Munich Re paves way for business model changes as profits drop

Munich Re believes that its business model will in the future rely increasingly on fee income and less on premium income, CFO Jörg Schneider suggested during a Feb. 7 press conference.

In 2016, the group’s gross premiums written declined to €48.9 billion from €50.4billion in the previous year. Consolidated profit dropped to €2.6 billion from €3.1 billion over the period.

Schneider noted that for 2017 there is no reason to expect Munich Re to exceed the 2016 earnings.

According to Munich Re the reinsurance industry has been facing a soft market for some time and rates are still falling, albeit at a slower pace. Reinsurers have been lucky that during this period there haven’t been any major large losses, Schneider noted. But the absence of large losses has made price negotiations for reinsurers difficult, he explained.

In addition to the soft market, there is pressure on investment income from low interest rates.

“It’s too early to say how much can be compensated for example through reserve releases [in 2017],” Schneider said. Looking at pressure from interest rates, it would be unrealistic to expect operating conditions to change quickly and allow Munich Re to achieve similar results as in 2016, he noted.

Munich Re is not relying on premium growth when seeking to boost profits.

“We do want to grow,” Schneider said. But growing premiums is complicated as often margins are very slim. At the same time, some low-premium business can come with large margins and high risk, he explained. “Premiums are therefore a weak indicator for results,” he said.

Instead, future growth may come via enlarged service fee contributions, Schneider suggested. Munich Re’s services are set to be remunerated via other means than insurance premium, Schneider suggested.

“I am convinced that through innovation and digitization trends we will see many types of remuneration which will not result in higher premiums but which have great profitability potential,” he said.

With respect to digitization and innovation, Munich Re is engaging in partnerships with start-ups, which can result in great growth potential in connection with Munich Re’s business resources, Schneider noted.

In May 2016, for example, Munich Re has partnered with PrecisionHawk, a global drone data platform, to enhance insurance assessments worldwide. The aim is to provide faster response times and increased reporting accuracy in the aftermath of a natural disaster.

In January 2017 Munich Reinsurance America (Munich Re, US) has created a key strategic position in its reinsurance division to help clients seize opportunities resulting from the rapidly developing field of insurtech.

Also in January, Munich Re helped funding insurtech start-up Bought By Many which uses social media and search data to offer “insight-driven insurance” to customers. Munich Re also has a long-term insurance agreement with the firm.

Apart from partnering with start-ups, Munich Re is investing in data analytics. But such action is likely to take time to bear fruit.

“This is not harvesting time, but time for very determined investing,” Schneider explained.

Munich Re is preparing for a different future. Reinsurance will change, Schneider said. Natural catastrophes will continue to play an important role, but a lot will have to do with balance sheet management requiring tax and accounting know-how, with regulatory optimization, removing undesired volatility for clients. This business will become increasingly important, Schneider said. In addition, Munich Re is expanding its business in adjacent areas, namely primary insurance and data management. “We firmly believe in this expanded definition of reinsurance,” he said.

Another, possibly more conventional driver for profitability could come from acquisitions as the reinsurer wants to expand its international footprint.

“We are always interested in complementing our portfolio particularly through specialized insurers,” Schneider said. Such firms which should have a very particular know-how could be leveraged through Munich Re’s wide platform and deliver growth synergies, he explained.

One hurdle in this regard are prices, which not always reflect the risks, he noted. “Therefore, very large M&A is currently not in the pipeline.”

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