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© 2009Münchener Rückversicherungs-GesellschaftKöniginstrasse 107, 80802 München, Germany

Order number 302-06182

TOPICSFrom knowledge to solutionsSolvency IIClimate change

© 2009Münchener Rückversicherungs-GesellschaftKöniginstrasse 107 80802 MünchenGermany Tel.: +49 89 38 91-0Fax: +49 89 39 90 56http://www.munichre.com

Supervisory BoardDr. Hans-Jürgen Schinzler (Chairman), Hans Peter Claußen (Deputy Chairman), Herbert Bach, Dina Bösch, Frank Fassin, Christian Fuhrmann, Dr. Peter Gruss, Prof. Dr. Henning Kagermann, Peter Löscher, Wolfgang Mayrhuber, Silvia Müller, Marco Nörenberg, Reinhard Pasch, Dr. Bernd Pischetsrieder, Anton van Rossum, Andrés Ruiz Feger, Richard Sommer, Dr. Ron Sommer, Dr. Thomas Wellauer

Overall responsibility Group Communications

Editor responsibleBeate BrixTel.: +49 89 38 91-38 36Fax: +49 89 38 91-7 38 36E-mail: bbrix@munichre.com

Picture creditsCover: Plainpicture/Greg Conrauxp. 2 top left, 4: Getty Images/Eddy Joaquimp. 2 top right, 7, 8, 10: Robert Brembeck, Munichp. 2 bottom left, 20: Plainpicture/Deepol/Marco Bohrp. 3 top, 32: Plainpicture/Millennium/Edgar Martinsp. 3 bottom, 46: Laif/Paul Langrock/Zenitp. 12, 14: Oliver Soulas, Munichp. 15: Getty Images/DAJp. 17 top: Oliver Jung, Munichp. 17 bottom: Plainpicture/Deepol/Rui Camilopp. 22–28: Oliver Jung, Munichp. 32: Plainpicture/Millennium/Edgar Martinsp. 34: Getty Images/Christopher Furlong/Staff p. 39: Munich Re archivesp. 42: Thomas Loster, Munich Re Foundationp. 43 top and bottom: welivit new energy GmbH/stilbezirk GmbH & Co. KG – Agentur für visuelle Kommunikationp. 44: welivit new energy GmbH/stilbezirk GmbH & Co. KG – Agentur für visuelle Kommunikationp. 45: Oliver Brunner/PIXELIOp. 46: Laif/Paul Langrock/Zenitp. 49: Munich Re archives

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1MUNICH RE TOPICS

From knowledge to solutions

Managing risks professionally is not just about pro-viding suff icient capacity. We are setting our sights much higher than that: We want to be the fi rst choice for you – our clients – when it comes to solving com-plex issues and to off er you our unique combination of fi nancial solidity and cutting-edge expertise. We realise the immense knowledge required to achieve this, and that is why we invest so much in know-how.

Now the path is clear for implementation of the Solvency II directives after the fi nal hurdle was cleared last May. A description of the changes that await the insurance industry and of the support we can off er our cedants on all aspects of this topic begins on page 21.

Climate change is undoubtedly one of the biggest challenges facing mankind. Munich Re was one of the fi rst companies to combat climate change. You can read about the knowledge we have built up over a period of more than 35 years and how we use it in the fi eld of product development, risk management and investments from page 33 onwards.

I hope you fi nd this issue of Topics interesting, with plenty of information that will be of practical use in your day-to-day work.

