Solvency II: Munich Re is well positioned
Solvency II comes into force on 1 January 2016. Today, On 30 November, Munich Re is giving a presentation to analysts in London about how it has been preparing for the new supervisory regime. Bernhard Kaufmann, Group Chief Risk Officer at Munich Re, talks about the new challenges facing the insurance industry, the certification of our internal model, and the opportunities for our Group.
Topics Online: Last week, the Federal Financial Supervisory Authority (BaFin) approved Munich Re's internal model. Was that a surprise?
Bernhard Kaufmann: We were certainly not surprised, but we were pleased nevertheless. After all, we started to develop this internal model fifteen years ago. For many years, we have been using our internal model for the economic management of our business as a basis for our value-based management and to make our risks more transparent. Our internal model covers all of the risks from the whole Group. This is where we differ from our peers – some of whom use partial models, or whose models cover only part of the respective group. Munich Re has set a very high standard in this respect.
Topics Online: On 30 November, you are giving a presentation to analysts to explain how Munich Re has prepared for Solvency II. What are the main messages?
Kaufmann: We have done our homework in recent years, and we are very well prepared. We are one of the few insurers whose solvency ratio will be somewhat higher after the switch to the new system than the ratio previously reported.
Topics Online: Why is it higher?
Kaufmann: We have built up the internal management of our business on the principles that are relevant for Solvency II, as these allow our business model to be mapped very precisely. We have been extremely puritanical, and stuck closely to economic valuation methods and market consistency. In the political discussion before Solvency II was introduced, there was some softening of the principles, which meant lower capital requirements.
Topics Online: The capital requirements under Solvency II are a particular challenge for life insurers in an era of persistently low interest rates. What are we doing about this?
Kaufmann: Under Solvency II, it is necessary to set aside a great deal of capital for business with long-term guarantees and options in particular. Thus life insurers with a large book of such guarantee products are particularly affected. Provision of adequate capital resources is one of the aims of the new Solvency regime – also in terms of consumer protection. Of course, this means that capital requirements for our life insurance subsidiaries will increase. But our Group has very comfortable levels of capitalisation, and so the question we face is: how can we satisfy these capital requirements in the most efficient way? One possibility is using reinsurance solutions.
Topics Online: Will the demand for reinsurance increase?
Kaufmann: Under the new regime, above all the necessity of actively managing the capital requirements will rise, as Solvency II takes account of more risk categories with respect to capital requirements than previously. Examples are catastrophe risks and counterparty default risk. Corresponding reinsurance solutions are available for catastrophe risks. One aspect to be considered with respect to counterparty default risk is that a primary insurer who has a reinsurance receivable must cover the potential default of the reinsurer with sufficient capital. For Munich Re – as a reinsurer with a very good rating – this is an advantage because the capital requirements for primary insurers will be lower than with other reinsurers.
Topics Online: So it seems that the opportunities outweigh the downsides?
Kaufmann: Yes, because reinsurance is a very fast, effective and targeted instrument to optimise the capital requirements of companies in an active and flexible manner. Risk-based solvency regimes are being introduced worldwide, not just in Europe. Our clients are asking us for support in managing capital requirements under this new regime, and we must provide our clients with targeted advice and solutions. We are well prepared to deal with these developments – for example with our new Capital Partners unit.