Dr. Torsten Jeworrek
Together we can beat the cycle trap
The forthcoming renewals will be a litmus test for the insurance industry. With discussions in recent years revolving around the issue of underwriting discipline, the insurance industry must now prove that it can match its words with action. After all, there are signs that the cycle is entering a softer phase.
The reinsurance industry currently has ample capacity and capital. It comes as no surprise, therefore, that we are heading towards a soft market phase, particularly since prices in individual segments of primary insurance have already taken a bit of a tumble. Although we may not be able to eliminate cyclical fluctuations entirely, at least we at Munich Re will not intensify the cycle.
The insurance industry is well advised – in its own interests – to always evaluate underwriting risks from an economic viewpoint. In addition to being guided by this economic maxim, we also need to meet the increased requirements of our major stakeholders, in particular the rating agencies, supervisory authorities and investors. Their credo, and rightly so, is greater transparency and sustainable results.
As far as transparency is concerned, the European regulatory regime under the banner of Solvency II will set new standards in future. Results, by contrast, can be influenced by active cycle management.
Well prepared
At Munich Re, cycle management has an especially important part to play in the current market situation. Its approach is a two-pronged one: managing the profitability of business volume on the one hand and varying the levels of risk-based capital on the other hand. Bearing in mind the experience of the 1990s, we are intent on consistently gearing our underwriting to economic requirements. It takes a great deal of underwriting know-how, sophisticated pricing tools and professional risk management to ensure that capacities are allocated to profitable business only.
Particularly in volatile segments such as aviation and industrial business, the rating tools available to underwriters leave considerable scope for assessment. In soft market phases especially, this scope tends to be stretched unnecessarily far in the hope that the technical reinsurance price will still be adequate. For this reason, Munich Re has opted for a more rigorous approach to identifying and measuring risks.
In a soft market environment, this approach may be at the cost of premium volume or market share. But at the end of the day, we have to calculate premiums in such a way that they consistently cover losses, expenses and costs of capital. This is best achieved through close collaboration with our clients, as they too are subject to cyclical swings and the same economic constraints. Besides, our important primary insurance partners expect their reinsurers to exercise discipline as well.
Active capital management
However, proper business management alone is not enough. It needs to be backed by flexible capital management. That is why we at Munich Re systematically return capital we do not need for profitable reinsurance growth to our investors, thereby underlining our disciplined underwriting practice and ensuring that capital is put to the most efficient use.
In terms of active capital management, Munich Re benefits from the many internal transparency mechanisms we have established in the past. Our capital model takes into account factors such as premiums, reserves, and asset values. It also provides good control mechanisms for our portfolio.
New solutions for emerging markets
Besides this, we have launched a number of initiatives aimed at identifying new fields of business and generating future growth. We see opportunities especially in segments not yet under significant competitive pressure, where Munich Re’s risk identifying expertise comes into its own.
A good example of this is the Kyoto Multi Risk Policy for projects designed to reduce emissions. A further source of growth are insurance solutions based on the principles of Islamic law (Retakaful business).
Joint responsibility
Our growth initiatives are also founded on the principle of value-based management. Every investment must yield a sustained risk-adequate return. Munich Re has thus internally put things in place to meet the demands that market players and stakeholders make of our industry.
The challenge we now face is to manage the cycle properly. If the industry acts in a disciplined manner, there is a good chance that the current downswing of the cycle will be less pronounced than those in the past. The strategy pursued by the major insurance players indicates that companies have learnt from past errors – after all, the painful memories of the last soft market cycle are still fresh.