Munich, August 2009

Dr. Torsten JeworrekMember of the Board of Management andChairman of the Reinsurance Committee

2 MUNICH RE TOPICS

1 FROM KNOWLEDGE TO SOLUTIONS

DEALING WITH FUTURE CHALLENGES FROM AN INTERDISCIPLINARY PERSPECTIVE The Emerging Risk Think-Tank

KNOW YOUR RISKSMunich Re’s investment strategy

THE MARKET CELEBRATES ITS COMEBACKInsurance-linked securities

“WE WANT TO DO MORE WITH OUR KNOW-HOW”

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Interview with Torsten Jeworrek on the future of reinsurance

SOLVENCY II The key to the future of the insurance industry

SIZE IS AN ADVANTAGE

ADVICE AND SUPPORT FOR SOLVENCY II Munich Re’s range of services

2 SOLVENCY II21

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Thomas Blunck and Joachim Wenning discuss reinsurance under Solvency II

3MUNICH RE TOPICS

CLIMATE CHANGE SOLUTIONS Innovative coverages for the energy industry

WORKING TOWARDS A POST-KYOTO AGREEMENT Munich Climate Insurance Initiative (MCII)

CLIMATE CHANGE AND JUSTICE

CLIMATE-FRIENDLY PROJECTS GENERATE MOUNTING INTERESTMunich Re’s sustainable investments

ELECTRICITY FROM THE DESERT

COOPERATION WITH THE LSE

COOPERATION WITH KFW

CORPORATE CLIMATE CENTRE

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3 CLIMATE CHANGE

Munich Re supports the Desertec Industrial Initiative

4 MUNICH RE TOPICS

5MUNICH RE TOPICS

“ WE WANT TO DO MORE WITH OUR KNOW-HOW”

The insurance industry is changing and with it the demands placed on reinsurance. Merely providing capacities at competitive prices will no longer off er suff icient potential in the future. What is needed are providers with a thorough knowledge of risk who can off er this know-how to their clients. Board member Torsten Jeworrek explains Munich Re’s strategy in an interview with Topics.

FROM KNOWLEDGE TO SOLUTIONS

6 MUNICH RE TOPICS

FROM KNOWLEDGE TO SOLUTIONS

Topics: The economic situation over the last 12 months has been anything but straightforward. Munich Re has coped well with the diff iculties and demonstrated its overall strength. Yet we are currently reassessing the strategic direction of Munich Re’s reinsurance business. Why? Torsten Jeworrek: Our fi nancial solidity has certainly helped us in the current crisis. However, we are now asking ourselves what services we have to off er our clients to make Munich Re an absolutely unique partner.

What does that mean in practical terms? We asked ourselves how the demand for reinsurance is likely to develop. For simple risks it is likely to fall, given our cedants’ increasing capital strength and improved modelling techniques. On the other hand, many risks that clients approach us with are becoming increasingly complex due to technological developments and globalisation. Our cedants are increasingly seeking protec-tion where loss potentials are extremely high or are still not fully known, such as natural hazards, complex liability risks, construction projects and the like – or in order to optimise their internal capital- and risk-management systems. You need immense know-how to solve cases like these. Our objective is to support our clients with this expertise so that we can fi nd new and improved solutions for these problems together.

Is it right to say that means Munich Re will not be writing any “standard risks” in the future? No, certainly not. But the tendency is for simple business to be placed in the market at the lowest margins in the form of standard treaties. With its know-how, Munich Re has a lot more opportunities to develop a larger busi-ness base more profi tably. It is therefore entirely appropriate that we expand our business model.

So, Munich Re will fulfi l a dual role in the coming years as a provider of both capacity and know-how? We have two objectives that we hope to achieve in the coming years by expanding our business model. Firstly, we want to continue to off er a high level of fi nancial security and reliability. Secondly, we want to support our clients – much more strongly than before – with expertise for their own business. Ultimately, we want to be the fi rst port of call for solving complex issues. My wish is that our clients say: “Ask Munich Re, they are bound to fi nd the right solution.” It is this dual role that sets us apart.

7MUNICH RE TOPICS

FROM KNOWLEDGE TO SOLUTIONS

“We want to continue to off er a high level of fi nancial security and support our clients – much more strongly than before – with expert ise for their own business.”

