Living with climate change – The strategic positioning of the Munich Re Group

Climate change is one of the greatest risks facing mankind. In recent years, the insurance industry – and Munich Re in particular – has been instrumental in ensuring that this message is received loud and clear by politicians, industry, and society as a whole. Now we are going one step further and are turning our knowledge into even more action – with the aid of an all-embracing strategic approach – in the areas of "risk management", "product development", and "capital market management".

Over the past thirty years and more, we have put much effort into investigating climate change. Our high-quality data provides strong evidence that the effects of climate change are already to be seen and that adaptation measures need to be taken without delay.

Expert network: science – technologies – finance

Prompted by our responsibility as a global player to take a proactive stance towards new social questions and in response to dramatic loss trends, we are adopting resolute measures to counter the loss factors stemming from human activity. The Munich Re Group is pooling its activities on this subject through a network of experts from all its business areas affected by climate change. We quantify risks by way of risk-adequate premiums and provide decision-makers with arguments for effective preventive action. Linking our expert network to the underwriting expertise in our operational units enables us to develop coverage concepts and to implement them in practical insurance solutions which include enterprise risks and other risks that have hitherto been considered "exotic". Also featured are covers for new CO₂-reduction technologies and measures designed to assist adaptation to climate change.

Knowledge and innovation capacity as a driving force in new fields of business

Investments in adaptation measures designed to deal with the effects of climate change and in the reduction of greenhouse gas emissions pay off: that is a view also shared by the former chief economist of the World Bank, Sir Nicolas Stern. One of the core messages in The Stern Review, published in autumn 2006 and recognised throughout the world as a visionary work, is as follows: Climate change is the greatest market failure of all time – the only economically reasonable solution: take action immediately!

That means:

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  meeting the ambitious CO₂ targets by initiating concrete legislative procedures and specifying energy production and efficiency requirements,
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  implementing new energy production technologies and new energy-saving construction methods,
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  employing new mechanisms to (further) develop carbon emissions trading.

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These developments present investors with completely new risks. They open up new fields of business for professional risk carriers that have extensive knowledge of new technologies and experience with the risks of change. For a successful and sustainable development of these business fields, two additional components are needed: capital strength and innovation capacity – both of which are established strengths of the Munich Re Group.

Wind and solar power are indispensable elements in reducing CO₂ emissions. Other technologies like geothermics, hydrogen technologies, and solar chimney, tidal, and wave power plants will play an important role in the future. The systems technology is still new, however, and both investors and operators need the security provided by new risk transfer solutions. This will open up extraordinary economic opportunities in a dynamic growth sector.

Two examples

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  Since 2001, Munich Re has supported the construction and operation of offshore wind power plants as both insurer and reinsurer. On account of the high risks and technical challenges associated with German sites, this type of green electricity has so far only been available abroad – and Munich Re is one of the market leaders in insuring such business.
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  Volcanoes, geysers, hot springs: in some places on the surface of the earth the colossal energy hidden within its depths is particularly evident. Modern technologies make it possible to exploit the climate-friendly and regenerative resource of geothermal heat. The greatest hurdle for investors has been the productivity risk – but Munich Re has developed an insurance solution for this.

Synergies between reinsurance and insurance and asset management

In the future, reinsurance will only be required to cover risks from new technologies that are very complex or involve high sums insured. In other words, following the initial phase, a substantial proportion of special insurance solutions will eventually be adapted for inclusion in extended standard products on the primary insurance market. For this reason, the primary insurance companies in our Group, such as ERGO and Midland Insurance, have access at all times to the knowledge on the subject of climate change that has been built up in our reinsurance business. As a result, Victoria has established itself as a pioneer with modern coverage concepts in the field of green electricity. Knowledge is also shared in connection with investment products: the climate strategy fund set up by Munich Re’s asset management subsidiary MEAG invests in water treatment and supply, renewable energy, energy efficiency, and recycling. In addition, it takes into account companies likely to benefit from measures intended to mitigate climate change.

Munich Re declared the topic of climate change a strategic topic and follows a holistic strategic approach. Analysing the prospects of climate change in the near future and its sectoral repercussions is therefore of great significance and culminates in concrete business strategies.

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