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Berlin, July 10 th , 2007

Risk Management @ Hannover Re . Wilhelm Zeller Chairman of the Executive Board Hannover Re. Berlin, July 10 th , 2007. Reinsurance. WE ARE AMONG THE TOP REINSURERS IN THE WORLD. League table (premium). WE ARE AMONG THE TOP REINSURERS IN THE WORLD. (2005 figures in million USD 1) ).

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Berlin, July 10 th , 2007

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  1. Risk Management @ Hannover Re Wilhelm Zeller Chairman of the Executive Board Hannover Re Berlin, July 10th, 2007

  2. Reinsurance WE ARE AMONG THE TOP REINSURERS IN THE WORLD League table (premium) WE ARE AMONG THE TOP REINSURERS IN THE WORLD (2005 figures in million USD1)) Top 15 more than USD 106 bn net premium, worldwide > USD 165 bn 1) Source: A.M. Best 2) GenRe Group; Berkshire Hathaway Re Group (National Indemnity) 3) 64 syndicates (as of Jul 2006) 4) ERC, GE Re, GE Frankona Group 1

  3. Reinsurance REINSURANCE IS TRULY INTERNATIONAL... REINSURANCE IS TRULY INTERNATIONAL... ...but 4 of top five are European (2005 figures in million USD1)) Top 15 : Total EU USD 41 bn, Total Europe USD 62 bn 1) Source: A.M. Best 2) GenRe Group; Berkshire Hathaway Re Group (National Indemnity) 3) 64 syndicates (as of Jul 2006) 4) ERC, GE Re, GE Frankona Group 2

  4. Destination Origin1)2) North America Bermuda Switzerland EU Japan Other North America Western Europe Japan Other 6% Reinsurance WORLDWIDE DISTRIBUTION OF REINSURANCE Property / Casualty WORLDWIDE DISTRIBUTION OF REINSURANCE Europe plays major role P/C USD 131 bn International Reinsurance Market International level playing field is crucial under Solvency II 1) Property / Casualty Business. Premium figure: Swiss Re 2) Source: Guy Carpenter European Reinsurance Market Report 2005 3

  5. HR Risk Mgmt. WHAT IS THE HIGHEST RISK? WHAT IS THE HIGHEST RISK? Top 10 Insurance Banana Skins 2007 • Too much regulation • Natural catastrophes • Management quality • Climate change • Managing the cycle • Distribution channels • Long tail liabilities • Actuarial assumptions • Longevity assumptions • New types of competitors Source: CSFI/PwC Banana Skins Poll 2007 4

  6. Approaches to risk management Risk Hannover Re Protect the… HR Risk Mgmt. WHAT DO WE WANT TO PROTECT? Risk management WHAT DO WE WANT TO PROTECT? • Our risk management is meant to • protect our capital • stabilise and optimise results • allow us to profit fully from hard markets(e.g. after a major loss in the R/I market) • Our risk management is not meant to • protect any given year's earnings • protect the mere survival of the company (i.e. new capital to be raised after big catastrophe) 5

  7. Quantitative RM Qualitative RM DFA Risk Cockpit Main Operating unit: GRM DFA Main Operating unit: GRM ORR HR Risk Mgmt. GROUP RISK MANAGEMENT GROUP RISK MANAGEMENT Overarching Tools Chief Risk Officer Risk Hierarchy: 1. Reserve Risk 2. Exposure Risk 3. Mispricing Risk 4. Investment Risks 5. Other Balance Sheet Risks 6

  8. HR Risk Mgmt. CENTRALIZED GROUP RISK MANAGEMENT CENTRALIZED GROUP RISK MANAGEMENT Reporting to CEO CEO Group Risk Committee RC Group Risk Management GRM Quantitative and Qualitative RM 7

  9. Group Company Group Company LoB* LoB* Best Estimate * Line of Business Reserves MULTIPLE RESERVE RISK ASSESSMENTS Top Risk Example MULTIPLE RESERVE RISK ASSESSMENTS From Line to Group, from Gross to Net External Studies Internal Studies 8

  10. 05#J Reserves EXTENSIVE USE OF EXTERNAL CONSULTANTS EXTENSIVE USE OF EXTERNAL CONSULTANTS Enhanced by internal and external peer reviews • Role of external actuarial consultants on behalf of Hannover Re • recommendations for Home Office business segments during book closing • actuarial certificate for US/Bermuda operations • complete actuarial report for HR Group Non-Life after year-end • Other external actuaries • as outsources for Malaysia, Canada, Australia • as auditors for branches & subsidiaries • as second peer reviewer for Australia (as required by APRA since 2006) 9

