Munich Re highlights the need for primary insurers to regain their capital strength

On an economic basis, many insurers experienced a drastic slump in their equity capital in 2008. The first signs of a recovery were only visible this year. Insurance companies are now having to gear up for the new regulatory framework under Solvency II, which is scheduled to be introduced in Europe as from 2012.

Insurers have mastered the financial crisis “comparatively well”, but now need to regain their former capital strength to meet the higher standards of Solvency II.

This was the message from Ludger Arnoldussen, a member of Munich Re's Board of Management, speaking in advance of the reinsurance renewals gathering in Baden-Baden, Germany.

Arnoldussen, who is responsible for reinsurance business Germany, Asia Pacific and Africa, added that regain strength was not enough for primary insurers – they also need to be seen to have secured it long term.

“For primary insurers, reinsurance will assume a new quality with Solvency II. On the one hand, the capital-relief effect of reinsurance will be taken into account in the risk-based models from 2012 and reinsurance cessions will no longer be limited to certain volumes. On the other hand, the need for tailored advice and consultancy will increase with Solvency II,” said a special statement from Arnoldussen and Munich Re at the Baden-Baden reinsurance meetings.

With the advent of Solvency II, insurers have to prepare themselves for an evaluation of all risks which is consistently economical. Besides greater emphasis on sound risk management, it is expected that small or specialist insurers in particular will face a need for more risk capital.

With Solvency II, more precise monitoring and controlling of risks will become standard practice, Munich Re said. A statement from the reinsurer said that uniform rules applying to the insurance industry in Europe will also serve as a model for countries outside Europe, for example in Asia. The industry as a whole is expected to be more crisis-resistant and internationally competitive as a result.

While economic conditions have improved markedly in 2009, insurance premiums nevertheless remain under pressure due to dampened economic development and reduced purchasing power, the reinsurer said.

"In times when margins are reduced, individual risk-transfer solutions are particularly valuable,” Arnoldussen said.

Also due to its solid capitalisation, Munich Re said it will continue to provide substantial capacity in the forthcoming round of renewals. Assuming appropriate prices, terms and conditions, there are no plans to restrict liability limits.