We can also use the experience gained from this interaction, plus the information and data we gather, for the optimum design and pricing of insurance products. With such an integrated approach, our insurance company clients enjoy a broad range of valuable services which are key success factors in carrying risk – be it as an insurer or a reinsurer.
How did you then develop a system for human resources risk management? Schneidawind: Firstly, we established that we already do a great deal in terms of personnel development and knowledge management. Then I took the experience I had gained from our Life and Health Division and considered how our know-how in risk management could be linked with the area of human resources. And from this we evolved our human resources risk management.
1898 – The birth of machinery insurance In 1898, chief engineer Fritz Böhrer proposes to Carl Thieme a totally new type of insurance for machinery. Böhrer polls companies in Bavaria and, in collaboration with friendly insurance companies, develops “accident insurance for machinery”. On 1 January 1900, Allianz Munich is granted a licence for Bavaria. From 1903, machinery insurance is authorised for all of Germany.
Munich Re shares as seen by the analysts More than 50 analysts give regular assessments on the performance of Munich Re’s shares. During the period under review, the buy-recommendations showed a marked increase year on year. At the end of 2004, 62% of analysts assessed our shares positively, compared with only 44% the year before.
Munich Re organised more than ten roadshows in the USA and Europe last year to present the Group. We also held over 100 individual meetings with investors and analysts at our offices. Additionally, as in previous years, we participated in several investor conferences around the world. But our activities are not only geared to institutional investors: private investors can contact Munich Re directly at any time as well. They obtain prompt answers to their enquiries via our shareholder hotline or e-mail postbox.
What we aim to achieve We are successful if we achieve our ambitious objectives: Segment Key indicator Objective Result Objective
High quality in management and administration – Optimised decision-making and organisational structures and processes: We develop structures and processes that are transparent, efficient and geared to profitability, and consistently implement them.
Reactions Awards 2004: Reinsurer of the Year Munich Re was awarded the title of “Reinsurer of the Year” by the British journal “Reactions”. The award was based on a vote among readers of the journal, who are primarily involved in insurance and reinsurance.
In November 2004, Munich Re decided to involve ergo more closely in significant Group processes, especially strategic issues and risk management, so that there is now “unified control” within the meaning of the German Stock Companies Act.
Hurricanes and typhoons p. 62 Eastern Europe p. 64 Capital market solutions p. 65 Customised portfolio solutions p. 67 Healthcare management p. 68 DKV in China p. 71 Life insurance p. 72
We are developing customised solutions to meet the recurrent demand for new types of cover. In the wake of the unusual accumulation of severe storms in the past year, clients are increasingly requesting protection against such events. We have developed various products to cover these frequency losses. Another example of new insurance demand are oil rigs. These had to be evacuated and their operation interrupted in part because of statutory provisions applying when a storm is imminent. Even if a rig is not devastated by the storm, it is still affected by a business interruption loss. Our experts are developing new insurance solutions for cases like these.
We also advise our clients in the development of innovative risk transfer or risk financing structures in life insurance and company semi-retirement schemes. Alternative capital market solutions are becoming increasingly important in life insurance: to finance business, to comply with reserving regulations or to transfer risk. They allow the capital employed to be optimised and performance to be improved.
The tsunami in South Asia and its aftermath are one of the greatest natural catastrophes in human memory. The death and destruction it caused afflicted both the local population and tourists.
Major opportunities for health insurance The health insurance market’s development is particularly dynamic. Although its share in China’s overall premium income is only around 6%, it has grown by up to 50% per annum in recent years. In 2003, income from health insurance products totalled more than €2bn. The majority of the population does not yet have enough health cover; however, the authorities are promoting the expansion of private health insurance.
Corporate pension schemes in the ascendancy Company pensions are especially attractive. Since the pension reform of 2001, which laid down a legal right for employees to demand certain forms of company retirementprovision arrangement, this area has increased appreciably in significance. A legal form that has benefited exceptionally from state promotion is the “Pensionskasse”, the traditional type of German corporate pension scheme. More than 90% of the new company schemes have this form. The life insurers of the Munich Re Group are among the market leaders in company pension insurance. Besides many medium-sized firms, a substantial number of wellknown major companies have entrusted provision for their employees to us. As there has been an improvement in the possibility for employees to take company pension entitlements with them when they change employers, the incentive to join corporate pension schemes has risen markedly.
Composition of the Supervisory Board The term of office of the Supervisory Board expired at the end of the agm on 26 May 2004. The agm re-elected all the shareholders’ representatives to the Supervisory Board.
