“Recent volatility
and future strategy
in the insurance
industry”
September 2003
Nikolaus von Bomhard
Münchener Rück
Munich Re Group
Munich Re
Content
– Volatility and capital conditions
– Consequences for strategy
– Who will be the future winners?
2
Munich Re
Volatility and capital conditions
3
Volatility and capital conditions
Munich Re
Recent volatility noticeable above average
50
45
40
35
30
25
20
15
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
10
Source: VIX, Chicago Board Options Exchange
4
Munich Re
Volatility and capital conditions
Loss of capacity in the insurance industry
600
Market value of the Euro Stoxx Insurance
Reduction in capacity
(1.1.1992 = 100)
-51,3%
500
– Investment losses: > US$ 200bn
since 2000 for P&C insurers
worldwide
400
– Major losses: e.g. WTC ~ US$ 50bn
300
– Capacity withdrawals
(several companies since 2001,
e.g. Gerling Global Re)
200
– Downgrades of insurers and
reinsurers by rating agencies
100
– New capacity, e.g. in Bermuda,
unable to fill the gap
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
5
Volatility and capital conditions
Munich Re
Recent developments in regulation
Tightening of reinsurance regulation
– Financial Stability Forum and IAIS
– EU considerations on a reinsurance directive
– Germany: Fourth Financial Markets Promotion Act
Solvency requirements for reinsurers
– EU “fast-track” approach
– Solvency II: a risk-based approach
6
Munich Re
Volatility and capital conditions
How much capital do we need?
Current situation: Significant differences in approaches to
quantifying available and required risk capital
Example 1: Differences
between stakeholders
Regulatory
authorities
Rating
agencies
Equity
analysts
Accounting
bodies
Internal
company
view
Example 2: Differences within
stakeholder category
Shareholder view
7
Consequences for strategy
Munich Re
8
Consequences for strategy
Munich Re
Strategic options
“Ride the tide”
“Rest in safe haven”
9
Munich Re
Consequences for strategy
The choice depends…
Underwriting risks
“Ride the tide”
Investment risks
“Rest in safe haven”
10
Consequences for strategy
Munich Re
“Rest in safe haven” and CR
CR in %
140
Combined ratios per market 1992–2001
France
120
Germany
100
US
80
60
40
20
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
11
Consequences for strategy
Munich Re
Major considerations
$
Focus on risk-adequate price
Improve risk management:
1. Prevent the big bang
2. Care about a creeping-death scenario
3. Connect the liability and asset sides
of the balance sheet
4. Manage more and more complex know-how
12
Munich Re
Consequences for strategy
Focus on risk-adequate price
(1)
Technical
price
The opportunistic view
(3)
Technical
price
(2)
Follow the fortunes
Technical
price
Focus on risk-adequate price
13
Munich Re
Consequences for strategy
Prevent the big bang
Example: Budgeting and monitoring of CAT covers
CAT
budget
Risk
capital
RoE definition
Pricing
Regional
underwriting
14
Munich Re
Consequences for strategy
Care about a creeping-death scenario
Number
Initial
Publications in
expert
scientific
discussions
journals
Conferences
Frequency of
weak signals
According to Igor Ansoff's theory of weak
signals, modified
Public
awareness
from
press/media
Degree of uncertainty
Options for action
Politics
Political parties
NGO (nongovernmental
organisations)
activities
Parliament
Laws
Standards
Company
statements
Regulations
Time
15
Munich Re
Consequences for strategy
Connect the liability and asset sides of the balance sheet
Example: Introducing an ALM-based SAA
1. Constraints
 Liabilities structure
 Market forecast
 Regulation
 Rating
 Liquidity
 …
 Distinguish
target function,
steering and
constraints
2. Control quantities
 Profit requirements
 Asset risk capital
 Level of confidence,
shortfall probability
3. Target function with regard to SAA optimisation
 Economic Value Added (EVA), Return on Risk-Adjusted
Capital (RoRaC),Total Return,…
16
Munich Re
Consequences for strategy
Manage more and more complex know-how
Overview of knowledge management organisation at Munich Re
Centre of
Competence
Advisory Board
Divisional KM
Knowledge
networks
Knowledge
networks
support the
handling of
technical
knowledge
DKM
Property
Casualty
Marine
Claims
E1
E2/LA
AAA
NA
CUGC
SFR
L/K
Creates the
basis of KM
within the
divisions and
provides all
employees
with access
to relevant
knowledge
17
Munich Re
Who will be
the future winners?
18
Who will be the future winners?
Munich Re
Insurers/Reinsurers…
…with broad access to clients
… with sophisticated tools to manage risks
… with cost-efficient internal procedures
… with efficient knowledge management
… with profits from technical underwriting
complemented by financial returns
… with the ability to convince capital markets of their
performance in order to have access to new capital
19
Thank you!
Münchener Rück
Munich Re Group