PRUDENT RISK MANAGEMENT IN TIMES OF UNCERTAINTY
Transcrição
PRUDENT RISK MANAGEMENT IN TIMES OF UNCERTAINTY
PRUDENT RISK MANAGEMENT IN TIMES OF UNCERTAINTY Torsten Jeworrek Monte Carlo, 9 September 2012 Macroeconomic Outlook Global economy slowing down, outlook sees only modest improvements p – highly g y uncertain environment Annual real GDP growth, 2011-2013e Potential downside risks: 10% 9% 2011 2012e 2013e 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% World Eurozone UK USA Source: Munich Re Economic Research, IHS Global Insight Japan China Europe Further deterioration in the eurozone, e.g. affecting financial situation of Spain or Italy, or G k eurozone exit Greek it Under such a scenario, recession would probably affect all of Europe USA Fiscal outlook highly unclear due to expiring financial programmes (“fiscal cliff”) With restrictive fiscal policy, growth in 2013 would be clearly weaker than anticipated Asia / MENA China “hard landing” (i.e. severe economic slowdown resulting from internal factors) p conflict in the Middle East with Geopolitical potential negative effects for world economy Risk Management in Times of Uncertainty, 9 September 2012 2 Macroeconomic Outlook Especially long-lasting low interest rates hurt the business model of the insurance industryy Implications for (re)insurance Yield curves and inflation expectations Risks are manifold: 2,5 Real rates already negative, higher realised inflation would hurt even more Sudden increase in nominal interest rates would weigh heavily on balance sheets: 2,0 1,5 10 1,0 0,5 0,0 -0,5 2012 2013 2014 2015 Germany Inflation US Inflation 2016 2017 2018 2019 In the last five quarters shareholder equity in the RI industry rose by 11,7% while government bond yields fell by around 180 bp Due to the corresponding rise in bond prices, the investment result (incl. unrealized gains) were one of the main drivers in the rise of shareholder equity 2020 Germany Gov Yield US Gov Yield Since mid 2011, nominal interest rates have decreased significantly further, to historical lows for “safe havens” Inflation is expected to remain at moderate levels over the next years – even then, this would not be enough to offset yet lower nominal rates in man many “safe ha haven” en” markets (across the full spectrum of the yield curve) Source: Bloomberg, IHS Global Insight, Consensus Economics, Munich Re Economic Research Outright deflation also possible in the event of further crisis escalation Risk Management in Times of Uncertainty, 9 September 2012 3 Impact on insurance industry Prudent risk management must consider potential risk scenarios … Description Government debt Default of states/ haircuts Break-up of eurozone Likelihood ood Impact on (re)insurance Inability to pay back debt Governments impose haircuts for investors on their debt Medium-term write-offs of bonds in weaker currencies substantially impacting on P&L accounts Risk Refinancing rates could rise scenario substantially, and even default of some players not excluded Higher claims burden, esp. in credit and financial lines Partial (e.g. several countries) or full break-up p Reintroduction of national currencies in exiting countries Potentially massive distortion on capital markets (severe impact on economy, y, (re)insurance) ( ) ) Possible reduction of available Risk capital/decreased buffer due to scenario write-downs or neg. inv. return Reintroduction of new “old currencies” could impact on currencies operating model (e.g. IT, claims) Increased exchange-rate risk Risk level Risk Management in Times of Uncertainty, 9 September 2012 4 Impact on insurance industry … with some scenarios already real Inflatio on Intere est rates Description Low interest rates Negative real interest rates t High inflation Deflation Ongoing period of low interest rates in “safe haven” countries Inflation exceeding nominal interest rates in selected countries Likelihood Impact on (re)insurance Already reality Already reality Risk level Appreciation of bonds Less inv. income for new assets Higher market risk to earn spread Life: Challenge due to guarantees Higher claims costs only partly compensated for by investment income, esp. for longer-tail and asset intensive business asset-intensive Medium- to long-term period of sustained inflation Top/bottom-line pressure since insurance spending focused Risk scenario Higher absolute claims amount, esp. in longer-tail casualty lines Inflation rate falling below 0% for an extended t d d period i d off time Overcapacity in PI market Potential downgrades/defaults – Risk consolidation scenario Pressure on some LoBs, e.g. credit Risk Management in Times of Uncertainty, 9 September 2012 5 Mitigating options The business model must cope with continued unpredictability p y – Dealing g with uncertainty y key y to success Mitigating options Deeply embedded overarching risk management Clearly defined risk appetite and product strategy Contingency planning and high operational preparedness To do: Adjust UW strategy and act quickly at operational level Disciplined asset-liability management Mitigating options to detect challenges and capitalise on opportunities at an early stage Risk Management in Times of Uncertainty, 9 September 2012 6 Adjusting underwriting strategy Adjust underwriting strategy – Reduce impact of economic scenarios appetite productand strategy (examples) 2 Risk define riskand appetite product strategy (exemplary) Review segment strategies and risk appetite Definition of strategies with specific risk potential, e.g. credit, financial institutions, … Life: Modification of savings products and guarantees Property/Casualty: Definition of risk appetite for reserve-intensive business Adapt underwriting principles to cope with high inflation Evaluation of impact on different types of business (e.g. reserve intensity, development pattern pattern, tail …)) Transparency on exposure and future inflation risk assessment Adapt models/parameters Review of capital intensity intensity, e e.g. g due to higher reserve or counterparty risk Evaluation of terms and conditions, e.g. deposits, currency clauses Retrocession strategy p to transfer reserve risk Evaluation of options Increase commutation activities Risk Management in Times of Uncertainty, 9 September 2012 7 Contingency planning Act quickly on operational level – Mitigate economic risk andand highproduct operational preparedness (examples) 2 Contingency define riskplanning appetite strategy (exemplary) Impact analysis on group, segment and LoB depending on economic scenario Set up task force for capital management strategy (e.g. strategic asset allocation, circumvention of “home bias”) Structured liquidity crisis planning Set up IT task force (e.g. implementation of new currencies, implications on financial statements)) UW: Exposure limits for critical countries UW: Assessment of political risk and social unrest UW: Review of currency clauses in contract wordings … Operational preparedness makes it possible to act in underwriting and in capital management even in high-risk scenarios Risk Management in Times of Uncertainty, 9 September 2012 8 Key takeaways Industry must concentrate on returns from core business Key takeaways Economic environment will stay challenging, especially low interest-rate environment and capital market volatility Thus focus on value creation on the liability side is paramount – no alternative to prudent technical underwriting Reinsurers’ capital base artificially inflated – sudden increase in nominal interest rates would weigh heavily on balance sheets Insurance and reinsurance industry has to reflect breadth of levers to create value in these times, e.g. market/product strategy, pricing and wording, disciplined ALM Risk Management in Times of Uncertainty, 9 September 2012 9 Disclaimer This presentation contains forward-looking statements that are based on current assumptions and forecasts of the management of Munich Re. Re Known and unknown risks, uncertainties and other factors could lead to material differences between the forward-looking statements given here and the actual development, in particular the results results, financial situation and performance of our Company Company. The Company assumes no liability to update these forward-looking statements or to conform them to future events or developments. Risk Management in Times of Uncertainty, 9 September 2012 10