Equal promotion opportunities and career perspectives In 2001, together with the Ludwig Maximilian University in Munich, we launched a three-year study entitled “Professional careers of men and women at Munich Re”. According to the results, now available, the potential of dedicated and motivated women in the Company is high. However, there is often a subconscious assumption that women are less career-oriented – this seems to be the only conclusion that can be drawn from the fact that they are not equally represented among executive staff and in projects and working groups. The study shows that this prejudice is unjustified. To make sure that the potential of our female staff is not lost, we are sensitising our executives to this issue and encouraging female staff themselves to take a more proactive approach. We support them by structuring our schemes and processes wherever possible in such a way that they promote women’s interests.
Thank you Munich Re’s Board of Management would like to cordially thank all the staff of the Munich Re Group for their commitment and loyalty in 2004. The quality, innovation capacity and international reputation of our Group are in great part due to their hard work, skill and dedication.
Life reinsurance continued to benefit from the longterm trend towards increased private provision for old age. The worldwide ageing of society and the pressure on social security systems are causing private life insurance to grow more strongly than the overall economy. Market concentration increased as a result of consolidation. The health reinsurance market also developed positively.
Apart from these natural catastrophes, we were also burdened by a strengthening of loss provisions by us$ 482m at our us subsidiary American Re. These increases mainly involved liability business for the accident years 1997–2001 and reserves for asbestosis claims. Given the pleasing improvement in our investment result and, above all, our very successful profit-oriented underwriting, we nevertheless achieved a very good reinsurance underwriting result. Where conditions did not meet our requirements, we refrained from writing the business. At the renewal dates, we improved prices and conditions for the third time in succession.
– The investment result increased significantly. As stock markets were more stable, we were noticeably less affected by writedowns on securities than in the previous year. However, downward real estate prices necessitated writedowns of €217m on our real estate.
The causes of the most important changes in shareholders ’ equity were as follows: – The Group profit of €1.8bn was responsible for the major portion of the increase, the previous year’s loss of €434m and the dividend payment for 2003 of €286m having been offset against the revenue reserves.
Several cyclones left their mark on the combined ratios, in particular in the divisions Europe 2 and Latin
The total insured losses from these natural catastrophes are likely to amount to about us$ 44bn. The Munich Re Group incurred claims expenses of about €715m before taxes on income, the divisions mainly affected being: Europe 2 and Latin America; Asia, Australasia, Africa; North America; and Corporate Underwriting/Global Clients. This accounts for about 4.5 percentage points of the combined ratio of 98.9% (96.5%) in property-casualty.
Europe 1 Result target surpassed despite decline in premium No severe natural catastrophes in the year under review
Austria, which accounts for 9.0% of overall business, is the division’s second-largest market. Our insistence on risk-adequate prices caused premiums to fall by about 17% to €150m. The result was clearly positive. Since Austrian primary insurers are also actively and successfully cultivating business in the neighbouring eastern European states, Austria remains an attractive market for Munich Re.
Munich Re Group Annual Report 2004 06_Financial report Europe 2 and Latin America / Asia, Australasia, Africa
We made a number of changes in the division’s responsibilities in the past business year: Australian alternative market business was shifted to our division Asia, Australasia, Africa; enterprise and contingency risks were taken over from Corporate Underwriting/Global Clients and combined in one sfr unit together with capital market products.
Our disciplined and selective underwriting strategy contributed to the positive result of €130m, despite substantial expenditure for major oil and gas losses and the us hurricanes.
As a consequence, the result before amortisation of goodwill totalled more than €615m (212m). The contribution to Group profit after amortisation of goodwill, taxes on income, and minority interests in earnings, was €261m, following a deficit of €1,091m in the previous year. The result in 2003 had been distorted by tax expenditure, writedowns of goodwill and the poor performance of the stock markets in prior years.
In life insurance, premiums fell to €1,020m (1,056m). This was attributable to weaker business in the single-premium sector as well as numerous normal policy expiries. Of decisive importance, however, was the fact that the boost in new business did not occur until the fourth quarter, so that the clear rise in regular new business premiums has not yet fully been reflected. The true marketing strength of the Karlsruher Insurance Group is best seen from the total new business premiums in relation to the overall term of insurance. These rose by 36.9% to €2.69bn (1.97bn).
