The FINANCIAL - Munich Re expects further hardening of markets

Munich Re expects further hardening of markets

Munich Re expects further hardening of markets

The FINANCIAL -- Following years of eroding rates caused by excess capacities and low major-loss expenditure, particularly in European markets, low interest rates – likely to remain even lower for even longer due to the coronavirus pandemic – are impacting the profitability of reinsurers. Insurance covers are therefore likely to become more expensive, particularly for long-term risks in third-party liability and other lines. Munich Re will consistently ensure that prices, terms, and conditions are commensurate with the risks in the next renewal round.

The gradual erosion of rates and the softening of terms and conditions – caused by excess capacities and randomly lower major-loss expenditure, particularly in European countries – have for years been making profitability a challenge for reinsurers. Interest rates have dropped to record lows once again in 2020. Against the backdrop of the coronavirus crisis, it is increasingly likely that the current interest-rate environment will continue to affect low-risk investments for the foreseeable future. These circumstances mean that sustained profits, in long-tail business and elsewhere, will only be possible if prices match the assumed risks.

"Interest rates will remain low for quite some time. In turn, income for insurers must come from risk assumption itself, and that includes long-tail business. Relying on interest income, or hoping that statistically likely losses will not occur, is an unsuitable basis for the long-term assumption of major risks. We want to support our clients reliably and in the long run with our financial capacity and our knowledge of risks. We devote considerable attention at Munich Re to sound underwriting as well as appropriate prices, terms, and conditions," stated Doris Höpke, Member of the Board of Management responsible for Europe and Latin America.

Elevated risk awareness of systemic developments

The sheer scale of the COVID-19 pandemic serves as a stark reminder that we must always properly assess and manage low-probability risks that bear tremendous loss potential. This is especially true of risks that are exposed to an underlying deterioration – as is the case with certain natural disasters made worse by climate change. Recent experiences following the lockdown of public life and the business world in many countries have been a wake-up call regarding the staggering potential for systemic risks to result in losses that subsequently trigger many different repercussions. Yet it is by definition impossible to insure risks that lead to losses everywhere at the same time, thus violating the fundamental criterion of insurability.

The coronavirus pandemic has also indirectly affected the rapidly growing insurance segment for cyber risks: the lockdowns forced most office staff to work from home and a lot of companies to migrate many business operations online, followed by a sharp rise in cyber attacks. In order to ensure sustained growth of cyber business, Munich Re is pursuing a comprehensive strategy of assessing existing risks individually; identifying systemic trends; and pursuing risk-commensurate prices, terms, and conditions. A Munich Re team of over 130 experts specialises in cyber solutions throughout the value chain, including the analysis, prevention, and transfer of risks.

The market for cyber risks remains one of Munich Re’s most important strategic growth areas. And additional, pandemic-fuelled momentum from digitalisation and companies’ rising awareness of cyber risks can further boost a market already exhibiting robust growth. In fact, the cyber insurance market could even surpass the current forecast for growth, from slightly above US$ 7bn in 2020 to around US$ 20bn in 2025.

Author: The FINANCIAL

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