Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
The changes in market value shown in the table can only
be taken as rough indicators of actual market value losses
that might occur in the future, as they do not consider any
counteractive measures. Moreover, the effects on the
Group’s annual result and equity would be reduced as a
consequence of policyholders’ shares and the tax implications.
More importantly, we consider the economic effects of
such changes on the difference between asset and liability
values to be the most reliable indicator of our asset-liability
mismatch. As an illustration, in the reinsurance segment
the effective duration (interest-rate sensitivity) of our
assets is 5.7 years, whilst the effective duration of our
liabilities is 5.5 years, showing that on an economic basis,
we are broadly immunised from the effects of interest-rate
rises and falls. In the primary life segment, interest-rate
rises are – economically speaking – positive for us regarding
interest-rate guarantees, as these guarantees then
move further “out of the money”. The extensive swaption
programme we put in place in 2005 and further supplemented
in 2006 means that we are to a large extent protected
against interest-rate falls concerning the guarantees,
albeit at some cost. However, our policyholders still
benefit from interest-rate rises when reinvestments can be
made at superior conditions.
Credit risks
Risk management processes
Our internal risk model also takes account of a wide range
of specific drivers that impact on our credit exposure.
Credit risks emanating from the insurance and investment
sides of the balance sheet are considered. On the insurance
side, we model trade credit, surety and bonding,
credit enhancement, and political risks. We also take into
consideration credit risks associated with claims on our
retrocessionaires after allowing for any collateralisation.
On the investment side, credit risks are measured and
limited using the credit-value-at-risk (CVaR) approach
with a standard “asset value” model. The main input parameters
are our investment volume, the migration matrix
between different rating classes, discounting curves and
recovery rates. The correlated rating class migrations and
defaults of the respective bond issuers are modelled using
a Monte Carlo simulation. Revaluation of our investments
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Management report_Risk report
under these rating scenarios ultimately leads to a future
profit and loss distribution. Hence, we can then adequately
capitalise for this risk and manage our portfolio with
respect to its expected and unexpected loss.
In order to aggregate the credit risks emanating from
the insurance and investment sides, we utilise an in-house
counterparty exposure monitoring system. We restrict
default risks by limiting our total exposure in respect of
individual debtors. To ensure exposures across both the
primary and the reinsurance segment are taken into
account, the Group Committee of the Board defines and
monitors these limits. Moreover, we consider a whole
range of individual attributes, including the issuer’s individual
rating, its capitalisation as a basis for covering
the liability, the quality of the collateralisation and of the
respective issue, as well as the industry sector concerned.
This allows us to control the exposure on a single
debtor and to steer towards a well-balanced credit risk
portfolio. Furthermore, we are able to shift available capacities
between the insurance and investment sides of the
balance sheet.
We also regularly perform stress tests on our crossbalance-sheet
exposures utilising the expertise of our
economists, who together with our experts in Integrated
Risk Management have developed a range of both shortterm/shock-event-type
scenarios and more long-term
trends to ensure the resilience of our assigned credit risk
capital in aggregate. The results of this analysis are shared
with the Board Risk Committees.
Munich Re’s investments were not affected by any
significant defaults in 2006.
Risk exposures
Credit assessment is of central importance for the management
of credit risks relating to fixed-interest securities. The
main factor here is the quality of the issuer or the respective
issue, which is primarily reflected – according to the
investment principles of the Munich Re Group – in the ratings
of international rating agencies: 93.5% of our investments
in fixed-interest securities at 31 December 2006 had
a rating of “A” or better (according to Standard & Poor’s
classification). The majority of fixed-interest securities in
our portfolio have been issued by governments or banks