Munich Re Group Annual Report 2006 (PDF, 1.8

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Munich Re Group Annual Report 2006 Risk report The selective acceptance of risks in primary insurance and reinsurance companies is at the core of the Munich Re Group’s business model. The Munich Re Group complies both with the German Law on Corporate Control and Transparency (KonTraG) and with local regulations on risk management in the different countries in which it operates. Our risk early-warning system is regularly examined independently, both by internal auditing units at the individual Group companies and by the external auditor as part of the annual audits. Whilst we are in a position to adequately assess risk situations, the growing complexity and dynamism of the environment in which we operate means that there are, naturally, limits. This risk report reflects the German Accounting Standard DRS 5-20. In accordance with IFRS 4, Insurance Contracts, it is supplemented by “Disclosures on the uncertainties of future cash flows from insurance contracts” (page 200 ff.). Risk management objectives and methods Risk management plays a core role in the steering of the Munich Re Group’s operations. The Munich Re Group deploys a mixture of decentralised and centralised risk management functions, tools and processes for its diverse global business. The central activities come within the responsibility of the Group Chief Risk Officer (Group CRO). The decentralised risk management activities are integrated in the framework of the Group Chief Risk Officer’s duties. Important decentralised risk management functions include the Corporate Underwriting Division of the property-casualty reinsurance business, the Life and Health Reinsurance Valuation and Controlling Departments, the Central Reserving Division, the Group Investments Division, the MEAG Asset Management Risk Controlling Department, the ERGO Integrated Risk Management Division, the Munich Re America Integrated Risk Management Department, the ERGO Asset-Liability Management Departments and the decentralised risk controllers in all divisional units of the Group. With our effective integrated risk management we aim to: – protect the reputation of the Munich Re Group; – ensure the highest degree of confidence in meeting policyholders’ claims; and – enable the Munich Re Group to protect and sustainably generate shareholder value. 124 Management report_Risk report Risk management framework: Principles and governance The functions and responsibilities of all participants – be they members of the Board of Management, executives, decentralised or central risk controllers or risk managers – are clearly defined. The Board of Management is responsible for the Group-wide, cross-divisional planning, steering and controlling of the risk landscape as a whole. In the Munich Re Group, Integrated Risk Management, headed by the Group Chief Risk Officer, is centrally responsible for preparing these Board decisions and for identifying, evaluating, steering, monitoring and communicating risks on the asset and liability sides. In this role, the CRO relies on the work of the decentralised risk management units. The Group Chief Risk Officer takes part in all meetings of the risk-related Board of Management Committees, namely the Group Committee and the Global Underwriting and Risk Committee. The Office of the Group CRO is also represented in the ERGO Risk Management Committee, and the CRO of Munich Reinsurance America, Inc. has a dotted-line relationship to the Group CRO. The main responsibility of Integrated Risk Management is to set standards and develop methods and tools as a basis for consistent Group-wide risk management. The decentralised risk controllers in the business units throughout the Group operationalise these in a manner suitable to their business needs and take account of legal requirements when necessary. In day-to-day business, our executives in the business units are also responsible for systematically handling individual risks in insurance and reinsurance. They identify, analyse, manage and monitor the risks on an ongoing basis with support from the decentralised risk controllers. By separating accountability and monitoring within insurance and asset management, we ensure the effective management of our risks.
Munich Re Group Annual Report 2006 Management report_Risk report Board of Management Approves business strategy Defines risk appetite and expected risk-adjusted returns Business management/Risk owners Business planning Identify and evaluate risks Take steps to manage/mitigate all risks associated with their business Manage and own risks of all approved transactions regardless of ultimate approval level Internal Auditing Audit function independently verifies that effective controls are in place and functioning Risk appetite and risk-based capital The basis for accepting risks is determined by the Board of Management’s requirements and decisions on risk appetite. These are defined by the Group’s strategic risk management framework (developed in 2006 and implemented as from 2007) and consider the impact on capitalisation, liquidity and earnings volatility. They include “whole portfolio criteria” as well as “supplementary” criteria designed to limit and steer peak exposures, concentrations, accumulations and systematic risks across the Group. We manage business portfolios by assigning return expectations, derived from the size of the risks assumed, to individual business activities. Our internal risk model, the Munich Re Capital Model, plays a central role here. We use it to analyse how certain risk scenarios affect the results of the segments life and health, property-casualty and the investments of the reinsurance and primary groups. For the segments life and health, we supplement the risk metrics from our internal risk model with risk metrics derived from our market-consistent embedded value steering framework. This framework allows us to take an objective view of the risks, tailored to the long-term nature of that business. We determine our required economic capital using a robust market-consistent economic capital model, the Munich Re Capital Model. It is calibrated to absorb two successive annual losses of a size only to be expected Integrated Risk Management Clear mandate by the Board to ensure that for all classes of risk appropriate limits, policies, procedures and measures are in place within each business unit Aggregate and monitor Group-wide risks (e.g. risk capital) and report to Board Develop risk mitigation strategies every 100 years. The model is built using a series of modules for each of our business segments. For example, for our scenarios of natural hazards worldwide, we utilise the expertise of our geoscience teams, who together with our Corporate Underwriting unit test and refine external models and internally-built models to represent our global exposures to hurricanes, winter storms, typhoons, earthquakes, flood and other natural perils. The modules are aggregated using a conservative measure of the dependence of the risks in the portfolio, and a series of stress tests are applied to check the resilience of the implied “economic capital buffer” (i.e. excess of available financial resources over required risk capital). In the next step, the required risk capital is allocated to the individual divisional units on a proportional basis in line with the volatility of their business activities. In primary insurance, the procedure is substantially influenced by other steering aspects, such as supervisory restrictions and policyholders’ participation in surplus. At the present time, for our primary insurance operations, required risk capital is therefore determined at a legal-entity level, taking these features into account. In reinsurance, where the majority of our business is written through Munich Reinsurance Company or one of its branches, we aggregate risk capital requirements at reinsurance-segment level. In this way, we evaluate the Munich Re Group’s risk capital with regard to the fungibility of risk and capital. 125
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Munich Re Group Annual Report 2006
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The Munich Re Group Our operations
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Munich Re Group in 2006 Tireless an
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Quarterly figures Balance sheet 31.
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© 2007 Münchener Rückversicherun
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