Risk report

The risk situation of the Talanx Group can be broken down into the five risk categories described below. They are based on German Accounting Standard DRS 5-20:

• underwriting risks
• default risks in insurance business
• investment risks
• operational risks
• other risks

No risks have as yet emerged that could jeopardize the continued existence of the Talanx Group or significantly impair its assets, financial position or net income. Substantial capital, reserves and underwriting provisions have been built up in order to cover for the financial consequences of conceivable risks.

The financial stability of the Talanx Group and its member companies has been reviewed over a number of years by highly reputed rating agencies such as Standard & Poor’s and A.M. Best. Standard & Poor’s has given the Hannover Re Group and the collective of primary insurers within the Talanx Group financial strength ratings of "AA–" (very strong) and "A+" (very good) respectively. A.M. Best rates the financial strength of the entire Talanx Group "A" (excellent); please see also the section of the Notes entitled "Nature of risks associated with insurance contracts and financial instruments".

Major underwriting risks

The underwriting risks in property and casualty insurance are considered separately from those in life insurance because of the considerable differences between them.

Underwriting risks in property/casualty business (primary insurance and reinsurance) derive principally from the premium/loss risk and the reserving risk.

The premium/loss risk is the risk that previously defined insurance premiums are used to pay subsequent indemnification, although the amount of such payments is initially unknown. The actual claims experience may therefore diverge from the expected claims experience. This can be attributable to two reasons: the risk of random fluctuation and the risk of error.

The risk of random fluctuation refers to the fact that both the number and amount of claims are subject to random factors and the expected claims level may therefore be exceeded. This risk cannot be excluded even if the claims spread is known. The risk of error describes the risk of the actual claims spread diverging from the assumed claims spread. A distinction is made here between the diagnostic risk and the forecasting risk. The diagnostic risk refers to the possibility that the current situation may be misinterpreted on the basis of the available data. This is particularly likely to occur if only incomplete data is available regarding claims from previous insurance periods. The forecasting risk refers to the risk that the probability distribution of the total claims may change unexpectedly after the estimation is made.