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Apr 2024

Investing in underwriting capacity and data-driven models

Source: Asia Insurance Review | Nov 2023

Reinsurance business models have been adapting to the changed macroeconomic environment over recent years. We caught up with Munich Re’s Dr Achim Kassow on the sidelines of this year’s Monte Carlo event to find out about recent business developments and prospects for the next 12 months.
By Paul McNamara
Pricing, capacity, retentions and terms and conditions for reinsurance business have become the core mainstays of discussions during the opening rounds of the renewal discussions during Les Rendez-vous de Septembre. This year was no different.
We caught up with Munich Re member of the board of management Achim Kassow to find out how business has been for the reinsurer over the past year as well as the outlook for the year ahead – and also picked his brains about the upcoming renewal season.
“For Munich Re overall, results for 2022 were quite successful,” said Dr Kassow. “We came out well above our EUR3.4bn ($3.59bn) target. That also translates into conviction that we are well on track for our 2025 planning perspective.”
Success for the reinsurer comes from a wide business base.
“What we aim for and are happy with is the broad diversification of our revenue streams,” he said. “On the one hand is P&C reinsurance business with the volatility that we all know about. This is balanced by the life and health reinsurance business which has become a pretty stable source of revenue. Then there is our global specialty insurance business, and the fourth pillar is the primary business under ERGO.”
ERGO is a group of insurance companies owned by Munich Re and is one of the largest insurance groups in Europe.
Core business areas
With these four pillars, Dr Kassow feels the reinsurer enjoys substantial diversification. “This is irrespective of the diversification that we enjoy in reinsurance when it comes to the global book and also the different businesses that we have in P&C,” Dr Kassow said.
“Looking at our business in Asia Pacific, Middle East and Africa, not that much has changed in the past two years - and that's a positive. Once again, we've seen over the two years more than 20% growth in revenues with top-line growing on average above 10%. We consider that to be a good result.”
Since overall global growth has been sluggish, this result is impressive. “Reinsurance business growing at 10% reflects a significant increase of our market position in the region,” he said. “We are happy with that. I cannot comment on our technical results for the region, but when it comes to the profitability of the business overall, we are satisfied.”
Market perspectives
Munich Re’s business is global and different markets are developing at different rates.
“In the more developed markets in the region, we see the same trends we see globally - peak capacity being in demand and Munich Re being a stable provider of capacity,” said Dr Kassow. “That holds especially true for large markets demanding big capacity like Australia and Japan. When it comes to emerging markets, typically driven by strong growth of the underlying primary industry, capacity for peak perils is less relevant. However, also here, we managed to grow slightly above the market, which means that we could build stronger relationships with our clients in the region.”
There have been losses too.
“We also have seen quite sizable losses in the region, especially in Australasia last year and this year and we have also seen significant losses from South Africa,” he said. “That all added to a certain market discipline in the region, which was also helpful in securing underwriting technical profitability.”
For Munich Re, China is developing at its own pace.
“In the second half of this year we will be celebrating the 20-year anniversary of our China branch,” he said. “The Chinese insurance and reinsurance market is becoming more technical as the government has taken substantial steps to improve a technical underwriting focus in the primary market, which is also helping the reinsurance market.
“What we see is a shift from whole account structures into more explicit risk sharing. From our point of view, it is a positive development that we now talk more about risk transfer between the primary sector and the reinsurance sector and less about optimisation of cash flows,” said Dr Kassow.
Looking ahead
Dr Kassow does not see Munich Re’s focus changing much in the year ahead.
“The strategic direction that we took around seven years ago - focusing on operating performance, keeping underwriting discipline, investing heavily in building our technical capabilities, moving closer to markets - that is paying off,” he said.
“We moved a lot of people out of Munich into Singapore and even more now into local offices to be close to the clients on the ground. In markets that are recalibrating, understanding the risk is a core competence. Having the right data and expertise available is essential,” Dr Kassow said.
This singular focus will remain.
