Munich Re pins its hopes on digitisation – but also cuts costs

That was a key message from Munich Re CEO Joachim Wenning, speaking during the company’s 2018 balance sheet press conference. He noted that all Munich Re units are being tasked with integrating digitalisation into their operations to ensure they set themselves apart in a competitive market. This initiative is part of a wider digital transformation strategy of the group, Wenning noted.

In its property/casualty reinsurance unit specifically, Munich Re expects data and technology investments to boost innovation while making a tangible impact on the business, according to the presentation.

As part of the digitalization process, the company anticipates changes in the nature of the value chain through digital cooperation models based. Its Digital Partners initiative is an example of how this might work as is multi-channel distribution models and Internet of Things (IoT) applications.

Munich Re embraces insurtech

Digital Partners is Munich Re’s global venture for digitalization. It strives to partner with disruptors changing the way customers experience insurance.

For example, in February, 2018, Digital Partners entered a long-term strategic partnership with insurtech home insurer Buzzvault. London-based Buzzvault, which describes itself as the world’s first asset vault to be built on the blockchain, will launch in the third quarter of 2018 as the “only truly personalised home insurance policy available to consumers based on a digital inventory of their home contents”.

Earlier in January, Munich Re partnered with California-based artificial intelligent (AI) start-up Betterview for the supply of drone imagery, analysis and reporting to Munich Re’s insurance company clients. Betterview offers drone-based inspection services to capture high-resolution images of residential and commercial properties.

In December, 2017, Munich Re-backed insurtech App-based insurtech managing general agent (MGA) Wrisk received full authorisation from the UK’s Financial Conduct Authority (FCA). Wrisk, which will market its insurance solutions based upon allowing users the ability to create a credit score-style “personal risk score,” is first launching a contents insurance product followed by a motor product.

Cyber grows

Munich Re also expects digitalization to expand the boundaries of insurability for example through cyber re/insurance and embedded service solutions for cedants and insureds. Munich Re has high hopes for its cyber business, which in 2017 had gross written premium of $354 million while recording low loss ratios.

“There is new demand coming from the marketplace, particularly in the US, but this will also spill over to Europe and other places,” said head of reinsurance Torsten Jeworrek.

Munich Re held a 10 percent share in the global cyber insurance market in 2017 and increased cyber premium by 40 percent year on year, Jeworrek noted. “For a reinsurance company, this is quite a lot,” he noted.

Munich Re is developing data-driven solutions in P&C reinsurance which will result in what it calls “digitally augmented underwriting/claims solutions” for cedants. In this sense, the company is investing in insurtech, IoT and data specialists.

“We want to develop new business models,” Jeworrek said. Big data and pattern evaluation will help to improve information on premium, losses or claims, he stressed. This data evaluation will enable new insight into client conduct behaviour and early risk detection which will then be added to generate a new form of contracts including, for example, early warning clauses, he explained.

Innovation changes products

For example, Munich Re is increasingly including performance data in contracts relating to risks such as vibration levels of wind turbines. These may be used to give insight into the need for repairs and potentially avoid losses, Jeworrek said.

Overall, the reinsurer is investing heavily in such data and technology, abilities, competencies, IT and also in partnerships and prototypes, Jeworrek said. Partnerships are more likely to be formed with companies outside the insurance business, he added.

Many of the digitalization initiatives create classical products such as in the cyber sector, while service models like the one regarding wind turbines, are expected to generate returns further in the future.

Costs to go down

At the same time, Munich Re will cut costs in the reinsurance operations and in the group functions to improve results. “We will cut somewhere in the region of €200 million in gross expenses,” Wenning said. “90 percent of these savings will be attributed to the reinsurance division,” he added.

Munich Re is targeting earnings of around €2.8 billion in 2020, an increase from around €2.3 billion expected for 2018. The reinsurance division is tasked with contributing about €250 million to this increase.

“If by 2020 we will have a stronger reinsurance earnings contribution, then one third of that will be due to a lower uptake of resources and two thirds will be due to growth initiatives,” Wenning explained.

The overall cost savings will involve 900 jobs worldwide, half of which will take place in the international operations while the other half will happen in the headquarters in Munich, Wenning noted.

Munich Re has already reduced the employee numbers by around 1,000 between 2016 and 2017. However, the majority of these staff cuts were linked to restructuring initiatives taking place at Munich Re’s primary insurance unit Ergo.

But staff reduction is not the main focus of Munich Re’s plan to improve profitability. “You have to develop new services, new business models, and that is the reason why we are investing in that right now,” Jeworrek said.

Wenning added: “It is our claim to be right at the peak of digitalization.”