  11. 04#N Reserves RESERVING PROCESS AT HR HOME OFFICE RESERVING PROCESS AT HR HOME OFFICE Strong actuarial controls • Segment matrix of 53 business segments • Line of business • Geographical split • Character of reinsurance (obl-fac, prop-NP) • Action plan during year • Actuarial calculations by GRM reserving actuaries • Actuarial calculations & recommendations by external consultant • Discussions with underwriters & board members • Close cooperation with Technical Accounting & Claims department • Data checks and actions for improvement • Reporting to Actuarial Committee • Quarterly review by Risk Committee 10

  12. Exposures COMPONENTS OF CATASTROPHE SIMULATION MODELS COMPONENTS OF CATASTROPHE SIMULATION MODELS Hazard Vulnerability Monetary Loss Event Generation Frequency Intensity Calculation of local intensities Loss estimations Calculation of insured losses Exposure databases Validation Treaty conditions 11

  13. Exposures DATA QUALITY IS KEY TO CATASTROPHE MODELLING DATA QUALITY IS KEY TO CATASTROPHE MODELLING Consistency: • Detection of accounts that are not part of any portfolio • Detection of locations found that have no location coverage • No line of business set • Unknown currencies found Geocoding: • Individual locations with high coverage not geocoded • Loading necessary for geocoding less than 95% Completeness: • Not all perils encoded in exposure • Construction/Occupancy classes set to default • Treaty settings specified by cedant may be incorrect • Structure of exposure Sources for underestimatingmodeled losses 12

  14. Exposures MARKET LOSS ESTIMATES US HURRICANE (A.I.R.) MARKET LOSS ESTIMATES US HURRICANE (A.I.R.) CATRADER 8.5 Near Term View: Occurrence vs. Aggregate in USD bn 13

  15. Exposures AIR MARKET LOSSES US HURRICANE AIR MARKET LOSSES US HURRICANE Long-Term (LT) vs. Near-Term (NT)* in USD bn *Incl. demand surge 14

  16. Exposures Enhancements in Cat.-Modeling 2006 OVERVIEW OF CALCULATION PROCEDURE Price calculation Modeled net loss cost (= technical rate from model) • Surcharge for not modeled loss components (demand surge etc.)* • Additional peril price / loadings (side peril tools, pareto) • Safety Margin • Admin. Expenses • Cost of Capital Charge • Targeted Net Profit • Brokerage = Gross Rate (= quoted price) Technical surcharges Non technical surcharges Distribution Expenses *New 15

  17. Exposures ORGANIZATION OF EXPOSURE MANAGEMENT Exposure Risk ORGANIZATION OF EXPOSURE MANAGEMENT Roles • Executive Board • determines the overall NatCat risk appetite in accordance with the global risk appetite by defining the maximum allowable use of capital for different return periods of the convoluted annual exceedance probability NatCat-curve • Group Risk Committee (RC) • Supervision of the overall risk measures and implementation of escalation processes • Non Life Executive Committee (NLEC) • Implementation of the defined risk measures into the underwriting • Decision-making body with respect to the capacity management: • Defines capacity limits by scenario and treaty department/business centre • Group Risk Management – Aggregate Control Department (GRM AGG) • Develops and maintenances tools for reliable aggregate control • Runs the aggregate control process and assists the NLEC in capacity management with special attention to profitability aspects • Close cooperation with and actuarial support of Group Protections • Group Protections • Informs and consults GRM AGG with respect to all retrocessions 16

  18. ~ EUR 0.2 bn. ~ EUR 0.1 - 0.2 bn. ~ EUR 0.1 bn. ~ EUR 1.9 - 2.2 bn. protection ~EUR 0.2 bn. ~ EUR 0.2 – 0.4 bn.2) ~EUR 0.7 bn. ~ EUR 0.4 bn. +expected premium Exposures SEVERAL LEVELS OF PROTECTION SAFEGUARD CAPITAL BASE Strong risk management 1) SEVERAL LEVELS OF PROTECTION SAFEGUARD CAPITAL BASE Our protection has never been better! Merlin CDO: EUR 1 bn. of reinsurance recoverables securitised ~ EUR 5.0 bn. 1) All figures are indicative values for 2007 2) Depending on peril 17

  19. Conclusion TRADEOFF BETWEEN TRANSPARENCY AND PRODUCTIVITY TRADEOFF BETWEEN TRANSPARENCY AND PRODUCTIVITY • Increasing pressure on transparency • by shareholders/analysts • by rating agencies • by supervisors • by clients/brokers • Increasing resources required • threat: limited availability (e. g. actuaries) • increased "unproductive work" required from underwriters Today Tomorrow The day after tomorrow Cutting-edge R/M + full transparency Delighted stakeholders Out of business (no clients) Black-box R/M, no transparency Disappointed stakeholders Out of business (no capital) State-of-the-art R/M Satisfied stakeholders Satisfied clients + sufficient transparency 18

