Munich Re Group Back to basics. Fox-Pitt, Kelton conference Solvency II: A life-changing experience. Charlie Shamieh Group Chief Risk Officer

Transcription

1 Back to basics Fox-Pitt, Kelton conference Solvency II: A life-changing experience Charlie Shamieh Group Chief Risk Officer 6 December 2006

2 A few facts & figures Approx. 150 active reinsurers globally with ca. US$ 170bn in premiums Non-life reinsurance (RI) premiums approx 80%/ life reinsurance premiums approx 20% US reinsurers (incl. US subsidiaries of Europeans) have approx 51%, Western Europe 31% of global market German reinsurance groups as the single most important European market with over 21% of global market Key exporters of reinsurance are Bermuda, Germany and Switzerland Solvency II can not take a parochial approach to the treatment of reinsurance must recognise global nature of reinsurance business Source: G30 Report Reinsurance and International Financial Markets, Role of reinsurance under Solvency II Facilitates separation of origination from portfolio composition More efficient source of capital for (relatively) undiversified insurers Insurance market shock absorber Instrument for primary insurers to optimise their risk (volatility) and return profile Business plan enabler for primary insurers Highly effective ladder of intervention in crisis situations Essential instrument of risk and capital management for primary insurers back to basics for reinsurers 3

3 A world leading reinsurer with a significant primary insurance business Munich Re Group Premiums 2005 breakdown by segment (consolidated) Reinsurance Property-casualty 13,699 (35.9%) ( 2.1%) Primary insurance Property-casualty 5,219 (13.6%) ( 0.8%) Health expected to become a 3rd pillar over time Reinsurance Life: 5,889 (15.4%) ( 8.9%) Health: 1,063 (2.8%) ( 9.6%) Primary insurance Life: 7,437 (19.5%) ( 4.5%) Health: 4,892 (12.8%) ( 7.8%) Reinsurance Gross premiums written 2005: 22.4bn Diversification as key success factor Full range of products: from traditional reinsurance to alternative risk financing Leading in non life and life reinsurance worldwide for 126 years Best reinsurer overall by cedant vote 1 Primary insurance Gross premiums written 2005: 17.6bn (including Karlsruher) Germany-based with growing importance in selected European markets 30 million clients in Europe, thereof 15 million in Germany No. 2 in Germany European market leader in health and legal expenses 1 Flaspöhler-Survey In the lead up to Solvency II, rating agencies continue to set the pace for capital adequacy standards Illustration of 2005 changes for NatCat 1 Mono-liner/Single scenario 5mpacts for BBB standard % 250 MR portfolio impacts Illustrative EQ - region 1 EQ - region 2 Hurr. - region 3 Hurr. - region 4 Flood - region 5 MR diverisifed NatCat portfolio Requirement for AA range capital Internal model standard used The 2005 rating agency strengthening of NatCat required capital had a significant impact on undiversified players for Munich Re it was business as usual 1 Based on MR Geo Research and Analysis of the effect on required capital of the shift from a 1 in 100 Year (baseline = 100%) to a 1 in 250 year PML basis as per the S&P model changes. For MR portfolio calculations, the AA range target is set at 160% of the 1 in 250 year standard. The MR internal model calibrates capital requirements to withstand two 1 in 100 Year losses. 5

4 Economic capital models increasingly accepted Solvency II: CEIOPS draft advice to European Commission (CP 14, July 2006): proposal to give quantitative recognition for group diversification effects where internal model is approved Rating agencies assessment of capital adequacy developments during A.M. Best will consider output from internal models as part of increased focus on ERM January February June Moody's announces a greater role for company-built internal capital models in rating process S&P's ERM framework provides for increasing use of results of internal economic capital models for insurers with strong or excellent ERM Fitch Exposure Draft: In-house models together with PRISM and regulatory models to be used in assessment of absolute capital adequacy Munich Re will benefit from a more efficient balance sheet 6 MR disclosure follows G30 report recommendation on transparency Breakdown of Group required risk capital in bn Risk category 1 Reinsurance segment Property-casualty Life and health Market Credit Total reinsurance segment Primary insurance segment Market Credit Total primary insurance segment Munich Re Group total 1 January 2006 Stand-alone Group Risk categories broadly based on refined "Fischer II" risk categories recommended for standardised industry disclosures. Munich Re Group includes an allowance for operational risk in each of the risk categories. 2 The measured diversification effect depends on the number of risk categories considered. Represents diversification effect recognised in internal model diversification effects between legal entities within primary segment and between primary and reinsurance segment are not recognised. Risk type diversification within primary segment legal entities is recognised January 2005 Stand-alone Group Simple sum Segment diversification effect Property-casualty Life and health Simple sum Segment diversification effect in %