Marketing Retail and segregated funds for private and institutional investors are offered directly by meag. However, investment products are also becoming an increasingly established part of ergo’s insurance marketing. Given the growing importance of private provision for old age, this trend is likely to intensify. In the past business year, meag won new mandates from significant corporate pension schemes in the hard-fought market for company retirement provision and thus consolidated its position further in this especially promising field of business.
Other income/expenses –1,021 –1,504 –2,692 –675 –476 we took advantage of the low volatility of the equity markets to hedge parts of the portfolio cost-effectively using derivative financial instruments. After taking account of hedging transactions, the ratio of equities to total investments – on a market value basis – fell from 14.5% to 13.4%.
The table on the right shows the investment result for 2004 broken down by type of investment: Investment result by type of investment 2004 Prev. year Change €m €m in %
For the global economy, the main risk factors will continue to be geopolitical uncertainties, in particular in the Middle East and the Gulf region, as well as the continuing risk of large-scale terrorist attacks. Another major risk is that economic growth in China, and thus for Asia as a whole, will decelerate more sharply than expected. A further decline in the us dollar, in particular as a result of the us twin deficit (current and fiscal account) would affect export dynamics and thus growth in the eurozone.
Recent years have shown that the Munich Re Group’s risk landscape can change quickly and unexpectedly owing to a wide range of events or influences. We are constantly refining the tools with which we monitor and manage risks, so that in our view they have now reached a high degree of maturity. We are in a position to assess risk situations appropriately, despite the greatly increased pace of change. The growing complexity and dynamism of the environment in which we operate means that there are natural limits, however. There cannot and never will be absolute security when it comes to identifying risks at an early stage, measuring them sufficiently or correctly estimating their real hazard potential.
Our combined ratios, which in addition to other key indicators are important to us in monitoring the premium/ claims risk in non-life (re)insurance, have developed as follows over the last ten years: In life insurance and reinsurance the biometric risk, the lapse risk and the interest-guarantee risk are especially relevant. The calculation of underwriting provisions in primary insurance is based on “biometric” calculation tables, i.e. on assumptions with regard to mortality and disablement. These assumptions are checked by the supervisory authorities or by institutes of actuaries every few years, depending on the specific national regulations. The checking of mortality and the appropriateness of trend assumptions may result in a need for additional reserving (e.g. if actual life expectancy has not been sufficiently taken into account) or alternatively in the reversal of reserves that have been posted. For the provision for future policy benefits in annuity insurance, the longevity risk is of particular importance. On the basis of the current mortality table drawn up by the German Association of Actuaries (dav) and published in June 2004, we have revalued our provisions for future policy benefits in annuity business. This has involved allocating additional amounts to the provisions posted in our life insurers’ German Commercial Code
An excellent tool for risk prevention, and thus for risk controlling, is careful reserving to cover future claims and losses which have been incurred but not yet reported or not reported enough. Hence we generally establish provisions for uncertain liabilities using actuarial methods. In addition, where required under national rules of insurance supervision and accounting, we post provisions for fluctuations in claims experience, although these are not included as such in our ifrs consolidated financial statements. Claims provisions for all classes of business and at all companies are regularly checked by means of internal reviews and audits to make sure they are sufficient. These analyses draw on the expertise and experience of a wide range of specialists, such as actuaries, scientists of various disciplines, underwriters and accounting experts. Whenever possible, we also refer to external statistics and documents (e.g. certified biometric calculation bases in life and health insurance) and, where necessary, appropriate adjustments are made to the provisions posted. Owing to the particular uncertainties involved, however, there is a substantial risk of misestimates in establishing reserving requirements. Thus, as in the previous years, we had to substantially strengthen reserves for losses from business written in the past. Particularly in us liability insurance business, the damages awarded by courts – to asbestosis claimants, for instance – recurrently exceed even the most pessimistic assumptions. This also means that further, possibly considerable, increases in the loss reserves from this and other liability complexes cannot be ruled out in the future either.
We only run currency risks to a very small extent in the Munich Re Group, since we practise a policy of currency matching. This means that for the main currency liabilities in underwriting business, appropriate matching items are established on the assets side. We use derivative financial instruments to hedge parts of the portfolio, to optimise earnings and to implement planned purchases and sales. Our Group companies act as end-users of derivatives; in addition, they engage in limited trading in these instruments with a view to profit-making. Particular care is paid to limiting risks, choosing top-quality business partners and strictly monitoring adherence to specifications in mandates and investment guidelines. The volumes involved are shown on page 172 f.
