Munich Re seeks to push boundaries of insurability

Reinsurers and insurers must better leverage their shared knowledge and expertise to drive innovation, conquer new risks and push the boundaries of insurability, Ludger Arnoldussen, member of the board of management at Munich Re, told Baden-Baden Today.

“It will be crucial that we as an industry—insurers and reinsurers—are capable of developing new products that suit our clients’ needs better or more comprehensively than in the past,” he said.

“Munich Re is devising innovative coverage concepts that go beyond the scope of traditional reinsurance and, to an increasing extent, also beyond the conventional boundaries of insurability.”

Arnoldussen named cyber, energy, reputational, supply chain and business interruption risks as areas where the industry can innovate and thus find growth. But success will be achieved only by better communication, he said.

“To successfully innovate, it is important to have direct contact with insureds. This access can be achieved either via primary insurance models, or via strategic partnerships,” he said.

The expansion of digital networks and the rapid evolution of hardware and software is opening up significant business opportunities.

One example of this is in the area of non-damage business interruption insurance or cyber risk coverage.

“Our experts have been working for many years on cyber risks and enhanced coverage options,” he said. “Munich Re now offers a broad spectrum of reinsurance solutions in this field and is also able to cover accumulation perils such as virus-related losses.”

He cited two other areas where he feels Munich Re has demonstrated innovation. One is a new coverage concept for reputation risks; another covers the launch-plus-life cover for the entire useful life of satellites.

This quest for innovation is driven by the multiple pressures facing the industry which are hindering growth and triggering fundamental change through the growth of new risk transfer mechanisms and further consolidation.

Arnoldussen said it will be interesting to see how the profile of classic reinsurance clients on the primary insurance side will change.

“Business models are changing,” he said.

“Companies are bringing primary insurance and reinsurance together. The primary insurers are getting bigger and have different demand patterns post-consolidation.

“That means that they buy reinsurance more centrally, and they buy reinsurance solutions that are capital-driven, for peak risk transfer.

The individual subsidiaries of a large company group no longer place the business themselves,” Arnoldussen said.

The strong capitalisation of most insurers has also prompted them to retain more, further reducing demand for reinsurance. Arnoldussen said a culmination of all these factors has resulted in a tiering of the reinsurance landscape.

“We observe that cedants now prefer to place the bulk of their treaties with two or three anchor markets at different terms and conditions. This creates a split: into a first tier of quoting markets that deliver value beyond pure capacity, and an increasing variety of following markets trying to get a share of what is left; and this split is increasing.”

This in turn creates more impetus for consolidation between reinsurers. Arnoldussen said Munich Re is unconcerned by the mergers between smaller players, but he does believe it could lead to more technical pricing and hence be good for the market in the medium term.

“I expect that consolidation in our industry will continue for some time, probably several years,” he said. “In the league that Munich Re plays in, there are no significant advantages in being a little larger, nor does being a bit smaller mean any disadvantage. All that matters is whether the company you buy offers what you didn’t have before.”

As a result of this upheaval in the market, he says it is difficult to predict the outcome of the renewal negotiations next January, but he hopes pressure on prices will begin to ease.

“Competition should remain intense as long as there are no extraordinary loss events or other major market upheavals during the last months of the year, but the pressure on prices should ease still further after two years of price deterioration,” he said.

Within such an environment, Arnoldussen stresses that disciplined underwriting is becoming increasingly important. Reinsurers cannot rely on a market cycle to eventually improve rates for the market.

“No-one can be sure that business that is presently underpriced will earn money back at some future date. That is why disciplined cycle management is central for Munich Re,” he said.

“As part of our cycle management we shifted our own traditional portfolio from nat cat excess-of-loss and other property lines to casualty some time ago. Now it seems other players are doing this as well. However, the biggest strain for the casualty market is resulting from the persistent low interest rate environment.”