Sampo Group

Annual Report 2011
P&C Insurance Underwriting Risks
Market Risks

Life Insurance Underwriting Risks

Life insurance risks encompass underwriting risk and discount rate risk in technical provisions. Underwriting risk includes biometric, policyholder behavior and expense risks. This chapter presents the development of these life insurance risks during 2011 and the management principles of these risks.

The figure 'Illustrative figure of life insurance risk concepts' depicts the life insurance underwriting risk on a general level.

Biometric Risks

Biometric risks in life insurance refer mainly to the risk that the company has to pay more mortality, disability or morbidity benefits than expected or the company has to keep paying pension payments to the pension policyholders for a longer time (longevity risk) than expected when pricing the policies. The specific case in which a single event of major magnitude leads to a significant deviation in actual benefits and payments from the total expected payments is called catastrophe risk. In life insurance catastrophe events include single events, or series of events, usually over a short period and longer lasting events.

Long duration of policies and restriction of Mandatum Life’s right to increase tariffs increases biometric risks. If the premiums turn out to be inaccurate and pricing cannot be changed afterwards, technical provisions have to be supplemented with an amount corresponding to the expected losses.

Table 'Claim ratios after reinsurance, Mandatum Life, 2011 and 2010' shows the insurance risk result in Mandatum Life’s Finnish life insurance policies. The ratio of the actual claims costs to the assumed was 77 per cent in 2011 (78 per cent in 2010). Sensitivity of the insurance risk result can also be assessed on the basis of the information in the table. For instance the increase of mortality by 100 per cent would increase the amount of benefit payments from EUR 13.5 million to EUR 27 million.

Claim ratios after reinsurance,
Mandatum Life, 2011 and 2010
  2011 2010

EURm

Risk income

Claim expense

Claim ratio

Risk income

Claim expense

Claim ratio

Life insurance

42.6 

23.0 

54% 

37.9

21.7

57%

Mortality

26.7 

13.5 

51%

23.4

14.2

61%

Morbidity and disability

15.9 

9.5 

60%

14.5

7.5

52%

Pension

58.9 

55.6 

94%

61.0

55.5

91%

Individual pension

9.5 

10.1 

106%

9.5

10.0

106%

Group pension

49.4

45.5 

92%

51.5

45.5

88%

Mortality (longevity)

44.6 

41.8 

94%

46.2

42.3

92%

Disability

4.8

3.7 

76%

5.3

3.2

60%

Mandatum Life

101.5 

78.6 

77%

98.9

77.2

78%

 

Longevity risk is the most critical biometric risk in Mandatum Life. Most of the longevity risk arises from the with-profit group pension portfolio. The main uncertainty of longevity risk is related to the mortality trend among relatively old and socio-economically selected insureds. In the unit-linked group pension and individual pension portfolio the longevity risk is less significant because most of these policies are fixed term annuities including death cover compensating the longevity risk.

The annual longevity risk result and longevity trend is analyzed regularly. The assumed life expectancy related to the technical provisions for group pensions was revised in 2002 and additional changes were made in 2007. The longevity risk result has been positive since these revisions. The longevity risk result of group pension for the year 2011 was EUR 2.7 million (EUR 3.9 million in 2010).

Mortality risk result in life insurance is positive and the mortality trend has been favorable to the company. A possible pandemic is seen as the most significant risk that could adversely affect the mortality risk result.

The insurance risk result of other biometric risks has been profitable in total, although the different risk results differ considerably. In a longer term, disability and morbidity risks are mitigated by the company’s right to raise insurance premiums for existing policies in case the claims experience deteriorates.

The insurance portfolio of Mandatum Life is relatively well-diversified and does not include major concentration risks. To further mitigate the effects of possible risk concentrations, Mandatum Life has the catastrophe reinsurance in place.

In addition to the biometric risks, Mandatum Life is exposed to other risks such as policyholder behavior, expense and discount rate risks.

Policyholder Behavior and Expense Risks

Uncertainty related to the behavior of the policyholders is a major risk as well. The policyholders have the right to cease paying premiums (lapse risk) and the possibility to interrupt their policies (surrender risk). Being able to keep lapse and surrender rates at a low level are crucial success factors especially for the expense result of unit-linked business. From ALM point of view surrender and lapse risks are less significant because in Mandatum Life, approximately 90 per cent of with-profit policies are pension policies in which surrender is possible only in exceptional cases. For ALM risk, surrender risk is therefore only relevant in individual life and capital redemption policies. In these policies, the risk is reduced by the relatively short maturity of the contracts. Furthermore, the supplements to technical provisions are not paid out at surrender which also reduces the surrender risk related to the with-profit policies.