  20. Thank you for your attention!

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  22. Conclusion RISK MANAGEMENT IS KEY RISK MANAGEMENT IS KEY Quantitative and qualitative view • Reinsurers offer various risk mitigation products • Reinsurers are part of worldwide financial markets stability considerations • Quantitative question No. 1: Sufficient capital:? • Qualitative question No. 1: Strong risk management processes ? • Quantitative answers: • Accounting Systems • Global (IFRS) • Local (HGB, US-GAAP) • Solvency Systems (Supervisors, Rating Agencies) • Standard Models (NAIC RBC, CAR, BCAR) • Internal Models • Qualitative answers: • ERM systems / qualitative checks • Market discipline / transparency Pillar I SolvencyII Pillar II Pillar III 1

  23. Conclusion STRICTLY REQUIRED: ECONOMIC VIEW Solvency II prerequisite STRICTLY REQUIRED: ECONOMIC VIEW Capital requirements for reinsurers and their clients must reflect business reality • Reinsurers fully support risk capital schemes based on economic principles • Major economic contribution of reinsurers: Worldwide diversification • Capital intense peak exposurers can be mitigated through worldwide spread • Diversification benefits go to direct insurers the same way as insureds benefit from diversification efforts of their direct insurers (principle of insurance) • Risk based solvency schemes therefore must reflect • Diversification achieved by reinsurers for their capital requirements • Capital relief for direct insurers achieved through reinsurance schemes • No artificial "barriers" for international business • Same risks should be treated with same capital requirements • Total Group approach • Available premium from all business segments = first layer of protection ! Reinsurer and their clients look for "fair treatment" 2

  24. € 100 m 1/200 year event Cal. EQ exposure € 100 m 1/200 year event European wind exposure € 4 m premium each -> € 96 m capital each Conclusion REINSURANCE IS TO PROTECT INSURER´S CAPITAL REINSURANCE IS TO PROTECT INSURER´S CAPITAL Capital intense local peak exposures can be mitigated through reinsurance Independence means: both events happening in the same year = 1/40.000 year event (neglectible under Solvency II standards) Reinsurer combining both exposures and both premiums needs € 92 m capital only to balance exposures with a non-exceedance probability of 99,9975% 3

  25. Conclusion DIVERSIFICATION REALLY MATTERS DIVERSIFICATION REALLY MATTERS Especially for international operations like reinsurers • Several types of diversification must be considered 1) • Within risk types (e.g. insurance risk from lines of business) (Level 1) • Across risk types (e. g. between insurance risk and asset risk) (Level 2) • Across entities (Level 3) • Across regulatory jurisdictions / geographies (Level 4) • Credit must be given wherever effective management of diversification can be demonstrated and stress tested • Simple factor models normally fail • Full or partial use of internal models (esp. for nat.cat.) will help • "Double counting of risk" must be avoided • For practical purposes a lead supervisor concept is necessary Risks are anything but linear! 1) Source: CRO Forum: A framework for incorporating diversification in the solvency assessment of insurers 4

  26. Conclusion KEY SOLVENCY II ASPECTS: SCR / MCR CALCULATION KEY SOLVENCY II ASPECTS: SCR / MCR CALCULATION From an international reinsurers' standpoint • Total Group approach • Available income is the "first line of defence" • Full premiums incl. expected risk margins and profits • Investment Income • SCR/MCR* requirements should attach beyond full income (operating ratios > 100) • Appropriate recognition of mitigation instruments without restrictions • Reinsurance / retrocession • Securitisations / Risk swaps • Asset liability management (ALM) and capital market instruments (e. g. hedging) • Sticking to the selected risk measure! • If a 1/200 probability over a one year time horizon guides the SCR it should be the guiding measure for the combination of all risks group wide! • "Adding up" various 1/200 approaches does not work "Economic approach" rules out "prudency on prudency" * SCR (Solvency Capital Requirement), MCR (Minimum Capital Requirement) 5