Is everything in place for us to be able to perform this role? We have a lot of the abilities required simply because we need them to operate our own core business. For example, we know from our own experi-ence how to design high-level risk-management processes or to model and insure diff icult risks. Through our new client managers, who will be much closer to the clients, we want to off er clients more than just our basic product of reinsurance. We want to provide consultancy services for their internal processes in balance-sheet management, risk modelling and asset-liability management.

Has the new system of client management already created the structures needed to realise our new strategy? Absolutely. We are looking to establish a dual specialisation – in client management and in underwriting. Client managers will specialise on their function as client consultants and no longer merely optimise our own business by acquiring treaty shares. In future, they will have a much greater presence and role as a genuine consultant for their cedants. At the same time, how-ever, they will also develop new client groups such as governments, pools, etc. They will need to be close to our clients and have a thorough understand-ing of their whole value chain in order to draw attention to the competitive situation and any problems regarding accounting, fi nancial strength or ratings. By listening to the clients and understanding their problems, client managers can suggest solutions, which can then be realised with the help of Munich Re and our expertise in underwriting, risk management and technical matters.

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FROM KNOWLEDGE TO SOLUTIONS

“The deployment of our global and interdisciplinary Group expertise will be a crucial success factor”.

So, client management has a much stronger outside focus in order to generate new business? Yes. We will broaden the Munich Re business model. We won’t just be com-peting with our traditional rivals for reinsurance business but will anticipate clients’ needs through strong client focus and in so doing develop new business potential. We are convinced that reinsurance should not be sold “off the peg” but should meet our clients’ individual needs.

Will the client manager be alone on the front line? No, not alone. Our underwriting specialists will also maintain close contact with our clients. This is good for clients as it enables a direct exchange with our specialist underwriters. And it is good for us because we get to know the clients’ portfolios and can then develop the most appropriate conditions for each client individually and not have to work on a broad-brush basis. How-ever, the client managers will assume the coordinating and central steering function. They must know their way around reinsurance but will need a broader degree of knowledge to do the job. And when implementing solutions they will rely heavily on specialists at our company? Precisely. Whenever a client has a problem, the client managers’ job is to fi nd the right people needed to solve this problem. They then work together in special ad hoc teams to come up with a suitable solution. Our challenge is to take the broad range of knowledge found in diff erent areas of the reinsurance group worldwide and to pool it for specifi c cases and make it available to the client. We will need to develop a much more fl exible project team mentality, as the know-how cannot possibly work optimally in each individual structure. In other words, the deployment of global and interdisciplinary Group expertise will be a crucial success factor.

9MUNICH RE TOPICS

FROM KNOWLEDGE TO SOLUTIONS

With such a broad knowledge profi le in the company, the obvious question is: Where does this knowledge come from and how do we ensure it is kept up to date? The demands placed on our knowledge are indeed extremely high. Ul -timately, we have to know our way around risks from all over the world and from a wide variety of diff erent technologies and areas of our society – and these risks are changing more quickly than ever before. In contrast to the situ-ation that existed, say, 20 years ago, the huge range of knowledge required today makes it unfeasible to establish and maintain internal teams of experts who are always up to date on the very latest developments. Now we need more intelligent ways of generating knowledge and of making it available. We therefore asked ourselves: For which risks do we have suff icient internal knowledge and where do we need to seek cooperation with external partners? For us, knowledge is not an end in itself but rather the fundamental pre requisite for developing new products and solutions.

And what was the answer? Two years ago we agreed upon a diff erentiated strategy of knowledge generation. This means that we do not always intend to be the one actually generating knowledge in each and every case. We want to act as a sort of organiser of know-how. We seek contact and cooperation wherever suitable and up-to-date external knowledge is available, and then we tap into this knowledge. Where this external knowledge does not exist, it is up to us to develop the know-how ourselves. That is why we maintain partnerships, for example, with the London School of Economics on climate change, with Risk Management Solutions for natural hazard modelling, and with RAND on the subject of class actions in the USA. The advantage of this strategy is that our staff can concentrate fully on turning this knowledge into value-creating solutions. You mentioned “expanding” the business model. Would that include the so-called PIRI activities, the operational steering of primary insurance business from reinsurance? PIRI, Primary Insurance out of Reinsurance, is actually an extension of our business model, not really a new one. Munich Re has long written specialised primary insurance business directly through MARP or the Watkins Syndicate in marine business. Given the wide-ranging, partly heterogeneous initiatives resulting from Changing Gear, the need arose to sharpen the PIRI strategy and to focus on the primary insurance segments where reinsurance is the “best owner”.