Outlook The accounting and insurance supervision landscape faces substantial changes as a result of ifrs, Solvency ii and numerous supranational and national reform initiatives. This will place additional demands on companies’ reporting and control mechanisms and especially their risk management.
Allocation to revenue reserves – – 65 – – – – –65 –
– Claims equalisation provisions as under the German Commercial Code do not constitute liabilities to third parties and are thus not admissible under ifrs; they therefore have to be reversed.
– Provisions for terrorism risks do not constitute liabilities to third parties under ifrs either and are therefore not admissible. They are also reversed.
– In accordance with ias 39 (rev. 2003), impairments losses are recognised for financial instruments with an equity character if there is a significant or prolonged decline in the fair value of the investment below its cost. By contrast, under the German Commercial Code, investments which have suffered an impairment in value must be measured at the value to be attributed at the balance sheet date.
Investments in affiliated enterprises that we do not consolidate because they are not material are carried at their fair values. If the shares are listed on a stock exchange, we use the share prices at the balance sheet date; for other shares, the fair value is the net asset value based on the German Association of Financial Analysts (dvfa) method or – in the case of new acquisitions – the acquisition cost. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
Over four years and up to five years 43 87 45 92
– Futures –1 – – – – – – – –1
On 26 May 2004, the Annual General Meeting voted to replace Authorised Capital Increase 2002, which amounted to €89,662,858.24 following its partial utilisation, by a new amount of €280m (Authorised Capital Increase 2004).
The miscellaneous other provisions comprise a large number of different items, including €36.4m for salary obligations, €26.2m for competitions for sales staff, €16.1m for other remuneration for desk and field staff, €10.2m for financial statement and reporting expenses, €8.4m for social insurance against occupational accidents, and €7.0m for severance pay.
– Ceded share 2 3 –10 –6 –1 –1 –2 –63 –11 –67
Total expenses for claims and benefits 5,292 4,816 10,124 11,313 14,090 14,777 3,040 3,023 32,546 33,929
As a result of Munich Reinsurance Company’s capital increase in the business year 2003, the initial share prices for the stock appreciation rights issued and the number of stock appreciation rights already granted were adjusted in accordance with the conditions.
The stock appreciation rights may only be exercised after a two-year vesting period and then only if the share price is at least 20% higher than the initial price. In addition, Munich Re shares must have outperformed the dax 30 (Plan 1999) or the euro stoxx 50 (from Plan 2000 onwards) twice at the end of a three-month period during the term of the plan. The gross amount that may be obtained from the exercising of the stock appreciation rights is limited to an increase of 150% of the initial share price.
In the year under review a total of 456,336 (459,398) stock appreciation rights were granted, 133,803 (139,698) of these to members of the Board of Management. Munich Re shares have been acquired to cover future obligations arising from the long-term incentive plans.
Intrinsic value 2004 for one right – – – – €8.98 €2.35
ergo International Aktiengesellschaft, Düsseldorf 93.67% 853,676 –542,101 ergo Kindlustuse as, Tallinn 93.09% 12,140 2,894 ergo Lietuva draudimo uab, Vilnius 93.67% 9,203 378 ergo Latvija Versicherung ag, Riga 92.38% 5,431 74 ergo Assicurazioni S. p. A., Milan 93.67% 53,638 7,016 ergo Previdenza S. p. A., Milan 65.90% 242,391 19,275 ergo Vida Seguros y Reaseguros, Sociedad Anónima, Saragossa 93.67% 13,014 1,869
Storebrand Helseforsikring as. Oslo 46,84% 9,031 282 union versicherungs-aktiengesellschaft, Vienna 42,15% 54,342 10,356 vereinsbank victoria Bauspar Aktiengesellschaft, Munich 28,10% 62,460 –1,008 victoria-volksbanken Pensionskassen Aktiengesellschaft, Vienna 43.87% 8,001 360
Net expenses for claims and benefits These include the expenses for claims (claims payments and the change in the provision for outstanding claims), expenses for premium refunds and the change in the remaining underwriting provisions (provision for future policy benefits and other), in each case after deduction of the ceded share.
Options Derivative financial instruments where the holder is entitled – but not obliged – to buy (a call option) or sell (a put option) the underlying asset at a predetermined price within a certain period. The writer of the option is obliged to transfer or buy the asset and receives a premium for granting the option to the purchaser.
Property-casualty Umbrella term for all insurance business that is not life or health insurance, e.g. liability, motor and fire insurance.
Watkins Syndicate 58, 125 Weather derivatives 65 * ic = Inside cover