Munich Re calls for industry to clarify systemic cyber risk

The company expects real annual growth of around 3 percent in both primary and reinsurance, led by the Asia-Pacific and Latin American regions (with 4 percent compound annual growth rate from 2021 to 2023) and, in the developed markets, the US (3 percent).

“For reinsurance and the next renewal, it’s still these markets that play the most important role in terms of our short-term ambition and short-term performance,” said Torsten Jeworrek, member of the board of management and chief executive officer for reinsurance at Munich Re.

Presenting the market outlook, Jeworrek said that the price environment remained positive. While recent cat losses did not pose a problem for the business, however, there were challenges around secondary perils.

“What is still an issue and where we still have to improve as an industry is to catch up in the modelling of the less modelled perils, particularly wildfires in the US and Australia, and flood losses,” he said. The social inflation that surprised many insurers in the US in recent years also continued to be a worry for the industry, he added.

“That’s stabilised somewhat, but we are all a bit uncertain as to what extent we’ll see an ongoing trend after the COVID-19 pandemic.”.

On the assets side, meanwhile, there was an increasing divergence between ultra-low interest rates in all major markets and underlying inflation and potentially higher losses in future.

“If this gap should increase further over the coming years, we will have to deal with it, and that will also be reflected in future prices,” Jeworrek warned.

In terms of capacity, traditional reinsurance capital continued to increase to an estimated $441 billion in 2021, from $429 billion in 2020, driven by better performance despite the COVID-19 crisis. Capital in alternative risk transfer remained steady at about $100 billion.

The global economy is recovering, but Jeworrek warned that downside risks still dominated. He particularly highlighted ongoing supply chain risks as a concern.

“Many industries are suffering from the shortage of shipping, and we have logistic problems in the container industry. That could all potentially affect the re/insurance sector in case of losses,” he said.

Avoiding a repeat of pandemic problems

The press conference discussed the impact of digital transformation on the industry and customers. With intangible assets’ share of the S&P500 rising from 17 percent in 1975 to 90 percent in 2020 and technology business dominating the top spots, it was a vital area for Munich Re.

Management board member Stefan Golling said: “We are of the firm belief that cyber insurance is more important than ever. If insurers and reinsurers shy away from this risk, they will not survive.

“If we want to remain relevant to this industry, relevant to our clients, we need to find solutions for cyber, and we will.”

Reviewing the risks, Golling noted rapidly increasing economic losses from cyber crime: they are estimated at $6 billion in 2021 from $3 billion in 2015, and forecast to climb 75 percent again to $10.5 billion by 2025. He also looked at the “hot topic” of ransomware. He noted that some had questioned whether insurers were part of the problem in providing the cover for ransoms to be paid. He rejected this, however.

“The starting point of purchasing cyber insurance is usually that you first become more resilient, and this should decrease the overall frequency of ransomware losses,” he argued.

“Yes, ransomware is a key challenge for the industry, but a challenge that we have mastered many times with other classes of business. We can work on the rate level, refine our risk appetite and introduce deductibles and limits. It’s nothing that should be a major concern for us,” he explained.

Where the industry may struggle is systemic risks. Golling noted that it was widely recognised that some risks could not be covered by the private insurance market alone. In property lines, war was covered by the market, for example.

In cyber, similarly, critical infrastructure, communication networks, power grids or the failure of the internet would lead to accumulations too big for the market. There were, however, grey areas such as “cyber war” that needed to be addressed. There was not yet clarity over definitions or how policies would respond, and such questions needed to be addressed, he said.

“If we have learned one thing through the pandemic, then it’s that we need to be clear about what is covered and what is not,” said Golling.

“To address systemic risk is not only important from insurers’ point of view and their solvency, but for our customers and policyholders. They need to be clear about what is covered and what is not. Wording ambiguity is what we need to avoid at all costs.

“We cannot risk a situation like last year again where our customers believe they are covered and the insurance industry is of the firm belief that such systemic risk is excluded,” he concluded.