Reinsurance credit risk

In addition to debt and derivative financial instruments, the Group is exposed to credit risk through the exposure to reinsurance counterparties to which part of the business is ceded. In particular, the ability by reinsurers to fulfill contractual obligations towards the Group is monitored.
The Group centrally sets the main reliability and solvency criteria, which take into account the risk exposure and the probability of default of each reinsurance counterparty.

The main criterion consists in the definition of a maximum exposure transferable to each reinsurer. In principle, the maximum liability transferable to an individual reinsurer for each reinsurance programme should not exceed a given percentage of its shareholder equity. Generally, such exposure is further reduced according to the rating provided by S&P’s or equivalent and to the line of business being considered. Based on the features of risk being transferred, a maximum amount threshold has been established. For long-tail business more restrictive criteria are adopted.
Additionally, in order to achieve the best spread of credit risk, a maximum share is generally defined for each reinsurer, per contract.

The Group uses the valuations provided by the main rating agencies (S&P’s and equivalent) to attribute a rating to each reinsurance counterparty.

(€ mln) 31.12.2011 31.12.2010
AAA 76.6 76.4
AA 3,382.4 2,206.7
A 1,143.5 2,375.4
BBB 36.3 62.0
Non investment grade 12.5 3.1
Not Rated 1,026.7 1,041.7
Total 5,678.0 5,765.3

The table demonstrates that the careful criteria for the selection of reinsurers adopted by the Group over the past allowed Generali to have a significant concentration of reinsurance credit risk with high rating counterparties. The small percentage of AAA counterparties is due to the limited size of the market with this rating. The changes in rating recorded in the reporting period also explain eventual variations which succeed in the following reporting periods.
With regard to “not rated” counterparties, these are often reinsurers that are no longer active in the market and are consequently no longer rated by agencies. However, they are not necessarily less strong from a financial perspective; on the contrary, they are often part of important and high rating insurance Groups that decided to stop their reinsurance activity. Furthermore, in some cases they represent mutual companies or captive companies of big industrial groups, which, even if they have a good financial position, are not rated.
Under some circumstances, local regulations, market practice or specific types of business allow the Group to benefit from mitigation of the related reinsurance credit risk through deposits from reinsurers and/or letters of credit as a guarantee on ceded reserves.