FAQ and Glossaries

• Aside general economic inflation, claims inflation is also influenced by price developments in specific segments of economy (e.g. development of wages, medical inflation, etc.) and by changes in the demographic, technological, social or legal environment. Consequently, the correlation between claims inflation and consumer price index (CPI) is rather limited.
• Usually monetary inflation and interest rates development are somehow correlated. Consequently there is some natural hedge between life primary insurance and non-life (re)insurance: while in non-life the claims costs could increase as a consequence of rising inflation, in life primary insurance the investment income and thus the Embedded Value would normally improve because of the increased interest rates.
• For long-tail business, especially in combination with non-proportional treaties, inflation could be a threat as the tail length has a levering impact; here we implement underwriting strategies to reduce this risk, e.g. introducing index clauses or tail-capping contract features in our reinsurance contracts as far as possible. In (German) primary health insurance we are able to increase premium rates to react to medical inflation and rising claims costs. On the asset side we hedge ourselves with investments in e.g. inflation-linked bonds, equities, commodities, real estate, and renewable energies.
• Inflation is less of an issue for short-tail (re)insurance business since final losses are known earlier and increased costs can be taken into account earlier in the annual price adjustments.
• The gap between CPI and claims inflation is a non-hedgeable risk and is consistently reflected within the pricing per line of business.
• Munich Re has a long-term experience with doing business even in high-inflation countries.
• All in all we feel well prepared to manage an inflationary environment successfully.

Withholding tax on income from foreign investments is included in the tax expenditure of the life or health insurer although this tax is predominantly borne by the policyholder. This procedure inflates the tax expenditure of the life or health insurer and as a result distorts the effective tax rate.

An example:
A foreign company, in which a life or health insurer of our Group holds shares, distributes a dividend of €100 for the shares held by the insurer. 10% of this is deducted for withholding tax, and €90 go to Germany. The policyholders are entitled to at least 90% of that amount, i.e. €81 in our example. The life insurer’s share is €9. Besides the foreign withholding tax burden of €10, a 40% tax or €7.60 is also levied in Germany on the taxable base of €19. However, of the foreign withholding tax that can be credited against the German tax burden (and thus recoverable by the insurance undertaking) only 26.4% or €5 (corporation tax and solidarity income-tax surcharge) of the taxable base of €19 may be credited against tax. This leaves a tax expenditure of €12.60, while the result before tax is €19 (dividend of €100 less the policyholders’ share of €81). The effective tax rate is around 66.3%.

Changes in exchange rates are primarily relevant to reinsurance business. The bulk of our primary insurance business is transacted in euros.
In the case of reinsurance, the principle of currency matching applies for the balance sheet. This means that foreign currency liabilities are generally matched with equal amounts of investments in the same currency to safeguard against exchange losses. In the income statement, the effect on the premium is mitigated by similar effects on losses and expenses.
The balance sheets of our foreign subsidiaries are translated into euros at the exchange rates applicable at year-end, and their income statements at the average quarterly rates; any translation differences arising in the process are recognised in equity.