Risk sharing with pension funds ups price competitiveness: Munich Re

The sharing of reinsurance underwriting risks with capital markets investors such as pension funds is seen as a “key development area” at the world’s largest reinsurer Munich Re, as it looks to embrace new business models.

Speaking yesterday at the Monte Carlo Reinsurance Rendez-vous, member of the board Thomas Blunck explained the steps that Munich Re is taking to develop strategic initiatives that it sees as key for its future development and likely to help offset the challenging market environment, to a degree.

One of those key development areas is the relationship it is building with capital market investors, such as pension funds, and the insurance-linked securities (ILS) community, which the firm works with as partners as well as some of its retrocessionaires.

“We are sharing risks with, for example, pension funds out of the alternative capital market space,” Blunck explained.

“Yes they are taking part of our risks on their balance sheet, and it takes away business from traditional reinsurance,” he continued.

Now, you might think that a large reinsurance firm like Munich Re, which is globally diversified and has primary insurance operations, may not need the support of additional capital from third-party investors. But there is a very important reason why the strategy makes sense and is expected to continue to develop at the firm.

Blunck stated; “Very importantly, it also can improve our own price competitiveness.”

So even the world’s largest reinsurance firm is bringing efficiency into its business with the help of the capital markets and ILS. Munich Re is aware that there is business it can share, helping it to manage its own exposures and maintain profits, while also modelling its exposures more effectively.

For ILS markets and investors like pension funds, the fact that Munich Re is clearly being bullish about the prospects for more risk being ceded to them will be welcomed. It is by finding the right mix between own balance-sheet and third-party balance sheet that reinsurers like Munich Re can leverage the efficiency of ILS capital, while still maintaining profits. A very important strategic development for any reinsurer, particularly one of such scale.

Blunck continued; “By sharing with them our peak scenarios it lowers our risk capital charges and improves our own front-end price competitiveness.

“It’s a change in the business model, but an important one also for us, so there are benefits for us as well here.”

As the reinsurance business model continues to change even the largest players are acknowledging the importance of the capital markets. Finding the right balance between its own capital and funds provided by ILS investors will be an ongoing development at Munich Re.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.