1. Münchener Rück Munich Re Group “Recent volatility and future strategy in the insurance industry” September 2003 Nikolaus von Bomhard

2. 2 Munich Re Content –Volatility and capital conditions –Consequences for strategy –Who will be the future winners?

3. 3 Munich Re Volatility and capital conditions

4. 4 Munich Re Recent volatility noticeable above average Volatility and capital conditions Source: VIX, Chicago Board Options Exchange

5. 5 Munich Re Loss of capacity in the insurance industry Volatility and capital conditions 100 200 300 400 500 600 199219931994199519961997199819992000200120022003 -51,3% Market value of the Euro Stoxx Insurance (1.1.1992 = 100) Reduction in capacity –Investment losses: > US$ 200bn since 2000 for P&C insurers worldwide –Major losses: e.g. WTC ~ US$ 50bn –Capacity withdrawals (several companies since 2001, e.g. Gerling Global Re) –Downgrades of insurers and reinsurers by rating agencies –New capacity, e.g. in Bermuda, unable to fill the gap

6. 6 Munich Re Recent developments in regulation Volatility and capital conditions Tightening of reinsurance regulation –Financial Stability Forum and IAIS –EU considerations on a reinsurance directive –Germany: Fourth Financial Markets Promotion Act Solvency requirements for reinsurers –EU “fast-track” approach –Solvency II: a risk-based approach

7. 7 Munich Re How much capital do we need? Current situation: Significant differences in approaches to quantifying available and required risk capital Regulatory authorities Rating agencies Equity analysts Accounting bodies Internal company view Example 2: Differences within stakeholder category Shareholder view Convergence to Example 1: Differences between stakeholders Volatility and capital conditions

8. 8 Munich Re Consequences for strategy

9. 9 Munich Re Strategic options Consequences for strategy “Ride the tide” “Rest in safe haven”

10. 10 Munich Re The choice depends… Consequences for strategy “Ride the tide” Underwriting risks “Rest in safe haven” Investment risks

11. 11 Munich Re “Rest in safe haven” and CR Consequences for strategy Combined ratios per market 1992–2001

12. 12 Munich Re Major considerations Consequences for strategy Focus on risk-adequate price Improve risk management: 1.Prevent the big bang 2.Care about a creeping-death scenario 3.Connect the liability and asset sides of the balance sheet 4.Manage more and more complex know-how $

13. 13 Munich Re Focus on risk-adequate price Consequences for strategy Technical price The opportunistic view (1) Technical price Follow the fortunes (2) Technical price Focus on risk-adequate price (3)

14. 14 Munich Re Prevent the big bang Consequences for strategy CAT budget Regional underwriting Risk capital Monitoring Linking PricingRoE definition Example: Budgeting and monitoring of CAT covers

15. 15 Munich Re Care about a creeping-death scenario Consequences for strategy Number Degree of uncertainty Time According to Igor Ansoff's theory of weak signals, modified Options for action Frequency of weak signals Initial expert discussions Publications in scientific journals Conferences Public awareness from press/media NGO (non- governmental organisations) activities Politics Political parties Parliament Company statements Laws Standards Regulations

16. 16 Munich Re 2. Control quantities Profit requirements Asset risk capital Level of confidence, shortfall probability Connect the liability and asset sides of the balance sheet Example: Introducing an ALM-based SAA 3. Target function with regard to SAA optimisation Economic Value Added (EVA), Return on Risk-Adjusted Capital (RoRaC),Total Return,… 1. Constraints Liabilities structure Market forecast Regulation Rating Liquidity …  Distinguish target function, steering and constraints Consequences for strategy

17. 17 Munich Re Advisory Board L/K E1 E2/LA AAANA CUGC SFR Property Casualty Marine Claims Knowledge networks Divisional KM Manage more and more complex know-how Overview of knowledge management organisation at Munich Re Centre of Competence Knowledge networks support the handling of technical knowledge DKM Creates the basis of KM within the divisions and provides all employees with access to relevant knowledge Consequences for strategy

18. 18 Munich Re Who will be the future winners?

19. 19 Munich Re Insurers/Reinsurers… Who will be the future winners? …with broad access to clients … with sophisticated tools to manage risks … with cost-efficient internal procedures … with efficient knowledge management … with the ability to convince capital markets of their performance in order to have access to new capital … with profits from technical underwriting complemented by financial returns

20. Thank you! Münchener Rück Munich Re Group