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Biometric Risks

Biometric risks in life insurance refer mainly to the risk that the company has to pay larger mortality, disability or morbidity benefits to insured or that the company is obliged to pay pensions to the policyholder for a longer time (longevity risk) than the company has anticipated when pricing the policies.

Because Mandatum Life's right to increase tariffs or change terms and conditions is restricted, longer maturities of policies increase the 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, 2010 and 2009" shows the insurance risk result in Mandatum Life's Finnish life insurance policies. The ratio of the actual claims costs to the assumed was 78 per cent in 2010 (87 per cent in 2009). Year 2010 risk result includes a one-off item of EUR 4.7 million which is due to a change in technical basis of claims reserve.

Sensitivity of the insurance risk result can also be assessed on the basis of the information in the table. For instance an increase of mortality by 100 per cent would increase the amount of benefit payments from EUR 14 million to EUR 28 million.

Claim ratios after reinsurance, Mandatum Life, 2010 and 2009

  2010 2009

EURm

Risk income

Claim expense

Claim ratio

Risk income

Claim expense

Claim ratio

Life insurance

37.9

21.7

57%

40.5

24.8

61%

Mortality

23.4

14.2

61%

26,8

15.4

57%

Morbidity

14.5

7.5

52%

13.7

9.4

69%

Pension

61.0

55.5

91%

49.9

53.9

108%

Individual pension

9.5

10.0

106%

9.9

10.4

105%

Group pension

51.5

45.5

88%

40.0

43.5

109%

Mortality

46.2

42.3

92%

34.9

39.4

113%

Disability

5.3

3.2

60%

5.1

4.1

80%

Mandatum Life

98.9

77.2

78%

90.4

78.7

87%

 

Longevity risk is the most critical biometric risk in Mandatum Life. Most of the longevity risk arises from the Group pension portfolio. The main mortality uncertainties in the Group pension portfolio are related to the socio-economic structure of the insured and the future mortality trend among the relatively old insured. In the individual pension portfolio the longevity risk is less significant because most individual pension policies are fixed term annuities including death cover compensating the longevity risk.

The annual longevity risk result and longevity trend is analysed regularly. The longevity risk result of group pension for the year 2010 was EUR 3.9 million, but last two years' total longevity result is slightly negative. The assumed life expectancy related to the technical provisions for group pensions was revised in 2002 and additional changes were made 2007.

Mortality risk result is positive and the mortality trend has been favourable to the company. Possible pandemics are 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 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 discount rate risk, lapse risk and surrender risk.

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