Munich Re well prepared for European regulatory regime under Solvency II

London. The new Solvency II regulatory regime is presenting the insurance industry with major challenges. Munich Re began at an early stage to lay internal foundations for applying the new standards, and has already been incorporating risk-based corporate management for a long time. Munich Re also thinks Solvency II presents new business potential.

"Munich Re is well prepared for the introduction of Solvency II," explained Chief Financial Officer Jörg Schneider. The solvency ratios published today also reflect Munich Re's capital strength: the economic solvency ratio calculated on the basis of the Solvency II standards was 277% as at 31 December 2014, and around 260% as at 30 September 2015. By comparison with the solvency ratio as calculated under the old method (this was 242% as at 31 December 2014), there has been a slight improvement under the method of calculation specified by the new regulatory requirements. This underlines the comprehensive and risk-commensurate calibration of the internal model already used by Munich Re. Even after Solvency II comes into force, Munich Re will retain a great level of flexibility for capital management.

"With interest rates remaining low, the new capital requirements under Solvency II pose a particular challenge for life insurance companies, including those of our Group," Schneider continued. Low interest rates will mean much higher capital requirements, whilst there will be a significant reduction in the types of equity pertinent for regulatory solvency purposes. "After the Group has implemented certain measures, our life insurers will probably not have to apply for any statutory transitionals," stressed Schneider.

As a globally operating (re)insurer, Munich Re began at a very early stage to use an economic approach as the basis for risk modelling. Munich Re has been drawing up and developing its own full internal model for around ten years. This model has already been approved by the Federal Financial Supervisory Authority (BaFin): from 2016, the regulatory solvency capital requirements for the consolidated Group and select solo undertakings will be calculated on this basis.

As a reinsurer, Munich Re also regards Solvency II as presenting some business opportunities: "By developing coverage concepts, we can support insurers in introducing and continuing to implement Solvency II," explained Schneider.

Solvency II is a project of the European Commission to fundamentally reform and harmonise European insurance supervisory regulations. Solvency II follows the three-pillar approach: minimum capital requirements (quantitative), supervisory review processes (qualitative) and market discipline (disclosure). After many years of negotiation, the institutions involved in the EU legislative process (Council of the European Union, European Parliament, and European Commission) agreed on standards which will come into effect as at 1 January 2016, and have already impacted supervisory practice before that date.