Münchener Rück Munich Re Group

1. Münchener Rück Munich Re Group “Recent volatility and future strategy in the insurance industry” September 2003 Nikolaus von Bomhard

2. Content • Volatility and capital conditions • Consequences for strategy • Who will be the future winners?

3. Volatility and capital conditions

4. Volatility and capital conditions Recent volatility noticeable above average Source: VIX, Chicago Board Options Exchange

5. Market value of the Euro Stoxx Insurance(1.1.1992 = 100) 600 -51,3% 500 400 300 200 100 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Volatility and capital conditions Loss of capacity in the insurance industry • 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

6. Volatility and capital conditions Recent developments in regulation • 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

7. Volatility and capital conditions How much capital do we need? Current situation: Significant differences in approaches to quantifying available and required risk capital Example 1: Differences between stakeholders Internal company view Regulatory authorities Rating agencies Equity analysts Accounting bodies Example 2: Differences within stakeholder category Convergence to Convergence to Shareholder view

8. Consequences for strategy

9. “Ride the tide” “Rest in safe haven” Consequences for strategy Strategic options

10. “Ride the tide” “Rest in safe haven” Consequences for strategy The choice depends… Underwriting risks Investment risks

11. Consequences for strategy “Rest in safe haven” and CR Combined ratios per market 1992–2001

12. $ Consequences for strategy Major considerations • Focus on risk-adequate price • Improve risk management: • Prevent the big bang • Care about a creeping-death scenario • Connect the liability and asset sides of the balance sheet • Manage more and more complex know-how

13. (2) (1) Technical price Technical price Technical price The opportunistic view Follow the fortunes (3) Focus on risk-adequate price Consequences for strategy Focus on risk-adequate price

14. CAT budget Monitoring Regional underwriting Risk capital RoE definition Pricing Linking Consequences for strategy Prevent the big bang Example: Budgeting and monitoring of CAT covers

15. Number Options for action Initial expert discussions Publications in scientific journals Conferences Public awareness from press/media NGO (non- governmental organisations) activities Politics Political parties Parliament Company statements Degree of uncertainty Laws Standards Regulations Frequency of weak signals Time According to Igor Ansoff's theory of weak signals, modified Consequences for strategy Care about a creeping-death scenario

16. Consequences for strategy Connect the liability and asset sides of the balance sheet Example: Introducing an ALM-based SAA • 1. Constraints • Liabilities structure • Market forecast • Regulation • Rating • Liquidity • … • 2. Control quantities • Profit requirements • Asset risk capital • Level of confidence, shortfall probability • Distinguish target function, steering and constraints • 3. Target function with regard to SAA optimisation • Economic Value Added (EVA), Return on Risk-Adjusted Capital (RoRaC),Total Return,…

17. Consequences for strategy Manage more and more complex know-how Overview of knowledge management organisation at Munich Re Centre of Competence Advisory Board Divisional KM Knowledge networks DKM E1 E2/LA AAA NA CUGC SFR L/K Property Creates the basis of KM within the divisions and provides all employees with access to relevant knowledge Knowledge networks support the handling of technical knowledge Casualty Marine Claims

18. Who will be • the future winners?

19. …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 Who will be the future winners? Insurers/Reinsurers… … with profits from technical underwriting complemented by financial returns

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