Munich Re warns of threats ahead
As the pandemic persists, reinsurers need to beware of threats from multiple vectors, says Doris Höpke.
By Marc Jones, Associate Editor
Munich Re’s Doris Höpke, Member of the Board of Management responsible for Europe and Latin America, said Monday during Munich Re’s virtual press conference – which replaced its usual in-person event at the annual Baden-Baden Reinsurance Meeting – that interest rates are likely to remain even lower for even longer due to the coronavirus pandemic.
Höpke added that insurance covers are therefore likely to become more expensive, particularly for long-term risks in third-party liability and other lines. As a result, 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 capacity and lower major-loss expenditure, particularly in European countries – have for years been making profitability a challenge for reinsurers, said Höpke. Interest rates, she added, 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. Hence, 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,” said Höpke. “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.”
Höpke stressed that the sheer scale of the COVID-19 pandemic serves as a stark reminder that the market 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 worsened by climate change.
According to Munich Re, global COVID-19 economic losses could reach up to $12trn, and while the insurance industry is bearing significant COVID-19 losses, there is also a huge uninsured portion.
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 insured losses. However, Höpke pointed out that it is by definition impossible to insure risks that lead to losses everywhere at the same time; pandemics violate the fundamental criteria of insurability.
Höpke added that 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 companies to migrate many business operations online, which has been followed by a sharp rise in cyber attacks.
In order to ensure sustained growth of cyber business, Höpke said that Munich Re’s cyber team is pursuing a comprehensive strategy of assessing existing risks individually; identifying systemic trends; and pursuing risk-commensurate prices, terms, and conditions.
The company said that 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. According to Munich Re the cyber insurance market could even surpass the current forecast for growth, from slightly above $7bn in 2020 to around $20bn in 2025.
