Joachim Wenning, Chief Executive Officer (CEO) and Chair of the Board of large European reinsurer Munich Re, has said that while inflationary pressures are on the rise, the firm expects this to be a manageable risk.
Speaking this afternoon to investors and analysts following the release of its Q2 and H1 2022 financial results, executives from Munich Re addressed the hot topic of inflation within the risk transfer industry.
“On the one hand, Munich Re is known for its prudent reserving and holistic ALM approach to mitigate these risks,” said Wenning. “On the other, we have seen significant nominal price increases in this year’s renewals, which were to a large extent driven by inflation and will be supportive for a continuation of the hardening market.”
With inflation and interest rates being intrinsically linked, it’s not surprising that the latter are on the rise as inflation trends higher. For Munich Re, while this means living with some “temporary accounting mismatches,” the trend is expected to be economically positive for the reinsurer.
Of course, as high inflation persists and consumers are increasingly impacted and adjust spending habits, among other trends, the risk of a recession grows. But this isn’t too much of a concern for Munich Re, explained Wenning, as past recessions have shown both positive and negative effects on the business, which largely balance out.
“With comparatively low credit risk in our investment portfolio, I feel relatively comfortable,” said Wenning. “Experience also tells us that past economic downturns also provided business opportunities, for example, capital relief transactions.”
According to Wenning, the good news for Munich Re is that a large part of its business is hardly affected, with the issue mostly centred on its property and casualty reinsurance operation, and notably the back book.
“If you look at the maturity structure of our reserves, about three quarters is short-term business, where we swiftly adjust prices to inflation development. 50% of our reserves have a maturity of less than two years. For long-tail lines, we prudently assess various inflation drivers that are relevant for each line of business. We further strengthened our reserves to react to inflationary trends already last year. We feel that our solid reserve position provides quite some resilience to inflation developments.
“So, although inflation pressure has increased, no doubt, we expect this risk to be manageable for us,” said Wenning.
Interestingly, the CEO went on to explain that at the July 1st, 2022, reinsurance renewals, an in-depth examination of business-specific inflation impact played a vital role.
“Some parts of European and North American property business are now expected to be more exposed to inflation than before,” noted Wenning. “Among the drivers for this is that demand for building materials currently exceeds supply by far, leading to strongly increasing overall building cost. And a large share of significant nominal price increases we have seen in the market was mitigated by adjusted loss expectations.”
“Overall, we have seen a continuation of the upward price trend as high loss experience and inflationary pressure enforced the need for adequate margins. At the same time, we continued to choose increasingly cautious loss picks for long-tail casualty lines, taking account of socialisation trends. Hence the flattish price development we are showing is, as usual, prudent and fully risk and business mix adjusted. Our growth was quite selective to preserve profitability,” he added.
All in all, prices for the Munich Re portfolio increased by 0.1%, as the firm exploited growth opportunities at July 1st, increasing the volume of business written by 6% to €4.4 billion, as reported this morning in its results.
