Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
Risk management processes and exposures
We adopt a holistic risk management approach, the main
objective of which is to analyse and control the interdependencies
between risks on the asset and liability sides,
and between strategic and operational risks. This entails
considering economic parameters as well as the requirements
and expectations of clients, shareholders, supervisory
authorities and rating agencies.
Market risks
Risk management processes
In the Munich Re Group we are guided by the following
ALM principles. In a first step, we structure our investments
so that they match the characteristics of our liabilities
as closely as possible. We allow in this step for the
economic structure of the liabilities as well as any regulatory
restrictions on the determination of those liabilities.
We call this the “neutral position” for the liabilities. In a
second step, the Munich Re Group exploits its expertise in
international financial markets to deliver a commensurate
return for the risk taken by deviating from the neutral position.
Such market risk is taken in a way that is commensurate
with the risk-bearing capacities of the Munich Re
Group, the skills and expertise of our asset managers,
and the strategic level of asset-liability mismatch that
is set by the Board or its Risk Committees.
The investment process for the Group’s investments is
controlled by the individual companies of the Munich Re
Group according to uniform rules. In line with our assetliability
management (see page 98), we follow a liabilitydriven
investment approach, i.e. we match the outflows
implied by the insurance operations with appropriate
investments, e.g. by matching currencies, durations and,
where relevant, convexity. Our asset-liability mismatch
risks are mainly steered on an economic basis, meaning
that the pure accounting effects must be treated with caution,
as the financial statements prepared in accordance
with the applicable accounting rules do not always fully
reflect the economic situation. Besides these aspects, our
investment strategy also considers requirements relating
to supervisory regulations, accounting and tax purposes.
Furthermore, for individual reinsurance products
involving explicit market risks, such as interest-rate or
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currency risks, asset-liability management principles are
applied at micro (e.g. treaty) level when the products are
being designed and priced. This is especially important
for life business and long-tail property-casualty business,
where long time horizons are involved. The companies
entrusted with our asset management, in particular MEAG,
are given mandates by the insurance and reinsurance companies
in the Munich Re Group based on uniform investment
criteria (General Investment Guidelines) established
by the Board of Management.
Market risks are measured and limited using a valueat-risk
(VaR) approach for the asset-liability mismatch risk,
which is also employed in our strategic investment planning
to model the optimal investment portfolio according
to our risk preference. This asset-liability mismatch risk
approach measures the possible adverse changes in economic
surplus resulting from changes in assets and the
valuation of liabilities. Within this VaR, all important
sources of the market risks of assets are considered, i.e.
equity, interest rate, credit spread, and currency and real
estate risks. As far as equity investments are concerned,
we model diversified equities using appropriate indices,
whereas concentrated equity investments are modelled by
name. Besides this, the change in valuation of liabilities
with respect to changes in interest rates, FX rates and inflation
is included.
When modelling these risks, state-of-the-art models
are used which allow, for example, for “fat tails” in equity
market risk distributions or all different shapes of interestrate
curves within the interest-rate modelling. Our stochastic
modelling is supplemented by applying stress tests,
sensitivity and duration analyses.
In our real estate investments, we are constantly optimising
the return and risk profile. We are achieving this by
rejuvenating our portfolio on an ongoing basis, diversifying
internationally and investing in top-class commercial
real estate primarily located in major European cities. In
addition, we are pursuing the aim of reducing the concentration
of our real estate investments in Germany, of which
we sold a significant package in 2006. To mitigate the risk
of loss of rental income, we structure our portfolio by
selecting tenants of high credit-standing.
We only run currency risks to a small extent, since we
practise a policy of currency matching. This means that we