After Munich Re, one of the world’s largest reinsurers, disclosed 90 million euros in IBNR reserves related to the ongoing conflict in Iran, Chief Financial Officer Andrew Buchanan expressed caution about the figure while highlighting Munich Re’s three lines of defence.
Munich Re said in its performance report released early this morning that the amount of claims caused by the Iran war was 90 million euros, of which 60 million euros were used for global special insurance and 30 million euros were used for property and casualty reinsurance.
In a recent conference call with analysts, CFO Buchanan was asked whether the €90 million was a specific announcement, as well as the potential second-order inflationary impact and whether there were any proactive actions.
“We received almost no notification. Therefore, €90 million represents IBNR,” the CFO said. “We also think that €90 million is somewhat cautious, but as an estimate of the direct losses that would arise if an insured or cedant were able to make a claim directly against our primary or reinsurance. So we position €90 million in a narrower sense. It really means that if there were claims coming from the maritime war market or the political violence and terrorism market, etc., we might end up paying that.”
Buchanan stressed that €90 million was a conservative, narrowly defined figure that did not include some kind of inflation allowance.
“We don’t think it’s necessary to do that at this stage, not because we deny that inflation could be higher than expected, but I actually think we’ve gone through an experience in 2022 that I think could be more severe than what we’ve seen this year, and I think our processes and financial management approach are going well and are proving to be effective,” he said.
The CFO went on to highlight Munich Re’s three lines of defense, the first of which is that much of the company’s business can be repriced within a year. “As you would expect, our pricing staff and economists are taking a hard look at what needs to be done,” he said.
Adding: “The second line of defense is asset liability management, a meaningful portion of our portfolio that responds to inflation in some way. I mentioned in my prepared comments that we do expect to see some catch-up effects in our inflation-linked bonds in the second quarter as the latest CPI data comes in.”
“And then the third line of defense is reserves… But, I have to say, as part of our annual reserves review, we have a reserve risk heat map where we carefully consider all the white swans, black swans and other swans that could go wrong. There’s also a whole, let’s say, broad allocation to economic deviations or fluctuations, part of which is inflation.
“So I’m comfortable at this point that whatever inflation brings to the claims side, we can absorb that. So we don’t see the need for some kind of opportunistic ad hoc booking in the first quarter.”
The CFO also took questions from the media today and was asked similar questions about inflation related to the Iran war.
“We look at all the things that could go wrong, and then we also have general reserves in place for things like adverse economic fluctuations, such as inflation. I’m pleased that the amount of money we have allocated in our reserve buffer for those types of scenarios is more than enough to offset anything we might see right now.
“To borrow a phrase, we’ve seen this movie before, and that was after the invasion of Ukraine in 2022, where inflation was very high. I think we found that actually our reserve process was well-positioned to handle that,” he said.