5 Credit taken for diversification in group internal model follows accepted industry standards and is supported by capital mobility Munich Re Group: High level of capital mobility supports credit taken for diversification "Banks typically operate from a single (or a small number) of balance sheets, and they finance the aggregate risk of the group from a single 'pot' of capital; Insurers typically have to have multiple separate legal entities, and so have multiple 'pots' of capital supporting the aggregate risk profile; Global reinsurers that operate from a dominant branch structure are closer to banks in this respect than they are to primary insurers with multiple subsidiaries" Diversification level definitions used in CRO Forum study 1 Level 1: Within risk types Level 2: Across risk types Level 3: Across entities within one geography Level 4: Across geographies or regulatory jurisdictions Measured diversification effects across CRO Forum member companies (Levels 1 to 4) 1 20% 30% 40% 50% 60% 1 Source: A framework for incorporating diversification in the solvency assessment of insurers, The Chief Risk Officer Forum, 10 June A B C D EF G HI J K Top 5 in a very narrow range 55 60% 8 Our approach to diversification is inextricably tied to a conservative assessment of capital fungibility Diversification within a legal entity allowed? Subject to satisfaction of minimum solvency requirements Allocation of reinsurance segment business by legal entities 1 in % Property-casualty Life and health Diversification between legal entities allowed? <100% Where capital and/or risk fungibility is assured Where capital and/or risk fungibility is subject to material frictional costs Subsidiaries Parent company and branches 1 Based on gross written premiums CY 2005 In reinsurance segment, dominant parent/branch structure and intra-group retrocession supports credit taken for diversification 2 Our captured diversification benefit is a "hard" benefit 2 Although calculated, no credit is taken for diversification between legal entities in primary segment and no credit taken for diversification between primary and reinsurance segments either conservative approach 9

6 Recognition of Group diversification benefits Munich Re s current conservative approach Diversification benefits Measured vs. recognised in internal model in bn Attribution of diversification benefit between PI and RI Within reinsurance Between legal entities in primary insurance Between reinsurance and primary insurance Key drivers of between RI and PI diversification Credit Market Life and health Illustrative Recognised in internal model Measured, not recognised Propertycasualty Primary P-C portfolio composition (CY 2005 GWP) Industrial Commercial Personal lines Note Global reinsurance diversification benefits highly fungible: measured and recognised Between legal entity primary insurance diversification benefits at present: measured not recognised Between primary and reinsurance diversification benefits highly fungible: measured not recognised on account of size of PI (conservative) Diversification between PI and RI strongest for P-C insurance risks These benefits are highly fungible on account of existence of intra-group reinsurance arrangements (respecting solvency admissibility constraints of primary companies) Personal lines focus of PI P-C further enhances Group diversification benefits 10 Capital management Share buy-back as next logical step Focus on efficient capitalisation: Derisking initiative started Change to flexible dividend policy Disclosure of risk capital Introduction of RoRaCtarget Share buy-back programme Volume: 1bn Period: Nov 2006 April 2007 (AGM) Cancellation of repurchased shares Ensuring discipline within Munich Re and reinsurance market Buy-backs as part of our ongoing capital management 11