Surrender and lapse risks are taken into account when the company is analyzing its ALM risk. This is described in more detail in the Market risks chapter.

The company is also exposed to expense risk, which is a risk that the future operating expenses exceed the level that was anticipated when pricing the insurances. Policy terms and tariffs cannot usually be changed materially during the lifetime of the insurance, which increases the expense risk. The main challenge is to keep the expenses related to insurance administrative processes and complex IT-infrastructure at an efficient level. In year 2011 expense result was EUR 9.8 million (EUR 7.8 million). Mandatum Life does not defer insurance acquisition costs.

Discount Rate Risk in Technical Provisions

Discount rate risk in technical provisions is the main risk affecting the adequacy of technical provisions. The guaranteed interest rate in policies is fixed for the whole policy period. Thus, if market interest rates and expected investment returns fall, technical provisions may have to be supplemented.

In most with-profit policies, the guaranteed interest rate is 3.5 per cent. In individual policies sold in Finland before 1999, the guaranteed interest rate is 4.5 per cent, which is also the statutory maximum discount rate of these policies. With respect to these policies, the maximum discount rate used when discounting technical provisions has been decreased to 3.5 per cent. As a result, technical provisions have been supplemented with EUR 79 million (EUR 86 million in 2010). In addition, EUR 29 million has been reserved to lower the interest rate of with-profit liabilities to 2.75 per cent in 2012. So due to low market interest rates, Mandatum Life has increased liabilities in total by EUR 108 million.

The provisions related to each product type and guaranteed interest rates are shown in table 'Analysis of the change in provisions before reinsurance, Mandatum Life, 2011'. The table also shows the change in each category during 2011.

Analysis of the change in provisions before reinsurance,
Mandatum Life, 2011
EURm

Liability 2010

Premiums Claims paid

Expense charges

Guaran-
teed interest

Bonuses

Other Liability 2011 Share %
Mandatum Life parent company
                 

Unit-linked total

2,977

611

-308

-41

0

-302

2,937

40%

Individual pension insurance

829

88 -6 -12 0 0 -145 753

10%

Individual life

1,178

183 -159 -11 0 0 -96 1,095

15%

Capital redemption operations

729

292 -140 -12 0 0 -46 823

11%

Group pension

241

48 -3 -5 0 0 -15 266

4%

With-profit and others total

4,391

202

-453

-37

153 6 -34 4,229

58%

Group pension

2,500

108 -190 -8 85 5 -6 2,494

34%

Guaranteed rate 3.5%

2,458

57 -185 -7 84 5 -8 2,404

33%

Guaranteed rate 2.5% or 0.0%

42

51 -5 -1 1 0 2 90

1%

Individual pension insurance

1,322

24 -148 -7 56 1 27 1,275

17%

Guaranteed rate 4.5%

1,134

16 -124 -6 49 0 5 1,075

15%

Guaranteed rate 3.5%

154

5 -17 -1 6 0 11 157

2%

Guaranteed rate 2.5% or 0.0%

34

4 -7 0 1 1 11 43

1%

Individual life insurance

335

33 -70 -11 11 0 -1 298

4%

Guaranteed rate 4.5% 83 5 -19 -2 4 0 7 77

1%

Guaranteed rate 3.5% 195 11 -44 -4 6 0 -6 158

2%

Guaranteed rate 2.5% or 0.0% 57 16 -6 -5 2 0 -1 63

1%

Capital redemption operations

21 1 -17 0 0 0 0 6

0%

Guaranteed rate 3.5% 15 0 -16 0 0 0 0 0

0%

Guaranteed rate 2.5% or 0.0% 6 1 -1 0 0 0 0 6

0%

Future bonus reserves

0 0 0 0 0 0 0 0

0%

Reserve for decreased discount rate

147 0 0 0 0 0 -40 108

1%

Assumed reinsurance

3 2

-1

0 0 0 -2 2

0%

Other liabilities

64 34

-28

-12 1 0 -13 46

1%

Mandatum Life parent company total

7,369

813 -761 -77 153 6 -336 7,166

98%

Subsidiary Mandatum Life Insurance Baltic SE 165 41

-47

-3 1 0 -20 137

2%

Unit-linked 147 37 -45 -3 0 0 -19 117

2%

Others 18 4 -2 -1 1 0 -1 19

0%

Mandatum Life group total

7,534

854 -808 -81 153 6 -356 7,303

100%

 

With-profit pension and saving policies have not been Mandatum Life’s new sales focus area for years even though almost 60 per cent of technical provisions still constitute with-profit liabilities. Trend of with-profit technical provisions is downward because premium income is decreasing and claims, especially pensions paid, trend is upward. Average guaranteed rate for policyholders' savings, excluding the effect of discount rate reserve, is 3.7 per cent, which is gradually decreasing because policies with 4.5 per cent guarantees mature sooner than policies with lower guarantees. The trend of unit-linked technical provisions is upward, except in years like 2008 and 2011 when investment losses of unit-linked savings have exceeded the net subscriptions.

