Munich Re calls for insurers to show risk management discipline

A changing risk landscape has led Munich Re to call for more disciplined risk management, particularly given “extreme” inflation risk and a spate of natural catastrophe losses.

Risks such as cyber-attacks and climate-risk-related extreme weather are causing increased claims frequency as well as severity for insurers, while inflation is further driving up the severity of those claims, Munich Re has warned.

The key to Munich Re’s own approach is “rigorously pricing in inflation”, said the German reinsurer, noting that turbulent capital markets continue to take their toll on insurers.

Munich Re said it would continue to make reinsurance capacity available, but that it and its ceding insurers need to price risks accordingly.

“What is crucial is that we ensure, together with our clients, that all of these developments are adequately covered in the pricing,” said Thomas Blunck, member of the board of management, Munich Re.

In response, Airmic calls for the well-managed risks of its members to be recognised and rewarded by insurers and reinsurers.

“Airmic understands the need for a resilient insurance industry. However, Airmic also expects the well-managed risks of our members to be recognised and rewarded,” said Julia Graham, CEO, Airmic.

“Risk management is a two-way street, and it is important that insurers and reinsurers remember and reflect this when pricing cover,” Julia added.

Cyber risks

Demand for cyber coverage is high, Munich Re said, noting premium volume in Europe rising from just over €400 million to €2 billion in the last five years.

Cyber risks will see the same discipline in risk selection and pricing, the reinsurer suggested, with a rise in cyber risks “firmly accounted for in Munich Re’s underwriting business”, the German reinsurer said.

“Our cyber business is profitable in Europe as well, even if a number of major losses have brought its earnings power down to slightly below that of the worldwide business,” said Claudia Hasse, Chief Executive for Germany, Cyber Europe and Latin America at Munich Re.

Munich Re said it has already added exclusions for systemic risks such as cyber war to its conditions and contributed to the rewording of similar standard clauses for Lloyd’s Market Association.

“The outlook both on the economy and on inflation has become bleaker in the past few weeks, especially in Europe,” Thomas Blunck concluded.

“That, along with increasing risks from cyber-attacks and natural disasters, puts insurers in a difficult and complex situation where financial strength and risk expertise will be what pay off,” he said.

Outlook for 2023

The macroeconomic situation, even if it becomes more stable, will remain tough for the duration of 2023, Munich Re cautioned, noting that its analysts have revised forecasts down for the US and Europe.

“Many markets are now seeing inflation rates reach their highest levels in 40 or even 50 years. In Europe, prices are being driven up primarily by energy and food costs,” Munich Re said.

Central banks increasing interest rates would also have a negative effect on insurance companies’ balance sheets, Munich Re warned.

This is due to the asset management side of a typical insurer being heavily invested in fixed income securities – many of which have fallen in market value, the effect of which is limiting insurers’ freedom for manoeuvre on the underwriting side.

These factors will put pressure on insurance capacity, which is expected to shrink. At the same time, reinsurers facing the same pressures are also limiting supply of capacity, all of which will lead to greater risk retention, putting the onus on strong risk management throughout the risk transfer chain.

“Inflation expectations and changing risks have to be reflected in our pricing for insurance cover. By taking this approach, we can remain a strong partner for our clients and, together with them, support economic resilience,” added Blunck.