10 MUNICH RE TOPICS

What are the advantages of the PIRI strategy? The entire insurance industry has changed radically in the last few years and with it the demand for reinsurance. We need to get closer to original risks for which we already have a core competence in order to grow profi tably. In doing so, we particularly focus on niche segments, as this is where our know-how can best be deployed. Business success here rests on sound risk expertise not on highly eff icient mass sales and standard policies. Our trad-itional cedants can naturally expect that Munich Re will implement this strat-egy as a technically sound market player.

How does last year’s acquisition of Hartford Steam Boiler (HSB) fi t in with this strategy? HSB is an ideal complement, as its business model exactly matches where we want to go. It combines two outstanding abilities, namely risk inspection and insurance solutions. HSB is the market leader in the USA in the certifi cation of industrial plants, and is very similar to the German TÜV in that respect. It therefore has excellent knowledge of industrial risks and uses this know-how to off er competitive and yet risk-adequate insurance solutions for precisely such risks. An extremely interesting model.

Which other client groups do we have in mind? Our business model clearly focuses on our traditional group of cedants. But the risk landscape is getting wider and will be joined by new clients that need intelligent insurance solutions or risk transfer. And it is increasingly becoming the case that insurance solutions can best be created in the form of a risk partnership between state organisations and insurance – in other words public-private partnerships. They are particularly suitable in cases where market-wide insurances would otherwise not be possible.

11MUNICH RE TOPICS

FROM KNOWLEDGE TO SOLUTIONS

Can you give us a concrete example of this? A good example is the state-sponsored crop-peril insurance in the USA. The state profi ts from the budgeting and eff icient use of revenue from taxes; the farmers receive customised risk coverage they can aff ord; and the insur-ance industry can make a long-term commitment to crop insurance. The Caribbean Cat Pool is another case in point. For example, it insures state infrastructures through private-partnership models and so ensures that natural catastrophes do not set back the progress of emerging countries by several years.

Are pools also an insurance solution that Munich Re supports in this respect? I do have my reservations about pools. Forming a pool tends to contradict the concept of competition. They are only acceptable if they cover insurance needs that would not fi nd suff icient capacity on the free market or in extreme cases like the terrorism pool. I consider it one of the insurance industry’s primary tasks to assume the economy’s and society’s risks, to organise the transfer of these risks as eff iciently as possible and in so doing to support social and technological progress. Another important aspect here is that risk coverage has a signifi cant steering eff ect. As long as the market can off er capacities and competition takes place, a risk-adequate market price will emerge. It off ers the appropriate incentive for consumers, namely to act in a risk-compliant way. If this eff ect is negated by state systems, then we are not acting in the interests of society, which would ultimately have to foot the bill.

Mr. Jeworrek, thank you very much for this interview.

12 MUNICH RE TOPICS

Will a regional wave of infl uenza turn into a pandemic? Are we set to face a new long-term economic crisis? Will life expectancy fall? What the future holds has always fascinated people. But for companies like Munich Re it is not just a matter of interest but of vital importance to consider a range of possible future scenarios and to develop meaningful strategies for them.

DEALING WITH FUTURE CHALLENGES FROM AN INTER-DISCIPLINARY PERSPECTIVEThe Emerging Risk Think-Tank

Guido Funke Christina GroßerMichael Menhart

The steering team of the Emerging Risk Think-Tank.

