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Münchener Rück Munich Re Group. “Recent volatility and future strategy in the insurance industry” September 2003 Nikolaus von Bomhard. Content. Volatility and capital conditions Consequences for strategy Who will be the future winners?. Volatility and capital conditions. - PowerPoint PPT Presentation
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Münchener RückMunich Re Group
“Recent volatility and future strategy in the insurance industry”
September 2003
Nikolaus von Bomhard
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Content
– Volatility and capital conditions
– Consequences for strategy
– Who will be the future winners?
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Volatility and capital conditions
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Recent volatility noticeable above average
Volatility and capital conditions
10
15
20
25
30
35
40
45
50
Source: VIX, Chicago Board Options Exchange
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Loss of capacity in the insurance industry
Volatility and capital conditions
100
200
300
400
500
600
1992 1993 1994 1995 1996 19971998 1999 2000 2001 2002 2003
-51,3%
Market value of the Euro Stoxx Insurance(1.1.1992 = 100)
Reduction in capacity
– Investment losses: > US$ 200bn since 2000 for P&C insurers worldwide
– Major losses: e.g. WTC ~ US$ 50bn
– Capacity withdrawals (several companies since 2001, e.g. Gerling Global Re)
– Downgrades of insurers and reinsurers by rating agencies
– New capacity, e.g. in Bermuda, unable to fill the gap
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Recent developments in regulation
Volatility and capital conditions
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
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How much capital do we need?
Current situation: Significant differences in approaches to quantifying available and required risk capital
Regulatoryauthorities
Ratingagencies
Equityanalysts
Accountingbodies
Internalcompany
view
Example 2: Differences within stakeholder category
Shareholder view
Convergence to Convergence to
Example 1: Differences between stakeholders
Volatility and capital conditions
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Munich ReConsequences for strategy
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Strategic options
Consequences for strategy
““Ride the tide”Ride the tide” ““Rest in safe haven”Rest in safe haven”
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The choice depends…
Consequences for strategy
““Ride the tide” Ride the tide”
Underwriting risks
““Rest in safe haven”Rest in safe haven”
Investment risks
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“Rest in safe haven” and CR
Consequences for strategy
0
20
40
60
80
100
120
140
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
CR in
%
France
Germany
US
Combined ratios per market 1992–2001
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Major considerations
Consequences for strategy
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
$
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Focus on risk-adequate price
Consequences for strategy
Technical price
The opportunistic view
(1) Technical price
Follow the fortunes
(2)
Technical price
Focus on risk-adequate price
(3)
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Prevent the big bang
Consequences for strategy
CATbudget
Regional underwriting
Riskcapital
MonitoringLinking
PricingRoE definition
Example: Budgeting and monitoring of CAT covers
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Care about a creeping-death scenario
Consequences for strategy
Number
De
gre
e o
f u
nc
ert
ain
ty
TimeAccording to Igor Ansoff's theory of weak signals, modified
Options for action
Frequency ofweak signals
Initialexpert
discussions
Publications inscientificjournals
Conferences
Publicawareness
frompress/media
NGO (non-governmentalorganisations)
activities
Politics
Political parties
Parliament
Companystatements
Laws
Standards
Regulations
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2. Control quantities Profit requirements Asset risk capital Level of confidence,
shortfall probability
Connect the liability and asset sides of the balance sheet Example: Introducing an ALM-based SAA
3. Target function with regard to SAA optimisation Economic Value Added (EVA), Return on Risk-Adjusted
Capital (RoRaC),Total Return,…
1. Constraints Liabilities structure Market forecast Regulation Rating Liquidity …
Distinguish target function,
steering and constraints
Consequences for strategy
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Advisory Board
L/KE1 E2/LA AAA NA CUGC SFR
Property
Casualty
Marine
Claims
Knowledge networksKnowledge networks
Divisional KMDivisional KM
Manage more and more complex know-how
Overview of knowledge management organisation at Munich Re
Centre of Competence
Knowledge networks support the handling of technical knowledge
Knowledge networks support the handling of technical knowledge
DKM DKM
Creates the basis of KM within the divisions and provides all employees with access to relevant knowledge
Creates the basis of KM within the divisions and provides all employees with access to relevant knowledge
Consequences for strategy
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Who will be the future winners?
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Insurers/Reinsurers…
Who will be the future winners?
…with broad access to clients
… with sophisticated tools to manage risks
… with cost-efficient internal procedures
… with efficient knowledge management
… with the ability to convince capital markets of their performance in order to have access to new capital
… with profits from technical underwriting complemented by financial returns
Thank you!
Münchener RückMunich Re Group