  27. Conclusion KEY SOLVENCY II ASPECTS: ELIGIBLE CAPITAL KEY SOLVENCY II ASPECTS: ELIGIBLE CAPITAL From an international reinsurers' standpoint • Full recognition of available capital • No artificial restrictions and/or haircuts • Risks should be reflected within SCR/MCR* calculation rather than arbitrary rules applied to certain balance sheet positions • Full recognition of hybrid capital • Full recognition of "soft capital" (e. g. in reserves), where it can be demonstrated and stress tested • Harmonised valuation principles • Market values wherever existing • Fair values according to market valuation principles (e.g. Cost of Capital approach) where necessary • Full recognition of any expected profits that are not considered within SCR/MCR calculation Double counting of risk must be avoided * SCR (Solvency Capital Requirement), MCR (Minimum Capital Requirement) 6

  28. Conclusion ACTUARIAL SUPPORT FOR ALL PARTS OF THE GROUP ACTUARIAL SUPPORT FOR ALL PARTS OF THE GROUP Various layered controls Majority Shareholder reserve study (annually) (by external consultant on behalf of TALANX) Group-wide non-life reserve study on annual basis (by external consultant on behalf of Hannover Re) Recommendations for year-end (by consultant) Peer Reviews & internal calculations by Group Risk Management (GRM) Home Office Calculations by GRM reserving actuaries 5 branches / subsidiaries by external actuaries 6 branches subsidiaries by HR Group actuaries 7

  29. Conclusion PROCESSES GROUP RISK MANAGEMENT - MODELLING Risk No. 2: Exposures PROCESSES GROUP RISK MANAGEMENT - MODELLING Evaluation, Quality Assurance, Licensing, IT-Coordination Training, Communication, Education Data-Quality-Support, Quotation Service, Hotline-Support Preparation of Model-Databases for Accumulation Controlling PML-Evaluation, Nat.-Cat.-Research 8

  30. Conclusion VENDOR-MODELS LICENSED BY HANNOVER RE VENDOR-MODELS LICENSED BY HANNOVER RE ALM RMS RISKLINK DLM • Exposure Input: • Excel / Access • Vendor-Data formats • UNICEDE/2 • UNICEDE/upx AIR CLASIC/2 • Result Output: • EP-curve • PML • Event Loss Table • Scenarios per peril AIR CATRADER/2 Hannover Re Side Peril Tools 9

  31. Conclusion EXPERTISE OF MODEL VENDORS COMPANIES EXPERTISE OF MODEL VENDORS COMPANIES • Geophysics • Geologists • Seismologists • Meteorologists • Climate Researchers • Hydrologists • Building Engineers • Actuaries • Programmers • Insurance / Reinsurance Market Experts 10

  32. Conclusion WINDSTORM HAZARD: NUMERICAL WEATHER PREDICTION WINDSTORM HAZARD: NUMERICAL WEATHER PREDICTION • Variation of parameters and initial characteristics leads to a variety of different storms which are the basis for the stochastic storm catalogue of the models 11

  33. Conclusion AGGREGATE CONTROL PROCESS Exposure Risk AGGREGATE CONTROL PROCESS in Detail • Basis of the aggregate control process are capacities for each major scenario by business unit and for different return periods derived from the overall risk appetite • Capacities will be adjusted before each major renewal by approval of NLEC • During renewal all data relevant for aggregate control must be entered into our internal systems by underwriters and modellers • GRM AGG monitors encoding of data and development of aggregates on a regular basis using special approximation methods • After renewal GRM AGG calculates aggregates and prepares detailed reports • Aggregates gross and net for all major scenarios for different return periods using modelled portfolio results from vendor models where possible • Deterministic aggregates gross and net on basis of Realistic Disaster Scenarios • Annual exceedance probability curves for rating agency models and internal DFA-model by stochastic simulation with ReMetrica • Before renewal of retro protections GRM AGG supports Group Protections in • pricing for offered retrocession products and optimization the retrocession structure • Actuarial support for securitizations 12

  34. Conclusion AGGREGATE CONTROL PROCESS Exposure Risk AGGREGATE CONTROL PROCESS Aggregate Reporting by GRM AGG to ... • Risk Committee • utilization of the overall risk measure as defined by the Executive Board and S&P Net Gap • Realistic Disaster Values for the main peak perils gross and net • Severe breach of rules regarding capacities and enconding standards • Non Life Executive Committee • Gross and net aggregates on scenario basis by business unit and information about over-utilization of capacities • Realistic Disaster Values for the main peak perils gross and net • Business Units • Capacity utilization during renewal by intranet • Detailed aggregate reports after renewal for KonTrag, Renewal Reports and local supervisory authorities • GRM DFA • Convoluted Annual Exceedance probability curve on RDS basis as input for the internal DFA-model • Group Protections • Aggregate curves by scenario and convoluted as information for brokers/retrocessionaires/investors • Corporate Communications • All relevant aggregate information requested for the rating process • Hannover Re Risk Cockpit and Talanx 13

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