Munich Re reveals its strategy to generate new business

For 2017, Munich Re said it is aiming for a consolidated result of between €2 billion and €2.4 billion in 2017, less than the €2.6 billion profit it made in 2016. The company is under pressure both from the soft market and, on the investment side, from the low interest rate environment.

“We will neither desperately reduce reserves to pump [results] up, nor increase our risk appetite, particularly on the investment side,” CEO Nikolaus von Bomhard says during the company’s 2016 full year press conference on March 15.

In 2016, gross premiums written shrank to €48.9 billion from €50.4 billion in the previous year, as it shed business that did not meet the company’s margins expectations particularly in China.

And Munich Re expects to shrink some more in the short term, Von Bomhard notes.

The operating environment makes it difficult for players like Munich Re to find profitable growth opportunities in its traditional reinsurance segment. But the company does nevertheless remain optimistic regarding its operations overall.

“Munich Re believes that it can grow through product innovation, through risk solutions as well as traditional reinsurance,” says Von Bomhard. The reinsurance part of the business depends on the market situation, he admits. However, “there is enough untapped insurance potential, not only in emerging markets but also in developed markets.”

In developed markets, Munich Re sees significant potential in closing the insurance protection gap for example in flood risk. Munich Re is participating in major natural hazard reinsurance programme Flood Re in Europe as well as National Flood Insurance Program (NFIP) in the US. While flood risk in the US and the UK have been traditionally covered by the government, it is now being passed on to the private sector.

In order to participate in this business opportunity, Munich Re is refining its flood modelling expertise.

However, “the price needs to be appropriate, and the price pressure is currently greatest in the traditional reinsurance business,” Von Bomhard notes.

But Munich Re is not waiting for prices to turn. “We are actively searching for new business,” says Torsten Jeworrek, executive board member responsible for reinsurance.

In January Munich Re received a license to write business domestically in India through a local subsidiary. India is a strong growth market, Jeworrek notes.

A number of foreign reinsurers have recently received approval to open a branch in India. The list includes Swiss Re, Lloyd’s, Hannover Re and XL Catlin. Reinsurers are excited about India because of the insurance growth potential they see for the country. Drivers for growth are the bright economic outlook on the one side and a low insurance penetration on the other.

Apart from India, Jeworrek believes that business is going to develop in the field of climate change which is being promoted by governments worldwide and for which Munich Re is developing insurance solutions. This market is, however at a very early development stage, Jeworrek admits.

More concrete may be growth generated via Munich Re’s innovation initiatives focusing on investments in IT and data analytics, which is set to boost the company’s revenues from services.

“This allows us to deal with large datasets and advanced analytical methods to dive into the datasets of re/insurers and detect patterns in customer behaviour in order to create new products,” Jeworrek says. The technology is to be applied by Munich Re in its reinsurance operations to support medium-sized primary insurers which could not shoulder such an investment on their own.

To support its endeavour, Munich Re has also implemented an IT system which is more agile than standard, large software systems and allows to work on prototypes and fast-track  product implementation to test them on the market and make adaptations quicker, Jeworrek says.

The goal is to deliver products that respond to new risks such as cyber but also business interruption without tangible damage. Munich Re also expects the initiatives to deliver new business models based for example on Internet of Things, Jeworrek says. New market potential is developing for example in the shared economy and through data mining and Munich Re aims at developing risk services which will result in a fee based platform for insurers, Jeworrek says.

The Internet of Things allows the tracking of behavioral patterns and enables better loss and risk prevention methods, creating innovative data-driven loss prevention models, Jeworrek says. “We are entering the service segment to protect our clients,” Jeworrek says.

The link between the insurance product and available data will reduce claims and ultimately also the premiums for the client, Jeworrek says.

Munich Re has created a unit called Digital Partners in 2016 which is fostering the relationship with insurtech start-ups, looking for alternative business models targeting the shared economy including Airbnb or Uber, where on-demand insurance is quite popular.

In October 2016 Munich Re invested in insurtech start-up Slice Labs  to launch the first on-demand insurance platform, to support the on-demand economy.

Munich Re’s Digital Partners group is working with Slice to provide the backing for Slice’s on-demand insurance products globally.

In November 2016, Munich Re has agreed to partner with app-based insurance provider Wrisk, an InsurTech venture, to become its exclusive carrier for business underwritten in the UK, Europe and US.

As part of the agreement, Wrisk will get access to some underwriting platform services from Digital Partners.

As a result of its investments in innovation, Munich Re is already offering a loss-detection service which allows, based on a small loss incident, to calculate for example which other companies might be affected by a business interruption when there is a fire in China, Jeworrek explains.

Overall, innovation-related business is currently generating a premium volume of €650 million, according to the company’s 2017 balance sheet presentation.

As part of its 2020 vision, Munich Re wants to become a risk carrier for established and new (digital) insurance and non-insurance companies, as well as a provider of integrated risk services (e.g. sensor-based), according to the presentation. In addition, it wants the business to generate income from  tailored risk solutions and data analytics-based services.

Munich Re wants its primary insurance business Ergo to benefit from the knowledge the reinsurance unit is developing by increasing the cooperation between the two units.

The move is part of Munich Re’s strategy to turnaround and grow the struggling primary business.

Ergo has been loss-making for many years. In 2016 it recorded a net loss of €40 million after a loss of €227 million in 2015.

As part of the strategy to achieve profitable growth, Ergo wants to take advantage of Munich Re’s global presence to enter new markets.

“Having a primary and a reinsurance business under one roof is necessary to develop the business in an agile way,” Von Bomhard said. As a result, “we can operate in any segment of the value chain with confidence,” suggesting that this is not the case if a company has no experience in sales and distribution or does not know how to manage a retail insurance business.

The two units will work together in product development, sales and distribution, as well as risk analysis and underwriting. Efficiencies may be gained through automated underwriting, shared fraud analytics tools and policy administration. Furthermore, Ergo will join forces with Munich Re’s reinsurance business to tap the potential of fintech and insurtech start-ups.

Ergo is launching a digital-only motor insurance platform in Germany this year to test the potential for such a product in the market. The launch in another country has yet to be confirmed. “This is a model which can potentially be applicable in other lines of business and regions,” Ergo CEO Markus Rieß, says.

Ergo is cooperating with Hartford Steam Boiler, a risk solutions provider of equipment breakdown insurance in Munich Re’s reinsurance operations, in the field of Internet of Things and sensors, says Rieß.

Munich Re wants also to grow its specialty insurance business.

This is the area where Munich Re is most likely to make acquisitions, Von Bomhard notes.