Munich Re's P&C capital charge swells €2bn in 2018

Property and casualty capital requirement pushes overall SCR to €14.7 billion

Heightened exposure to natural hazard risks, coupled with a shake-up to its internal model, hiked Munich Re’s regulatory charge for property and casualty (P&C) risk by 21% in 2018.

The German reinsurance group’s solvency capital requirement (SCR) for P&C underwriting risk hit €11.1 billion ($12.7 billion) at end-2018, up from €9.1 billion the year prior. Taking diversification benefits into account, the respective totals were €7.6 billion and €6.3 billion. 

The charge for large and accumulation losses, which covers the underwriting risk of losses exceeding €10 million in a single line of business and losses touching more than one line of business, increased 24% to €7.1 billion year-on-year, and that for basic losses 16% to €4 billion.

The firm stated that the increase to the P&C charge reflected the growth of reinsurance businesses covering exposures to natural disasters.

 A “major change in the methodology used for the basic loss model” was also cited as a contributor to the higher SCR.

The P&C charge accounted for 28% of Munich Re’s overall SCR, before taking diversification into account. This stood at €27 billion at end-2018, up 5% on the year prior. Post-diversification benefit, the 2018 SCR was €14.7 billion compared with €14.4 billion in 2017. 

Market risk made up the biggest chunk of the reinsurer's 2018 SCR, at 34%, down slightly from 36% in 2017. Of the market risk SCR, €3.8 billion related to currency risk, €3.7 billion to general interest rate risk, €3.6 billion to equity risk, €3.2 billion to specific interest rate risk and €2.1 billion to property risk. 

Hedging activity in 2018 was recognised for dropping the firm’s equity risk exposure and a cut back in long-term liabilities held by its life and health primary insurer, ERGO, for crushing its general interest rate risk.

Munich Re's own funds were just shy of €36 billion at end-2018, up from €35 billion the year prior. The reinsurer's 2018 Solvency II ratio, its own funds divided by its SCR, stood at 245.4%, a slight improvement from 244.3% at end-2017.

What is it?

The Solvency II ratio is found by dividing an insurer’s own funds by its solvency capital requirement. Own funds constitute excess assets over liabilities, and are divided into three tiers based on their loss absorbency.

The SCR is the amount of own funds insurers need to hold under the European Union's Solvency II regulation. It can be calculated by reference to a fixed regulatory formula or through an insurer’s own internal model. The requirement is calibrated to ensure a firm could withstand a one-in-200-year financial shock. Insurers must maintain a Solvency II ratio above 100% at all times.

Munich Re breaks out its SCR into six components: P&C risk, life and health risk, market risk, credit risk, operational risk and other risks.

Why it matters

Munich Re appears to be mastering the art of expanding its business while keeping its Solvency II-defined risks in check. Since 2015, its P&C SCR has increased 18%, largely reflecting business growth, but its overall SCR has fallen 4%. What explains this divergence? Diversification. Risk offsets Munich Re is able to claim between the different components of its SCR lopped €3.4 billion from its P&C requirement in 2018, up from €2.8 billion in 2017 and €3.1 billion in 2016.

Efforts to hedge market risk have also helped suppress its total SCR. Maintaining a balanced risk profile and keeping an eye on market exposures should serve the insurer well going forward, allowing it to expand underwriting without causing its own funds requirement to spiral.

But it's also true that non-insurance and market risk related factors could cause its SCR to jump around. The fact that a model tweak contributed to the 16% year-on-year increase to the basic loss P&C SCR is a reminder for all Solvency II insurers to be mindful of model risk.

Get in touch 

Munich Re's accumulation of own funds is keeping pace with its growing SCR – for now. What pitfalls could cause its Solvency II ratio to plummet? Let us know by emailing [e-mail], tweeting @LouieWoodall, or messaging on LinkedIn.

Keep up with the Quantum team by following @RiskQuantum.

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