Weather derivatives trading unit complements Munich Re: S&P

The world’s largest reinsurance firm Munich Re’s U.S. weather derivatives and energy commodities trading unit Munich Re Trading LLC complements the reinsurers core operations and is highly strategic to its parent, according to S&P.

Munich Re purchased the weather and weather-related energy risk management unit of Bermuda reinsurer RenaissanceRe, RenRe Energy Advisors Ltd., back in September 2013. Almost a year later the unit, now called Munich Re Trading LLC, has become strategic component of the reinsurance firm, complementing its expertise in weather and catastrophe risks.

Ratings agency Standard & Poor’s said in a report that Munich Re Trading LLC’s strong business position in the weather derivatives market is a complement to Munich Re’s product portfolio in the area of weather risks.

S&P said that Munich Re Trading holds “highly strategic group status” to its parent, reinsurer Munich Re. Its business involves selling corporate clients which are weather sensitive, such as utilities, risk management products to mitigate the effects of weather events and variation.

This is achieved predominantly with the use of derivative contracts utilised to mitigate the economic impact of noncatastrophic weather events as well as weather-linked commodity price variations.

These activities are likely a strong complement to Munich Re’s increasing focus on providing specialist, customised reinsurance covers for large corporate clients, which is a key strategic aim for the reinsurer as it navigates the challenging reinsurance price environment.

S&P views the weather market as a potential growth area for Munich Re, hence the Munich Re Trading unit could be highly strategic as the reinsurer continues to become increasingly bespoke in terms of its re/insurance product offerings to large corporates.

S&P also highlights the potential for cross-selling or synergies between the weather and energy derivatives trading unit and the reinsurers core reinsurance and primary insurance operations.

Munich Re assumes 100% of the risks written by Munich Re Trading LLC via its subsidiary New Reinsurance Company via a master swap and stop-loss agreement. This covers the weather and energy trading units maximum multi-year exposure and potential losses, based on a value at risk calculated in line with the group’s confidence level. Munich Re Trading therefore transfers all of its risks to New Reinsurance, who in turn cedes them to Munich Re.

The weather derivatives and energy commodity derivatives trading business could prove a key area of growth for Munich Re. With its move into providing highly customised solutions a key response to the challenges presented by the highly competitive reinsurance market, it is likely that this area could become a core focus for the group over the coming years.

Weather risk management complements large insurance and reinsurance solutions very well. Most corporates are exposed to weather variations to some degree and large facultative type risk solutions often include an element of weather protection.

By combining its specialist, customised re/insurance solutions with very targeted weather and energy commodity derivatives solutions, Munich Re could find it has a product offering which is hard for others to match.

The weather derivatives and risk management market has itself become more focused on customised solutions, rather than the over the counter derivatives trading once thought to be its future. As a result, large reinsurers like Munich Re should be able to leverage their analytical and underwriting experience across catastrophe types and weather impacts, to combine underwriting with weather risk management to provide solutions to large, weather exposed corporates or insurers.

It will be interesting to see how this area develops for the reinsurer over time and whether the weather trading unit becomes increasingly important to the reinsurance group, especially if the challenging reinsurance market environment continues.