After Munich Re, one of the world’s largest reinsurance companies, revealed IBNR reserves of €90 million related to the ongoing conflict in Iran, the company’s CFO, Andrew Buchanan, described the figure as cautious as he highlighted Munich Re’s three lines of defence.
In its results announcement early this morning, Munich Re reported that the €90 million for claims arising from the Iran war is split €60 million in Global Special Insurance and €30 million in property and casualty reinsurance.
During a recent call with analysts, CFO Buchanan was questioned on whether the €90 million is specific notification, and also on the potential second order inflation impact and if there’s any proactivity around that.
“We have little to no notifications. And so, the €90 million represents IBNR, ” said the CFO. “We also consider the €90 million to be somewhat cautious, but somewhat cautious as an estimate of direct losses that might arise as a result of insureds or cedents being able to claim directly on the primary insurance or the reinsurance that we have with them. So, we’re positioning the €90 million in a more narrow sense. It’s literally claims that we might end up paying if, for example, there are claims coming through the marine war markets or the political violence and terrorism market, that kind of thing.”
Buchanan emphasised that the €90 million is a conservative, narrowly defined number, which doesn’t also include some kind of blanket allowance for inflation.
“We don’t consider that to be necessary at this stage, not because we’re denying that inflation could be higher than expected, but I actually think we’ve lived through an experience in 2022 that I think will probably turn out to be more severe than what we’re seeing this year, and where our processes and our financial management approach, I think, came through very well and proved to be effective,” he said.
The CFO went on to highlight Munich Re’s three lines of defence, the first of which is that most of the company’s business can be repriced within one year. “And as you’d expect, our pricing people and our economists are looking carefully at what that needs to be,” he said.
Adding: “The second line of defence is asset liability management, where a meaningful part of our asset portfolio is responsive to inflation in some way. And I mentioned in my prepared comments, we do expect a bit of a catch up effect on our inflation linked bonds in Q2 as the most recent CPI numbers kick in there.
“And then the third line of defence is reserves… But there, I would have to say we, in part of our annual reserve review, have a reserve risk heat map where we think carefully about all of the white swans, black swans, and other swans that could go wrong. And there’s a whole, let’s say bucket that is broadly allocated to economic deviations or volatility, and part of that is inflation.
“And so, at the moment, I’m pretty comfortable that whatever inflation brings on the claims side we can certainly digest. And so, we didn’t feel the need in Q1 to do some kind of opportunistic special booking.”
The CFO also took questions from the media today, and was asked a similar question around inflation related to the Iran war.
“We look at all the things that could go wrong, and we do also then have general provisions for things like adverse economic fluctuations, which is things like inflation. And I’m comfortable that what we have in our reserve buffers allocated to scenarios like that, is more than adequate to counteract anything that we might see at the moment.
“We’ve seen this movie before, to borrow a phrase, in 2022 after the invasion of Ukraine and the very significant spike of inflation there. And I think we found that actually our reserving processes were able to cope with that quite well,” he said.