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FROM KNOWLEDGE TO SOLUTIONS

The way the economy has developed over the last 24 months has been a ride into unknown territory. Never before have predictions and assessments changed so quickly. And never before have com-panies had to revise and constantly adjust their response to the economic situation as quickly as they have done now. The fi nancial crisis and the ensuing economic crisis were a real-time stress test for risk-management systems. Extensive activities in Enterprise Risk Management (ERM) did much to ensure that Munich Re was spared the most serious eff ects of the crisis. The Group has managed this diff icult situation well so far and has quickly adapted its underwriting and investment policy to the fl uctu-ating circumstances. How have we achieved this?

Continuous analysis of the situation focusing primar ily on global economic parameters but also on socio-cultural and technological phenomena is the basis for remaining competitive. However, the ability to implement these fi ndings in business operations as quickly as possible is equally important. Munich Re’s wide-ranging expertise and the close, cross-divisional networking of interdisciplinary knowledge make it possible to swiftly develop actions and strategies and to improve risk management.

Integrated risk management

“Following the tough years from 2001 to 2003, we arrived at our own conclusions and took a raft of measures to ensure more holistic risk management: the profi tability of our core business was returned to the fore and a well-thought-out asset management policy enabled us to reduce our dependency on the capital markets. Also, a central risk-management unit headed by the Chief Risk Off icer was estab-lished”, explains Dr. Christina Großer, who manages the Risk Identifi cation and Control unit in the Central Division: Integrated Risk Management (IRM). IRM, which was set up in 2004, is responsible for Group-wide risk management. “We ensure that the risks involving life insurance business, property insurers and investments are not considered in isolation but in terms of all possible interdependencies.”

The interdisciplinary Emerging Risk Think-TankChristina Großer is also a member of the steering team of the Emerging Risk Think-Tank, an interdis-ciplinary team of experts from across the whole com-pany. The group meets every four weeks to discuss and assess current developments. The steering team also includes two other colleagues: Dr. Michael Menhart, head of Economic Research in Group Development, and Dr. Guido Funke, responsible for Corporate Underwriting for Casualty. Of course, there are many areas of the company that closely monitor and analyse changes in the economic envir-onment but such activities are usually restricted to particular regional markets and principally from a retrospective standpoint, i.e. past data are used to draw important conclusions regarding future proce-dure in their own local markets. “The Emerging Risk Think-Tank takes this to the next level: we try to identify trends and to draw up future scenarios which may at fi rst appear unrealistic. The chances of such wildcard scenarios actually occurring may be slim but they can have an enormous impact if they do come about. We need to be prepared for such cases”, says Guido Funke.

Last year’s analyses obviously focused on economic scenarios. Compiling these analyses was the task of Economic Research, a part of Group Development. This unit acts as an internal consultancy team for strategic and economic topics and works in close cooperation with the operational units on specifi c business topics and on identifying future business opportunities. This is the starting point for analys- ing certain topics, which are then passed on to the Emerging Risk Think-Tank.

“Economic crisis scenarios present a special challenge when it comes to modelling future risks. They can aff ect the insurance industry in so many shapes and sizes and are one of the main reasons why an interdisciplinary approach is so essential.”

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FROM KNOWLEDGE TO SOLUTIONS

As soon as a topic is suff iciently understood and its relevance for Munich Re established, it is implemented in the risk-management systems and processes. The decentralised structure in risk management is a great advantage in this respect. “The challenge in managing emerging risks is in moving from the holistic risk perspective to specifi c, implementable and meaningful measures”, explains Guido Funke. “This takes place in close dialogue with the under-writers in the diff erent markets. We also use our con-tacts with external risk-research institutes. Finally, our compact company structure is also a great help: short channels facilitate networking on the oper-ational business side. And it is the fast fl ow of infor-mation that makes consistent action possible.”

“Emerging-risk management thrives on dialogue. That is why the activities and results of the Emerging Risk Think-Tank are available on the intranet. And because dialogue is not a one-way street, all staff at Munich Re can use the intranet to submit their ideas and suggestions to the Emerging Risk Think-Tank.”