“I don’t see that changing,” he said. “In the current environment, it's even accelerated. I would rather invest more in underwriting know-how and data-driven models. When you ask me the same question again in an interview next year, you can expect me to have the same position, because I believe that this is what we as a reinsurer, perhaps as an industry, need to do.”
Understanding the nuances of each market is critical to success.
“Questions around sustainability, the effects of climate change, AI, cannot be answered generically,” Dr Kassow said. “The answer has to be a concrete one - and a concrete answer can only come with experts knowing the markets, knowing the businesses. This is what we, as a reinsurer, should do and what we are committed to do - to build that local expertise and to leverage our global knowledge.
“If Munich Re is perceived as a provider of state-of-the-art risk solutions with deep knowledge and technical underwriting know-how, this is exactly how we would see ourselves. This won’t change because we believe that the changes around us are playing to our strengths with that being our core competence,” he said.
Pricing and capacity at the 1/1 renewals
Dr Kassow recognises that renewals must make sense for all parties.
“The perspective of the primary insurer is the most crucial,” said Dr Kassow.
He points to the discussion amongst the Australian public about affordability of insurance. “That's where primary insurers have the first discussion,” he said. “What do they feel is a sustainable pricing level that is technically necessary, but is also acceptable to the public, by the market, by the environment they're operating in? That’s the first question.
“The second question is how much capital would I be willing to dedicate to my basic loss expectations? And how much peak scenario do I want to cede out to my reinsurers? Do I, as a primary insurer, believe that my shareholders would be happy to accept more volatility to get a higher return? Or would they expect me to deliver very stable returns so that I need to cede out whatever is there in terms of volatility? I need the reinsurance market for that.
“Structurally, over the last two years, the prices for ceding out volatility have increased and so you need to compare the price of ceding out against your own cost of capital.”
For Dr Kassow, considering all of these perspectives is essential.
“That is why I start looking at primary insurance from a reinsurance perspective,” he said. “The question of what you could do in your primary market is for my cedant to assess. The second question is between the primary insurer management and their investors, and what the risk-return profile should be. That is also not part of my business as a reinsurer.
“The third thing is what does that mean for the market and is it sustainable from a reinsurance perspective? That's my business,” said Dr Kassow. “It could well be that in the coming months we will see some more primary insurers saying, ‘I would rather retain business because I believe that the risk-return of this business is better if I keep it for my shareholders instead of ceding out of the reinsurance market’.
“Those considerations are made in every market by every single insurance player. There is no generic answer, the best solution is always a specific one. In our discussions we say, let's credit our cedents that they understand what they want to do and then we discuss what our contribution could be. This is what we want to leverage, to understand the demands of our clients.
“They may wish to increase their retention, or they may rather go for more reinsurance providers, that's a very individual strategic decision and this is why Monte Carlo is so important, because it's basically the melting pot to find out where each company wants to go,” said Dr Kassow.
“Munich Re does not rely on third-party capacity because we are a gross net company. We don't have any dependencies on the market when it comes to our balance sheet. That gives us the opportunity to be a stable and predictable partner,” he said.
Affordability of insurance
Does Dr Kassow foresee a time when some geographies or some business lines simply become uninsurable?
“I would rather expect more intense affordability discussions,” he said. “Uninsurable is very rare. That applies to some systemic risks. So the main question is not one of insurability, it's rather a question of affordability. My hope is that price signals by the insurance markets will help all stakeholders to take sustainable actions.
“I commit quite a lot of time advocating to officials that the effective and sustainable thing to do is to provide targeted rules and regulations as well as to focus more on prevention.  
“There are multiple examples around the globe where people after a catastrophe have taken intelligent prevention measures and that has helped reinsurance premiums come down and overall insurance penetration to increase. The interest of insurers needs to be to help the societies to build sustainable solutions,” he said. A 
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