Münchener RückMunich Re Group

“Recent volatility and future strategy in the insurance industry”

September 2003

Nikolaus von Bomhard

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Content

– Volatility and capital conditions

– Consequences for strategy

– Who will be the future winners?

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Volatility and capital conditions

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Recent volatility noticeable above average

Volatility and capital conditions

10

15

20

25

30

35

40

45

50

Source: VIX, Chicago Board Options Exchange

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Loss of capacity in the insurance industry

Volatility and capital conditions

100

200

300

400

500

600

1992 1993 1994 1995 1996 19971998 1999 2000 2001 2002 2003

-51,3%

Market value of the Euro Stoxx Insurance(1.1.1992 = 100)

Reduction in capacity

– Investment losses: > US$ 200bn since 2000 for P&C insurers worldwide

– Major losses: e.g. WTC ~ US$ 50bn

– Capacity withdrawals (several companies since 2001, e.g. Gerling Global Re)

– Downgrades of insurers and reinsurers by rating agencies

– New capacity, e.g. in Bermuda, unable to fill the gap

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Recent developments in regulation

Volatility and capital conditions

Tightening of reinsurance regulation

– Financial Stability Forum and IAIS

– EU considerations on a reinsurance directive

– Germany: Fourth Financial Markets Promotion Act

Solvency requirements for reinsurers

– EU “fast-track” approach

– Solvency II: a risk-based approach

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How much capital do we need?

Current situation: Significant differences in approaches to quantifying available and required risk capital

Regulatoryauthorities

Ratingagencies

Equityanalysts

Accountingbodies

Internalcompany

view

Example 2: Differences within stakeholder category

Shareholder view

Convergence to Convergence to

Example 1: Differences between stakeholders

Volatility and capital conditions

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Munich ReConsequences for strategy

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Strategic options

Consequences for strategy

““Ride the tide”Ride the tide” ““Rest in safe haven”Rest in safe haven”

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The choice depends…

Consequences for strategy

““Ride the tide” Ride the tide”

Underwriting risks

““Rest in safe haven”Rest in safe haven”

Investment risks

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“Rest in safe haven” and CR

Consequences for strategy

0

20

40

60

80

100

120

140

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

CR in

%

France

Germany

US

Combined ratios per market 1992–2001

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Major considerations

Consequences for strategy

Focus on risk-adequate price

Improve risk management:

1. Prevent the big bang

2. Care about a creeping-death scenario

3. Connect the liability and asset sides of the balance sheet

4. Manage more and more complex know-how

$

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Focus on risk-adequate price

Consequences for strategy

Technical price

The opportunistic view

(1) Technical price

Follow the fortunes

(2)

Technical price

Focus on risk-adequate price

(3)

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Prevent the big bang

Consequences for strategy

CATbudget

Regional underwriting

Riskcapital

MonitoringLinking

PricingRoE definition

Example: Budgeting and monitoring of CAT covers

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Care about a creeping-death scenario

Consequences for strategy

Number

De

gre

e o

f u

nc

ert

ain

ty

TimeAccording to Igor Ansoff's theory of weak signals, modified

Options for action

Frequency ofweak signals

Initialexpert

discussions

Publications inscientificjournals

Conferences

Publicawareness

frompress/media

NGO (non-governmentalorganisations)

activities

Politics

Political parties

Parliament

Companystatements

Laws

Standards

Regulations

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2. Control quantities Profit requirements Asset risk capital Level of confidence,

shortfall probability

Connect the liability and asset sides of the balance sheet Example: Introducing an ALM-based SAA

3. Target function with regard to SAA optimisation Economic Value Added (EVA), Return on Risk-Adjusted

Capital (RoRaC),Total Return,…

1. Constraints Liabilities structure Market forecast Regulation Rating Liquidity …

Distinguish target function,

steering and constraints

Consequences for strategy

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Advisory Board

L/KE1 E2/LA AAA NA CUGC SFR

Property

Casualty

Marine

Claims

Knowledge networksKnowledge networks

Divisional KMDivisional KM

Manage more and more complex know-how

Overview of knowledge management organisation at Munich Re

Centre of Competence

Knowledge networks support the handling of technical knowledge

Knowledge networks support the handling of technical knowledge

DKM DKM

Creates the basis of KM within the divisions and provides all employees with access to relevant knowledge

Creates the basis of KM within the divisions and provides all employees with access to relevant knowledge

Consequences for strategy

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Who will be the future winners?

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Insurers/Reinsurers…

Who will be the future winners?

…with broad access to clients

… with sophisticated tools to manage risks

… with cost-efficient internal procedures

… with efficient knowledge management

… with the ability to convince capital markets of their performance in order to have access to new capital

… with profits from technical underwriting complemented by financial returns

Thank you!

Münchener RückMunich Re Group