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BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen

BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

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Page 1: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE?

24 October 2011

Ludger Arnoldussen

Page 2: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Key topics and challenging issues for the insurance

business

2

Euro

crisis/Turbulence in

the financial markets

Political

uncertainty

High natural

catastrophe losses

Increasing

accumulation

risks

Emerging

risks

Global

economic

networking

Changing

regulatory framework

Low-interest-rate

environment

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 3: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Falling interest rates have

a positive effect on the

capital base of insurers,

but an adverse effect on

future investment income.

Low-interest-rate

environment has to be

reflected in the pricing,

esp. in long-tail business.

Substantial international

differences despite

generally low-interest-

rate environment.

Generally low-interest environment – Crisis signalled

by sharply falling yields throughout the year

Yields on ten-year government bonds

3

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

Jan. 11 Feb. 11 Mrz. 11 Apr. 11 Mai. 11 Jun. 11 Jul. 11 Aug. 11 Sep. 11 Okt. 11

UK

USA

Deutschland

Source: Bloomberg

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 4: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Low-interest-rate environment:

Shock or opportunity for the industry?

Reduced investment income

Capital relief measures may be necessary

Low interest rates also have a salutary effect on the non-life market (cash-flow-

underwriting opportunities are limited)

Reinsurers have to reflect the low-interest-rate environment in their pricing

Solvency II – the insurance industry in Europe is on the right track

4

Low interest rates make price increases necessary, especially in

the case of long-tail risks.

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 5: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Euro debt crisis: Present situation

Current bywords – Maastricht treaty and eurobonds:

Amending the Maastricht treaty to address future challenges

Sanctions and regulations to ensure the success of the treaty

Fiscal union and a common budgetary policy are a precondition of eurobonds

Effective mechanisms for taking action at European level

5 24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 6: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Contingent business interruption (CBI)

The problem

6

Incident

2nd-tier suppliers

2nd-tier suppliers

Customer

Utility

Insured business

1st-tier supplier

1st-tier supplier

Claim

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 7: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

CBI: Critical supply industries

7

Definition of critical supply industries:

Industries that produce parts on which other industries are highly dependent and whose

failure could lead to a material CBI loss in those industries

Critical supply industries identified in the context of the CBI underwriting strategy:

Semiconductor production Automotive suppliers

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 8: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Combination of country/region, accumulation hazard and the particular supply industry

CBI: Critical scenarios

8

Semiconductor production Automotive suppliers

Japan earthquake Japan earthquake

Japan typhoon Japan typhoon

Taiwan earthquake US Midwest earthquake

Taiwan typhoon US LA/California earthquake

US Pacific Northwest earthquake

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 9: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Earthquake,

tsunami

Japan,

11 March

Earthquake

New Zealand, 22 Feb.

Cyclone

Yasi

Australia, 2

Feb.

Landslides, flash floods

Brazil, 12/16 Jan

Floods,

flash floods

Australia

Dec. 2010–Jan. 2011

Severe weather, tornadoes

USA, 22–28 April

Severe weather, tornadoes

USA, 20–27 May

Wildfires

USA, April/Sept.

Earthquake

New Zealand, 13

June

Floods

USA, April–May

Number of events: 550

Geophysical events

(Earthquakes, tsunamis, volcanic eruptions)

Meteorological events

(Windstorms)

Hydrological events

(Floods, mass movements)

Selection of major loss events (see

table)

Natural catastrophes

Climatological events

(Temperature extremes, droughts, wildfires)

Drought

USA,

ongoing

Hurricane Irene

USA, Caribbean

22 Aug.–2 Sept.

Wildfires

Canada, 14–22 May

Drought

Somalia

ongoing

Floods

Pakistan

Aug.–Sept.

Floods

India,

June–Aug.

Floods,

landslides

Thailand, Cambodia,

Vietnam, Aug.–Sept.

Natural catastrophes January–September 2011

© 2011 Munich Reinsurance Company, Geo Risks Research, NatCatSERVICE 24.10.2011 9 Is the market ready to change? / Ludger Arnoldussen

Page 10: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Natural hazards in Europe

Munich Re’s own models are regularly checked and optimised using all available information:

Our own analysis results

Studies like the GDV’s “Scenarios for Germany – Impacts of climate change on the loss situation in the

insurance industry”

Findings produced by external models

Conclusion:

Windstorm modelling has improved thanks to new data on current storms and revised historical data.

The updating of Munich Re’s Storm Europe model results overall (including in Germany) in an increase in

the burning cost

24.10.2011 10 Is the market ready to change? / Ludger Arnoldussen

From the insurers’ perspective, the reinsurance structure may need

adjustment to maintain the present level of protection.

Munich Re will continue to make available its previous high capacity

provided technically adequate prices are achieved.

Page 11: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Renewals 2011 – First evidence of improved prospects

11

Renewals 2011 – Munich Re's portfolio

% 100 –15.8 84.2 5.1 15.1 104.3

€m 10,596 1,678 8,918 540 1,595 11,052

Total renewable

Cancelled Renewed Increase on

renewable

New business

Estimated outcome

Change in premium: +4.3%

Thereof price movement: +1.0%

Thereof change in exposure for our share: +3.3%

Factors putting upward pressure on pricing

Fragmentation of p-c reinsurance market

Prolonged low-interest rate environment –

Quite likely scenario

Reserve releases drying out – Redundancies largely

exhausted

Introduction of RMS11 – Impact to become

increasingly visible

Reduced capacity – Result of large losses, but still

artificially inflated industry capital

Stable Expected price change Increasing

Examples

Loss-affected segments

Nat cat business

Large commercial

business

Specific motor markets

Examples

US casualty

Proportional

business

Munich Re actively managing the reinsurance cycle – Overall improving

prospects with differing characteristics depending on business line and area

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 12: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Future prospects

Reinsurance and primary insurance market further affected by capital market

fluctuations, primarily due to debt crisis and low-interest-rate environment

Reinsurance markets remain fragmented

Cycles flatten out

12

Strict focus on profitability is more vital than ever in times of

major uncertainty.

24.10.2011 Is the market ready to change? / Ludger Arnoldussen

Page 13: BADEN-BADEN 2011 - IS THE MARKET READY TO CHANGE? · BADEN-BADEN 2011 IS THE MARKET READY TO CHANGE? 24 October 2011 Ludger Arnoldussen . Key topics and challenging issues for the

Disclaimer

This presentation contains forward-looking statements that are based on current

assumptions and forecasts of the management of Munich Re. Known and unknown

risks, uncertainties and other factors could lead to material differences between the

forward-looking statements given here and the actual development, in particular the

results, financial situation and performance of our Company. The Company assumes

no liability to update these forward-looking statements or to conform them to future

events or developments.

13 24.10.2011 Is the market ready to change? / Ludger Arnoldussen