Major discretionary decisions and estimates

Preparation of the consolidated financial statement to a certain extent entails taking discretionary decisions and making estimates and assumptions that have implications for the assets and liabilities recognised, the consolidated statement of income and contingent claims and liabilities. Actual results may deviate from these estimates.

As a rule, these decisions and assumptions are subject to ongoing review and are based in part on historical experiences as well as on other factors, including expectations in respect of future events that currently appear reasonable. The processes in place both at the Group level and at subsidiary level are geared towards calculating the values in question as reliably as possible, taking all relevant information into account. It is further ensured – inter alia, through uniform Group accounting guidelines – that the standards laid down by the Group are applied in a consistent and appropriate manner.

Estimates and assumptions that entail a significant risk in the form of a material adjustment within the next financial year to the carrying amounts of recognised assets and liabilities are discussed below. In addition, further details can be found in the subsection “Summary of major accounting policies”, the section “Nature of risks associated with insurance contracts and financial instruments”, and directly in the remarks on individual items.

Technical provisions: As at 31 December 2013, the Group recognised loss and loss adjustment expense reserves in the amount of EUR 33,755 million and benefit reserves in the amount of EUR 49,767 million.

Loss and loss adjustment expense reserves are created for claims that are uncertain in terms of their amount or when they will become due. In general, these reserves are recognised in the amount that is likely to be claimed, using best-estimate principles that are based on actuarial methods, such as the chain ladder method. The development of a claim until expected completion of the run-off is projected on the basis of statistical triangles. The actual amounts payable may prove to be higher or lower. Any resulting run-off profits or losses are recognised as income or expenses. The level of reserves is regularly reviewed – not only internally but also by external actuaries – and an external expert assessment of the reserves is commissioned in order to minimise the reserving risk.

In the area of life primary insurance and Life/Health Reinsurance, the determination of provisions and assets is crucially dependent on actuarial projections of the business. Key differentiating criteria include age, smoking status of the insured individual, metrics of the insurance plan, policy duration, policy amount and duration of premium payment. In this context key input parameters are either predetermined by the metrics of the insurance plan (e.g. costs included in the calculation, amount of premium, actuarial interest rate) or estimated (e.g. mortality, morbidity and lapse rates). These assumptions are heavily dependent, for instance, on country-specific parameters, sales channel, quality of underwriting and type of reinsurance. For the purposes of US GAAP accounting, these assumptions are reviewed as at each balance sheet date by specialised life insurance actuaries and subsequently adjusted in line with the actual projection. The resulting effects are reflected, for instance, in true-up adjustments in “Other intangible assets”, “Insurance-related intangible assets” (PVFP), “Deferred acquisition costs”, “Provision for premium refunds” (provision for deferred premium refunds) and, where applicable, “Benefit reserve” (funding of terminal bonuses).

Fair value and impairments of financial instruments: Financial instruments with a fair value of EUR 50,997 million were recognised as at the balance sheet date, including financial assets of EUR 49,970 million and financial liabilities of EUR 1,027 million. Fair value and impairments of financial instruments, especially for those not traded on an active market, are determined using appropriate measurement methods. In this regard, cf. our remarks on the determination of fair values as well as the applicability criteria for assessment of the need to take impairments on certain financial instruments set forth in the subsection “Investments including income and expenses” (section “Summary of major accounting policies”). The allocation of financial instruments to various levels of the fair-value hierarchy is described under item 12 “Fair value hierarchy” in the Notes. To the extent that significant measurement parameters are not based on observable market data (level 3), estimates and assumptions play a major role in determining the fair value of these instruments.

Impairment testing of goodwill (carrying amount as at 31 December 2013: EUR 1,105 million): The Group tests for impairment of goodwill. Insofar as the recoverable amount is based on calculations of the value in use, appropriate assumptions – such as sustainably achievable results and growth rates – are used as a basis (cf. item 1 in the Notes, “Goodwill”). In addition, the Group performs sensitivity analyses for the most important parameters, such as anticipated combined ratio and discount rates.

Deferred acquisition costs: As at the balance sheet date, the Group recognised acquisition costs in the amount of EUR 4,513 million. The actuarial bases for amortisation of deferred acquisition costs are continuously reviewed and adjusted where necessary. Impairment tests are carried out by means of regular checks on, for example, profit developments, lapse assumptions, and default probabilities.

Present value of future profits (PVFP) on acquired insurance portfolios: The PVFP (EUR 1,182 million as at 31 December 2013) is the present value of anticipated future net cash flows from existing life insurance contracts, life reinsurance contracts and investment contracts at the time of acquisition and is determined respectively Purchase cost using actuarial methods. Uncertainties may arise with regard to the expected amount of these net cash flows.

Realisability of deferred tax assets: Estimates are made in particular with respect to the utilisation of tax loss carry-forwards, first and foremost in connection with deferred tax liabilities recognised in the balance sheet and anticipated future earnings. The Group’s tax department tests for impairment of key deferred tax assets. The Group’s deferred tax assets amounted to EUR 548 million as at the balance sheet date.

Provisions for pensions and other post-employment benefits: As at the balance sheet date, pension liabilities under defined benefit plans – net of plan assets – amounted to EUR 1,695 million. The present value of pension liabilities is influenced by numerous factors based on actuarial assumptions. The assumptions used to calculate net expenses (and income) for pensions include discount rates, the estimated rate at which salaries will increase and pension increases. These parameters take into account the individual circumstances of the units concerned and are determined with the aid of actuaries. For detailed remarks on how pension liabilities are determined, including a depiction of sensitivity analyses in the event of deviations from certain key assumptions, cf. item 23 in the Notes, “Provisions for pensions and other post-employment benefits”.

Provisions for restructuring (31 December 2013: EUR 73 million): Provisions for restructuring recognised by the Group are based on official restructuring measures of which the affected employees have been informed, and they include inter alia, assumptions in respect of the number of employees affected by the redundancies, the amount of the severance payments due and costs in connection with terminating contracts The Group’s accounting guidelines establish the requirements for creating a restructuring provision as well as for the cost components for which provisions may be created.