Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
One of the main risks for any company is failing to recognise
new business opportunities that maximise the company’s
franchise value. We counter this danger by, among
other things, integrating innovation teams into our operative
reinsurance units in order to tap into new product and
client segments at an early stage. This approach is also
designed to ensure that we identify and work on topical
market and client issues, as well as fields of knowledge
that are of critical importance for the future. Furthermore,
our steering tools are increasingly oriented towards the
key drivers of new business value – for example, in the life
reinsurance and primary life and health segments, management
compensation is explicitly linked to the meeting
of value added by new business targets. These targets are
not top-line growth-oriented, but rather bottom-line-oriented
– meaning that management is incentivised to grow
the franchise in a sustainable and profitable way.
Financial strength
Financial strength on an economic basis
We started the reporting year 2006 with available financial
resources comfortably exceeding the risk-based capital
requirements for the Group. This was also illustrated by a
series of “stress tests” applied to our economic measure
of financial strength. The favourable result for the business
year 2006 further consolidated this position, giving us
headroom to launch our first €1bn share buy-back programme.
Shares repurchased during the period November
2006 to April 2007 will subsequently be retired.
At the present time, the way we determine our financial
strength differs somewhat from the regulatory and ratingagency
approaches. This means that we must constantly
compare and contrast these calculation methods and
resultant evaluations of our financial strength as part of
our active capital management. It is not yet possible for
insurance groups to adopt one measure of financial
strength, although the Solvency II project to reform insurance
supervision in Europe and various initiatives of all
major rating agencies may assist in converging these
indicators of financial strength over time.
Regulatory and rating-agency capital
requirements
The Munich Re Group meets the regulatory solvency
requirements stipulating a specified minimum capitalisation
supplemented by the criteria of specific ratings
from the major rating agencies. More detail is provided
in the “Financial situation” section (see page 97 f.).
138
Assessment of risk situation
Management report_Risk report
Status quo
We see ourselves in a position to sustain the level of profitability
we have achieved in recent years, adjusted to eliminate
the effects of exceptionally low claims expenditure
for natural catastrophes and particularly favourable capital
market conditions. We therefore assess the Munich Re
Group’s risk situation as manageable and under control.
With our risk management instruments, we will systematically
control the risks in our reinsurance business
and ensure that we firmly adhere to our policy of riskadequate
prices, terms and conditions (e.g. exclusions),
even if this means having to refrain from participating in
some business.
Outlook
The external requirements for Group-wide risk management
are likely to increase further since national and international
initiatives such as IFRS are setting new standards
for accounting, and Solvency II is fundamentally restructuring
insurance supervision in the European Member
States. Rating agencies increasingly and explicitly take the
quality and effectiveness of risk management into account
in their ratings and their requirements are very much in
line with what we have adopted internally as best practices.
Insurance associations and research institutions
such as the Geneva Association actively promote an
exchange of views on risk management best practices and
their establishment. At the end of 2006, Munich Re hosted
the second CRO Assembly of the Geneva Association,
which is the largest global gathering of insurance and reinsurance
CROs. The programme organised by Munich Re
provided a unique opportunity for our clients and peers to
exchange views on developments in risk management and
to interact with regulators, rating agencies, policymakers
and analysts. Munich Re’s experts from the fields of geosciences,
biosciences, liability regimes and macroeconomics
also conducted workshops during the Assembly to
assist our clients in a deeper understanding of the risks of
change in their portfolio. It is our hope that our efforts in
these areas will help reduce the cyclicality of results in our
industry and further improve the underwriting standards
adopted by insurers and reinsurers globally.
Munich Re also participates actively in the CRO Forum
and in 2007 will chair the Emerging Risks Initiative of the
CRO Forum, which it co-founded (see section on qualitative
risk management on page 126 f. for a description of the
activities of this initiative).