Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
management. Experts also emphasise
the fact that there will be a level playing
field. Though we are not against
the risk-based approach using economic
capital as a matter of course,
we are concerned that this principle
may not be implemented properly and
fairly, on solid and proven grounds.
And we don’t share the optimism
about the insurance pricing for instance,
because on the US market
with its risk-based regulatory system
you still have pricing cycles and different
pricing strategies, for instance.
Moreover, if you look at the Basle II
system in banking, it is not clear at
this stage that the main beneficiary
from the system will be the customer.
Hubert Rodarie_ Solvency II could
clearly lead to a better and more commonly
accepted view of risks. But as
far as long-tail insurers in France are
concerned, we gave up the Solvency I
standards as a measure of our risk. So
Solvency II, if it is implemented properly,
will not have a great effect on our
pricing.
Claus Brinkmann_ If you just consider
the future in five years after the implementation
of Solvency II, will there be
a trend towards intensified consolidation?
Hubert Rodarie_ Certainly, though
it’s difficult to say in what proportion,
as long as we don’t know the final
design of Solvency II and how the
supervisors will act in this landscape.
Philippe Marie-Jeanne_ I think
that there will be a trend towards consolidation,
as there was after the implementation
of Basle II. But the difficulties
of medium and small insurers
will depend on the way the principles
are applied. I believe that the specialists
and real monoline insurers – big
enough to have real expertise – will
continue to perform better than multi-
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liners. And I hope that reinsurers and
the solvency model will still recognise
our capabilities. So if we have the
support of our preferred reinsurers
and also a fair model, I think that we
still have a real position in the market
and a bright future of our own.
Claus Brinkmann_ I agree completely
with what you said. A basic principle
of our business model is to support
small and medium-sized companies in
reducing their size-driven disadvantages.
To have only a few huge clients
left in the world is not what we are
aiming for, of course. I think one of the
most crucial points will be the definition
of the standard model. Do you
think the standard model adequately
reflects your risk situation, which is
strongly geared to long-tail risks?
Philippe Marie-Jeanne_ At the
moment, we are concerned about the
one-size-fits-all approach that can easily
become a Procrustean bed. We fear
the current tendency to push for a
rigid formula-based approach which
fails to recognise the real quality of
risk management and underwriting
policy. Account has to be taken of all
forms of risk mitigation and not only
of “simple” mathematical diversification.
Hubert Rodarie_ We are also
worried about a too conservative
approach based on the one-year horizon.
That concept ignores the reality
of our long-tail business, where we
have to deal with great uncertainties
with a long-term horizon. More precisely,
the proposed risk modelling of
assets in the insurance balance sheet
ignores the reality of the business and
will have a negative effect on the longterm
financial return, ultimately resulting
in an increase in the price of
insurance products for customers,
especially in the case of long-tail
insurance.
Philippe Marie-Jeanne_ So we are
very keen for our risk expertise to be
recognised along with the mathematical
diversification effect. We strongly
believe that experience is a key factor
in managing underwriting risks and
that it could be measured if an insurer
is able to get historical data by line of
business over a sufficient time horizon.
In short, what we really need is
the possibility to personalise the
standard formula so that it takes into
account the quality of our risk management
in investments or underwriting
and our long-standing expertise.
What we really need is the
possibility to personalise the
standard formula.
Claus Brinkmann_ Reinsurance is the
classic external tool for risk capital
relief. Do you think risk relief through
reinsurance is given sufficient credit in
Solvency II?
Philippe Marie-Jeanne_ No, definitely
not. Under the current solvency
regime, recognition of the positive
effect of reinsurance is insufficient
because it only involves the ceded
premium. Particularly for the reserve
risk, the effect of non-proportional
reinsurance is not adequately acknowledged
under Solvency II. In order to
identify the real impact on risk mitigation,
it would be necessary to distinguish
the effect of the mean ceded
exposure and the reduction of volatility
due to reinsurance.
Hubert Rodarie_ Since non-proportional
business is quite common in
France and especially since we are
writing more non-proportional contracts
in decennial and long-tail business,
this is a crucial issue for us. And
the smaller the insurer is, the more
reinsurance is necessary.