Munich Re Group Annual Report 2006 (PDF, 1.8

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.
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