“Economic crisis scenarios present a special chal-lenge when it comes to modelling future risks. They can aff ect the insurance industry in so many shapes and sizes and are one of the main reasons why an interdisciplinary approach is so essential”, explains Michael Menhart. “For us to be able to react quickly, it is vital that the whole process runs like clockwork and the fl ow of information is as smooth as possible.”

Identifi cation – Analysis – ActionThese three words perfectly sum up the way things are done in the Emerging Risk Think-Tank. Since the summer of 2008, economic scenarios focusing on a global recession have been developed and refi ned precisely on this basis. “We then looked at each line of business separately and investigated the eff ects various macroeconomic parameters have on pre-mium volume and losses in individual classes”, adds Funke. “It is important to strike the right balance between centralised regulations and decentralised scope for decision-making. While we trust in the abilities of our underwriters for known and non-cumulative risks, we do provide much stricter guid-ance for large and systemic risks. These cannot be managed on a deal-by-deal basis. For example, our underwriting policy for a local property crisis in the UK has been managed decentrally and for a global crisis centrally by means of a reduction in limits and adequate price adjustments.”

“The scenarios enable us to approach future prob-lems and risks in a much more structured manner. The discussions in the Emerging Risk Think-Tank ensure that all developments are given due consid-eration. We can then put together the optimal teams to carry out the more detailed analyses”, explains Menhart. Christina Großer adds: “The interdisciplin-ary make-up of the teams is a major advantage that permits a much more holistic view to emerge. This helps to ensure that nothing is overlooked and we can respond quickly and appropriately. For example, we already adjusted our counterparty limits to the changed risk situation in December 2007. It is only this holistic picture of things that allows us to iden-tify critical developments, support and strengthen appropriate lines of development, and counter or mitigate unwanted developments.”

15MUNICH RE TOPICS

KNOW YOUR RISKS Munich Re’s investment strategy

Successful asset management improves our competitiveness in our core business of insurance. Even if Munich Re did not escape the turmoil in the fi nancial markets in 2008 unscathed, it was able to report a respectable annual result thanks to a balanced investment policy and strict risk management.

The most severe fi nancial crisis for decades put many players in the fi nancial world in diff iculty. However, despite the unaccustomed turbulence, Munich Re succeeded in achieving a positive, albeit reduced, investment result of €5.8bn last year. The key to this success lies in our investment strategy, which is strictly aligned with future payment obliga-tions arising out of our core business (“liability-driven investment approach”). We do not use classic benchmarking as practised, for example, by invest-ment companies. Thus, instead of focusing purely on return, we also constantly take our liability struc-ture into account, and strive to identify risks and to optimise the risk-return profi le of our portfolio.

The starting point for the investment process is a minimum-risk “neutral position” that refl ects as closely as possible the characteristics of our liabil-ities to insurance companies. The second step is to feed in the main subsidiary parameters (supervisory rules, rating requirements, uncommitted capital and strategic investments). On the basis of these factors, we produce a benchmark portfolio, which also takes account of other factors such as risk tolerance, profi t targets and transaction costs. The benchmark port-folio serves as a model for our asset manager, MEAG, whose management of the portfolio includes the tactical asset allocation. MEAG may deviate from the benchmark portfolio within predefi ned limits,

Michael Bös

with its performance being measured on the basis of the excess return achieved. A new benchmark port-folio is developed each year, though it can be amended during the year if necessary.

A key factor in our 2008 performance was the deci-sion to gradually run down the already reduced equities ratio and to implement a dynamic hedging strategy. We also benefi ted from holding in our books mainly government bonds issued by credit-worthy countries with no material credit risks. We were largely unaff ected by the higher-risk structured asset-backed securities that proved so destructive in 2008 because we had not deemed the risk-oppor-tunity ratio appropriate.

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FROM KNOWLEDGE TO SOLUTIONS

What lies ahead?

