Munich Re Group Annual Report 2006 (PDF, 1.8

Munich Re Group Annual Report 2006
ratio of 100% means that premium income was exactly sufficient
to cover claims and costs. Net expenses for claims
and benefits mainly include paid claims, the change in
claims provisions, and the bulk of other underwriting
expenses. The portion of other underwriting expenses not
considered includes, for example, German fire brigade tax.
Net operating expenses chiefly comprise the costs arising
in the acquisition of new business (e.g. commission) and
for the ongoing administration of insurance contracts.
In the property-casualty reinsurance segment, there
were net expenses for claims and benefits of €8,925m
(11,329m) and net operating expenses of €3,846m (3,827m)
in 2006, compared with net earned premiums of €13,795m
(13,565m). The combined ratio thus amounts to 92.6%
(111.7%), an excellent figure, significantly due to the fact
that we were largely spared major losses from natural
catastrophes last year.
The combined ratio in the health reinsurance segment
amounts to 96.3% (93.0%), with net expenses for claims
and benefits of €748m (658m) and net operating expenses
of €303m (324m) comparing with net earned premiums of
€1,091m (1,056m).
The combined ratio in primary insurance is determined
solely for the property-casualty segment (including legal
expenses insurance), as most of the health primary insurance
business is conducted like life insurance. In 2006,
paid claims and the change in claims provisions totalled
€2,218m (2,338m) and net operating expenses €1,390m
(1,390m), compared with net earned premiums of €3,975m
(4,005m). Our combined ratio in primary insurance thus
amounts to 90.8% (93.1%), an outstanding figure both in
absolute terms and in comparison with competitors.
When it comes to interpreting the combined ratio, the
particular circumstances of the class of business in question
have to be taken into account. The composition of the
portfolio, for example, is of great significance. The following
factors (among others) are important:
– The more the claims burden fluctuates over time, the
greater the risk is, and so the premiums needed to cover
the risk must be higher. Loss ratios in good years, as well
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Management report_Munich Re Group
as average loss ratios, have to be all the lower to provide
the reinsurer with an adequate return for assuming this
risk. This is particularly true in the case of natural catastrophes,
which may occur rarely, but are often very
severe when they do.
– Another important distinguishing feature relates to the
time-lag between premium being received and claims
being paid. The longer these periods are, the longer the
premiums received can be invested in the capital markets.
High combined ratios in classes of business in which
claims settlement takes a long time (e.g. casualty) therefore
generally entail higher returns from investments
with which the loss reserves are covered. These returns
are not reflected in the combined ratio.
Therefore, while we aim to keep our combined ratio as low
as possible, it is not our only target.
Rather, the key factor we consider is economic value
added, which cannot be properly reflected by the combined
ratio. We pursue this target internally through the
performance metrics of value added and European Embedded
Value (see page 52 f.), both of which are more meaningful
and better tailored to the characteristics of the relevant
business segments. Their common feature is that they
measure value creation not only on the basis of current
and forecast profits but also taking into account the size of
the risks taken. Thus, when considering Group performance,
we gear targets (by way of a common, linking element)
to a risk-adjusted return. Although this is not a direct
performance measure, it is a strong indication of the
Group’s value creation.
Risk-based Group return target for the financial year 2007
We have set ourselves ambitious targets again for 2007, to
follow up the successful performance of the past financial
year. For this purpose, we are employing a risk-based performance
measure which we used for external communication
for the first time in 2006: return on risk-adjusted capital
(RORAC). We derive this target by placing the profit
achieved or aimed at, expressed in euros, in relation to the
necessary risk capital, the amount of which we determine