Munich Re Group Annual Report 2006 (PDF, 1.8

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Munich Re Group Annual Report 2006 ation requirements of other countries are enforced by means of intensive and widespread training measures for our staff. Given its business model, the Munich Re Group is particularly dependent on the knowledge and proficiency of its staff. We control the resultant human resources risks by means of appropriate indicators and metrics. Our human resources tools as a whole serve to strengthen our staff’s ties with the Group and consequently to safeguard our business intelligence. With our specially tailored programme of qualification and further training measures, we make sure that our staff are able to adapt to current market demands. Targeted personnel marketing measures, staff potential assessment and development schemes, and systematic succession planning are designed to reduce the risk of shortages in qualified staff. Modern management tools and adequate monetary and non-monetary incentives ensure a high level of motivation. Legal and supervisory risks Legal risks may arise on the one hand from court decisions and legislation (changes in legal parameters) and on the other from legal disputes and arbitration proceedings in which we as an international insurance group are involved, especially in the area of claims settlement. We counter risks from changes in legislation and court decisions by constantly monitoring current developments and by actively participating in relevant bodies and associations in order to contribute our views. The following are examples of currently relevant legal risks: – In April of 2004, New York State Attorney General Eliot Spitzer started an investigation into the use of Placement or Market Service Agreements (PSAs) in the insurance industry. Several other US state regulators subsequently commenced similar probes into this matter, as have other regulators. We have received requests to provide information in connection with these investigations and are cooperating fully with the authorities. Entities of the Munich Re organisation, together with several other insurers and brokers, have been named defendants in 136 Management report_Risk report several PSA-related class actions by US policyholders. Munich Re denies any wrongdoing and will defend itself vigorously. – Given the hitherto unbroken trend of rising claims against insurance companies, we increased our provisions for asbestos claims as at 31 December 2006. In February 2006, the federal legislative procedure for the Fairness in Asbestos Injury Resolution Act in the USA foundered. With the Democrats gaining the majority of seats in the House of Representatives in the Congressional elections in November 2006, the chances of the Bill being revived have fallen substantially. Revelations about questionable asbestos-related disease diagnoses and resultant lawsuits have led to the convening of various investigation committees in the USA to look into these practices. This could be a sign of a positive trend with regard to the asbestos situation in the USA. However, it is too early to say whether and to what extent this will have favourable implications for the insurance industry’s loss development. – In connection with the attack on the World Trade Center of 11 September 2001, a federal court has upheld two district court rulings which had earlier found that the attack on the two WTC towers should be treated either as one or as two separate events, depending on the wording of the insurance policies. The remit of the Court of Appeals was solely to establish whether procedural errors alleged by the parties to the dispute warranted fresh proceedings in a court of the first instance. As the objections were dismissed, the legal uncertainty regarding the loss event issue is now finally resolved. Since the rulings of the courts of first instance are already reflected in our ultimate loss estimates, the decision will not affect our projected US$ 2.6bn total WTC claims bill. Confirmation of the Wilprop decision will, however, enable Munich Re to defend itself against additional financial burdens. – As a consequence of the severe hurricanes of 2005, particularly Katrina, hundreds of lawsuits against diverse insurers are still pending in the affected US states. Plaintiffs with private buildings insurance are attempting to circumvent the exclusion of all flood damage routinely
Munich Re Group Annual Report 2006 Management report_Risk report contained in such policies. The fact is that the damage along the coast was caused mainly by the storm surge accompanying Katrina rather than as a direct result of the wind. Despite the good arguments of the insurers (the exclusion of flood damage in private buildings insurance policies has been established practice for years and has been approved by the regulatory authorities) the outcome of the lawsuits is at present difficult to assess, not least owing to public pressure on the insurance industry and the uncertainties inherent in jury decisions. – As a result of our global activities, we are subject to a large number of supervisory regulations in different countries. These may give rise to legal and regulatory risks. In late 2004, the US Securities and Exchange Commission (SEC) and the Office of the New York State Attorney General initiated inquiries of Munich Re with respect to “certain loss mitigation insurance products”. Subsequently, a number of other authorities in the USA and elsewhere made both formal and informal requests for similar information from Munich Re and some of its subsidiaries. We are fully cooperating with these inquiries. Main other risks As insurers and reinsurers, we are dependent on economic and political parameters in the different markets in which we operate, as well as on macroeconomic and geopolitical risks. The development of the economy not only affects our insurance business but also influences the capital markets and hence our investment portfolio. An economic downturn can lead to payment defaults and downgradings of credit ratings among our debtors, which may require write-downs in our books. When developing new markets, such as those in Asia and eastern Europe, the Munich Re Group is largely dependent on the prevailing economic, political and regulatory conditions, the accessibility of market segments, and the local sales channels. But even in developed markets, social or political changes may result in a deterioration of legal, fiscal or economic conditions, and this may ultimately affect the assets, liabilities, financial position and results of individual companies or the Munich Re Group as a whole. Thus, for instance, the ongoing discussion about the reform of the social security systems in Germany still harbours risks for the health insurers in the ERGO Insurance Group. We are therefore closely monitoring these developments by (among other means) being active at insuranceassociation level and making regular scenario calculations that simulate the effects of possible changes in basic parameters. We are also proactively investigating the implications of the recent reforms for our product strategy in comprehensive and supplementary health insurance. As a matter of general principle, our economists constantly study and monitor the economic and political situation of our main markets and inform the Board of Management without delay about relevant trends so that, if necessary, suitable risk mitigation or management measures can be taken. Conceivable scenarios are also discussed and coordinated with our asset management company MEAG to enable us to react promptly and appropriately in respect of our held investments. Strategic risks arise if the strategy at overall Group level or business-segment level is not compatible with existing and future client requirements, market conditions or other parameters (e.g. economic or regulatory). If these disparities were not recognised, our objectives and initiatives would not take sufficient account of developments. In our strategic planning, we therefore carefully analyse the strategic risks, which are evaluated in individual projects (e.g. investment or market-entry projects) using scenarios and at an aggregate level on the basis of “wild cards”. These wild cards describe events with a very low occurrence probability but a potentially strong impact on our business operations. In addition, we systematically perform “SWOT analyses” (strengths, weaknesses, opportunities, threats) and, building on these, specify what action is to be taken. Our Group Development Division works closely with our Integrated Risk Management Division to ensure these risks can be adequately reflected in the “stress tests” applied under the Munich Re Capital Model and in our management of cross-line, cross-segment and cross-balance-sheet accumulations of risks. 137
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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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