The fi nancial markets now appear to have survived the most violent upheavals. The greatest immediate danger in autumn 2008 – the risk of a system col-lapse – has been avoided and a second Lehman Brothers is very unlikely. In the absence of further complications, one of the possible scenarios would be similar to that experienced in the 1970s. It would involve less globalisation, more regulation, less dynamic markets, modest economic growth and higher infl ation. However, the long-term conse-quences of the fi nancial crisis remain shrouded in uncertainty. We are currently in a transition phase which, in the worst case, could end in one of two extremes: either defl ation could gain the upper hand and plunge the economy into a 1920s-type depres-sion, or the burgeoning state debt combined with an extremely expansive monetary policy on the part of central banks could trigger a period of infl ation. Even though each of these extreme scenarios would have diff ering economic consequences, Munich Re has positioned itself in such a way that it should not experience substantial problems should either occur.

We are sticking to our strategy in 2009, giving safety priority over short-term gain. This does not mean that we are avoiding all risks: if they can be properly evaluated, they may be acceptable. An example of this is credit exposure, which we have been gradually increasing. What we have no inten-tion of doing is to compensate for the lower level of investment income by assuming greater risks. We would rather forgo apparent opportunities than accept an undisciplined risk policy. To protect our-selves against infl ation, we are investing more in infl ation-indexed bonds, which also partially com-pensates for the infl ation risk inherent in our claims liabilities. Should the probability of the infl ation sce-nario occurring increase, we will choose the right time to increase the weighting allocated to equities and real estate.

For every decision, our motto is “know your risks”. To this end, we have built up professional risk man-agement with clear responsibilities and precisely defi ned limits and triggers, ensuring that a decision will be taken at most 48 hours after a special risk situation has arisen, such as a major fall in share prices, a dramatic change in interest rates or a cur-rency crisis. Our investments are constantly moni-tored on the basis of various key risk and earnings fi gures for every company as part of a Group-wide early-warning system. This ensures that we take no inappropriate risks at either individual-company or Group level and meet our capital requirements at all times.

MEAG – Pooled investment expertise

For ten years now, the Munich Re Group has been relying on MEAG’s expertise for its asset manage-ment. Our investments are in good hands, thanks to a prudent, risk-based approach to investment.

After we had created the ERGO Insurance Group in 1997, bringing together primary insurance operations under one roof, we saw the pooling of our know-how in asset management as the next logical step. It was completed in 1999. Since then, MEAG MUNICH ERGO AssetManagement has proved its worth as an extremely successful integration project. With management units in New York and Hong Kong and assets under management of some €185bn, it is today one of the most important asset managers in Europe. It also makes its international competence available to institutional investors and private clients.

By virtue of the large volume of investments it man-ages, MEAG plays a major role in our success. It is responsible for direct investment in securities and property, and for indirect investments such as assets held in investment funds. The benefi ts of centralisa-tion are obvious: a uniform and transparent investment process, improved management of investments, synergy eff ects and lower costs.

The Munich Re Group was the fi rst large insurance group to introduce full centralisation of its asset management. MEAG has shown us how targets that are demanding and ambitious can be met and even surpassed. What is more, in the recent diff icult times during the fi nancial crisis, it recognised the risks in time and reacted. This was a major factor in the achievement of an excellent investment result in comparison with competitors.

17MUNICH RE TOPICS

Following a short, sharp slump in demand, insurance-linked securities are back in business. Apart from a temporary increase in price, the fi nancial crisis has in no way altered the fundamental advantages of insurance-linked securities as an attractive complement to traditional reinsurance. Munich Re’s Risk Trading Unit gives our clients access to the whole range of products and services that this securitisation segment has to off er.