The development of the structure and amount of Mandatum Life’s technical provisions is shown in the figure 'Development of with-profit and unit-linked technical provisions, Mandatum Life, 2003-2011'.

Table 'Expected maturity of insurance and investment contracts before reinsurance, Mandatum Life, 31 December 2011' shows the expected maturity and duration of insurance and investment contracts of Mandatum Life. The sensitivity of technical provisions to changes in discount rates can be assessed on the basis of the durations shown in the table.

Expected maturity of insurance and investment contracts before reinsurance, Mandatum Life, 31 December 2011
EURm Duration 2012-2013 2014-2015 2016-2020 2021-2025 2026-2030 2031-2035 2036-
Mandatum Life parent company
               

Unit-linked total

8.5

472

406

753

480 342 

220

296

Individual pension insurance

11.4

38 68 173 153 122 84 96

Individual life

6.1

272 195 281 133 85 46 47

Capital redemption operations

8.0

148 121 236 132 86 53 84

Group pension

13.2

14 22 63 62 49 36  69

With-profit and others total

9.3

1,018

855

1,621

1,138 815 569

905

Group pension

10.8

499 467 1,029 821 628 469 783

Guaranteed rate 3.5%

10.9

475 449 995 797 611 457 761
Guaranteed rate 2.5% or 0.0%

9.5

24 19 33 24 17 12  22

Individual pension insurance

6.7

328 320 481 259 147 72 74

Guaranteed rate 4.5%

6.6

276 273 417 224 122 58 59

Guaranteed rate 3.5%

7.0

41 38 52 29 21 12 11
Guaranteed rate 2.5% or 0.0%

6.7

12 9 11 6 4 2 4

Individual life insurance

7.4

101 50 84 43 33 24 44
Guaranteed rate 4,5 %

8.0

23 17 25 13 10 7 14

Guaranteed rate 3.5%

7.2

62 22 38 22 17 13 24
Guaranteed rate 2.5% or 0.0%

7.1

16 10 21 9 6 4 6

Capital redemption operations

8.6

1 1 2 1 1 1 0
Guaranteed rate 3.5%

0.5

0 0 0 0 0 0 0

Guaranteed rate 2.5% or 0.0%

8.8 1 1 2 1 1 1 0

Future bonus reserves

1.0 0 0 0 0 0 0 0

Reserve for decreased discount rate

4.7

45 15 23 12 6 3 3

Assumed reinsurance

0.5

2

0

0 0 0 0 0

Other liabilities

0.9

41

3

2 0 0 0 0
Mandatum Life parent company total 9.1 1,490 1,261 2,374 1,618 1,158 789 1,201
Subsidiary Mandatum Life Insurance Baltic SE
17

12

30 21 18 11 27
Unit-linked   13 10 24 17 17 11 26
Others   5 2 6 4 1 1 0
Mandatum Life group total   1,507 1,273 2,404 1,638 1,176 800 1,227

 

Life Insurance Risk Management

Biometric risks are managed by careful risk selection, by pricing to reflect the risks and costs, by setting upper limits for the protection granted and by use of reinsurance.

Reinsurance is used to limit the amount of individual mortality and disability risks. The Board of Directors annually determines the maximum amount of risk to be retained on the company’s own account, which for Mandatum Life is EUR 1.5 million per insured. To mitigate the effects of possible catastrophes, Mandatum Life participates in the catastrophe reinsurance bought jointly by Finnish life insurance companies.

Risk selection is part of the day-to-day business routines in Mandatum Life. Mandatum Life’s Underwriting Policy sets principles for risk selection and limits for sums insured. Compliance with the principles and limits set in the Underwriting Policy are monitored continuously.

The risk result is followed actively and analyzed thoroughly annually. Mandatum Life measures the efficiency of risk selection and adequacy of tariffs by collecting information about the actual claims expenditure for each product line and each type of risk and comparing it to the claims expenditure assumed in insurance premiums of every risk cover.

Technical provisions are analyzed and the possible supplement needs are assessed regularly. Assumptions related to technical provisions are reviewed annually. Adequacy of technical provisions is tested quarterly. Tariffs for new policies are set, the Underwriting Policy and assumption used in calculating technical provisions are updated based on adequacy tests and risk result analysis. Tariffs and prices, as well as the reinsurance principles and reserving principles are reviewed and approved annually by the Board of Directors of Mandatum Life.

P&C Insurance Underwriting Risks
Market Risks