it 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 19 February 2013 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 2004 to 2013. 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 € 550.4 million in 2013).

The difference between the ultimate cost of claims and the cumulative paid losses for calendar year 2013 constitutes the claim reserve for accident years 2004 to 2013. 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 2004- 2013 indicates the adequate level of prudence adopted by the Generali Group in its reserving policy.

Claims development
(€ million) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total
Cumulative claim payments                      
at the end of accident year 4,540 4,815 5,223 5,613 5,896 6,111 5,953 5,590 5,714 5,624  
one year later 7,677 8,089 8,844 9,542 10,054 10,087 9,890 9,307 9,371    
two years later 8,594 9,039 9,885 10,635 11,150 11,270 11,003 10,398      
threes years later 9,061 9,503 10,358 11,187 11,686 11,861 11,512        
four years later 9,314 9,756 10,660 11,517 12,017 12,199          
five years later 9,476 9,952 10,867 11,725 12,242            
six years later 9,631 10,105 11,025 11,872              
seven years later 9,754 10,219 11,095                
eight years later 9,847 10,275                  
nine years later 9,884                    
Estimate of ultimate cumulative claims costs:                      
at the end of accident year year11,431 11,659 12,649 13,240 13,717 13,931 13,695 13,157 13,477 13,067 130,023
one year later 11,119 11,556 12,530 13,149 13,563 13,735 13,512 12,953 13,062    
two years later 10,881 11,286 12,276 12,893 13,349 13,608 13,345 12,796      
threes years later 10,746 11,111 12,120 12,752 13,266 13,566 13,316        
four years later
10,643 11,042 12,037 12,689 13,226 13,570          
five years later
10,573 10,977 11,961 12,638 13,253            
six years later
10,522 10,932 11,932 12,671              
seven years later
10,481 10,911 11,908                
eight years later 10,468 10,885                  
nine years later
10,486                    
Estimate of ultimate cumulative claims costs
at reporting date
10,486 10,885 11,908 12,671 13,253 13,570 13,316 12,796 13,062 13,067 125,013
Cumulative payments to
date
−9,884 −10,275 −11,095 −11,872 −12,242 −12,199 −11,512 −10,398 −9,371 −5,624 −104,471
Provision recognised in the balance sheet
602 610 813 799 1,011 1,371 1,804 2,398 3,691 7,444 20,542
Provision not included in the claims development table                     5,738
Total provision included
in the balance sheet
                    26,279

The differences with the amounts published in previous reporting periods are mainly due to changes in exchange rates and the transfer of the claims provisions of Fata Assicurazioni Danni into liabilities directly associated with non-current assets and disposal groups classified as held for sale.

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 energy and accepted reinsurance, for example.

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.

Assicurazioni Generali S.p.A. - C.F. e P.IVA 00079760328