7 General concerns over the EU-wide threats" to reinsurance posed by Solvency II Reinsurance product innovation could be stifled against the interests of cedants and regulators (e.g. consider treatment of LPTs and other genuine ART instruments) Capital relief for reinsurance could become too complex to obtain in Pillar I taking away the single most important buying motivation and hampering use of reinsurance in crisis situations (ladders of intervention) Some attempts to level the playing field may be stacked against reinsurers SPVs with no or light regulation not in the interests of an industry with one of the lowest barriers to entry Credit risk associated with reinsurance instruments could be linked to rating agency discretions/qualitative assessments and arbitrary penalties supposedly designed to encourage diversification might be applied German insurance association reinsurance sub-committee proposals seek to address each of these threats in the interests of primary insurers, regulators, reinsurers and financial markets 12 Four key recommendations of the German insurance association s reinsurance sub-committee (GDV RVUK) Solvency II should avoid arbitrary haircuts/restrictions on the form and level of reinsurance that counts for capital relief under Pillar I Solvency II should incentivise cedants to use reinsurance as an integral form of risk and capital management. Several options for recognition under Pillar I, recognition in the MCR and requirements for a Board Risk Management Statement (ala APRA) The credit risk assessment of reinsurance instruments should be determined in a robust economic framework that makes use of standard banking practices as opposed to arbitrary rules of thumb/ haircuts - and based on a regulatory measure of capital adequacy Operationalisation of the recommendations must be accessible to small/mutual insurers Recommendations are consistent with principles followed in CRO Forum paper on financial risk mitigation in insurance 1 See Financial risk mitigation in insurance Time for change ; published by CRO Forum; March

8 Recent survey of larger insurers shows Solvency II unlikely to have a significant impact on capital requirements Size distribution of surveyed insurers Distribution of ca 200 survey respondents mean revenues of US$ 6bn Capital requirements What effect do you expect Solvency II to have on the level of capital your business is required to hold? Over $10bn 19% Increase capital requirement 14% $1bn to $10bn $100m to $999m Less than $100m Decline to answer 3% 5% 29% 44% Reduce capital requirement Little change in capital requirement Unsure of impact on capital requirements 16% 36% 34% Suggesting large insurers RI demand unlikely to be significantly impacted by Solvency II Source: Tillinghast, ERM Survey, September Increase in RI Demand Most Likely from Small/Medium Players Often Among the Most Profitable Client Accounts Example: US General Liability Possible Reasons For Better Profitability Analysis of Historical Profitability of 29 Insurers over Mean Loss Ratio Small Average Deviation Jumbo Regional Large National Fewer rating classes/options for underwriters More exposure-driven pricing with less reliance on experience rating Lower underwriter and pricing actuary turnover more ownership of underwriting results Lower range of pricing options (e.g. deductibles, loss sharing etc) offered to original insureds Greater portfolio homogeneity General absence of premium volume targets Source: ERM for P&C insurance companies, Wang & Faber August

9 Global reinsurance demand with continued high growth in mature European markets Nominal non-life reinsurance growth p.a. until 2015 in selected regions 5 6% 4 5% 7 10% North America Western Europe Eastern Europe 10 12% Source: MR Economic Research 8 10% Latin America Emerging Asia Munich Re with strong/leading position and client access in all major mature and emerging markets 16 With biggest demand growth likely from small & medium insurers It s back to basics for Munich Re Cession ratios (in %) for large vs. small insurers in selected European markets (based on legal entity data) Germany P&C France P&C Austria P&C 39.6% 31.3% 32.5% 25.2% Large insurers (> 1bn) Small insurers ( m) 14.3% Large Insurers (> 1bn) 24.9% Small Insurers ( m) Large Insurers (TOP15) Small Insurers (< 50m) Sources: MR Economic Research based on national supervisory authorities (Germany, Austria), L Argus de l Assurance (France) 17

10 Appendix Financial calendar Contacts Disclaimer 18 Financial calendar 30 January 2007 Press release on the renewal of reinsurance treaties 20 March 2007 Balance sheet press conference 21 March 2007 Analysts conference for 2006 financial statements 26 April 2007 Annual General Meeting 27 April 2007 Dividend payment 7 May 2007 Interim report as at 31 March August 2007 Interim report as at 30 June November 2007 Interim report as at 30 September

11 For information please contact Sascha Bibert Head of Investor Relations Tel.: +49 (89) Ralf Kleinschroth Tel.: +49 (89) Dr. Thomas Dittmar Tel.: +49 (89) Robert Kinsella Tel.: +49 (89) Fax: +49 (89) Internet: Frank Kopfinger Tel.: +49 (89) Disclaimer This report 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. 21