After insurance-linked securities (ILS) had success-fully withstood the crisis on the securitisation market for some considerable time, they then felt the full force of the Lehman Brothers’ bankruptcy in the autumn of 2008. Insurance securitisation issues came to a complete standstill in the fourth quarter of 2008, suff ering the same fate as most other fi nancial markets. However, the demand for fi nancial instru-ments that securitise nat cat risks from property insurance and transfer them to the capital market has since increased signifi cantly, again attaining the average volume of past years. Securitisation trans-actions for nat cat bonds alone had reached almost US$ 2bn by the end of July (see chart). Given the backlog demand involved, we fully expect this positive trend to continue and predict an issue volume in the region of US$ 3bn for the whole of 2009.

THE MARKET CELEBRATES ITS COMEBACKInsurance-linked securities

Andreas MüllerDieter Frey

7,000

6,000

5,000

4,000

3,000

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1,000

02003 2004 2005 2006 2007 2008 2009/

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FROM KNOWLEDGE TO SOLUTIONS

ILS versus reinsurance

Munich Re regards insurance-linked securities as an attractive and useful complement to traditional rein-surance. They are particularly suitable for reducing peak exposures, developing additional sources of capacity or for overcoming innovation gaps. However, ILS can never fully replace traditional reinsurance because only certain risks that can be clearly quan-tifi ed and modelled are suitable for transfer to the capital market. More complex risks whose evalu ation requires not only quantitative expertise but also a high level of market and underwriting experience remain fi rmly a matter for reinsurers.

Munich Re services the whole value chain

Our objective is to expand and develop the market for cat bonds as an additional source of capacity. Direct contact to a broad investor basis is every bit as important as our know-how in order to success-fully conclude placements. For our clients, cat bonds usually constitute just one element of a comprehen-sive reinsurance concept, so that a good market overview, a wide range of products and speedy implementation are at the forefront of our services.

The record fi gures from 2007, when cat bonds total-ling some US$ 7bn were placed, are unlikely to be repeated. However, there are strong arguments for transferring insurance risks to the capital market in the form of securitisation. Firstly, in times of hard markets when conventional reinsurance is expensive, capital-market products such as ILS become more attractive to sponsors. As issuers of cat bonds, (re)insurers are able to ease their equity capital or avoid risk concentration by transferring risks to the capital market. Finally, ILS are a welcome reinsur-ance instrument where no traditional capacity is available. This applies, for example, to pandemic covers in life or to business interruption in property and casualty.

The fi nancial crisis has actually enhanced demand for alternative risk transfer: as some suppliers of traditional reinsurance ran into diff iculties, capaci-ties for US peak risks disappeared and prompted primary insurers to consider alternative risk transfer in order to diversify their sources of reinsurance.

The fi nancial crisis showed investors that ILS off er an investment opportunity that is uncorrelated with conventional investment classes. The returns on diversifi ed ILS portfolios were positive in 2008 in spite of the fi nancial crisis, unlike the returns on almost all other investment classes.

However, the Lehman insolvency did change the structure of ILS. As the most recent issues on the cat bond market show, investors are more acutely aware of the credit risk, i.e. the credit risk of the assets in the collateral backing a cat bond. A higher level of security is achieved, for example, by investing the paid-in capital in government bonds or in invest-ments with a similar security. Nevertheless, the risk premium remains higher than before for the time being, so that there are only certain segments in which cat bonds can compete with the price of tradi-tional reinsurance. Cat bonds are currently in espe-cially high demand to cover the peak risk US wind. If traditional capacity is available in suff icient amounts and at favourable prices, the current high returns on the capital market make securitisation solutions more diff icult. In this connection, Munich Re’s objec-tive is to develop those investor segments that reward the diversifi cation eff ect of ILS (also within the ILS investment class) with more favourable risk premiums (e.g. pension funds) in order to secure the prerequisites for the further development of the ILS market.

TRANSACTION VOLUME 2003–2009

Issuance volume (US$ m)

YearAs at endof July

Est.

Following a period without any transactions between September 2008 and February 2009, the cat bond market picked up again in spring 2009. The issuance volume of nat cat bonds had risen to approximately US$ 2bn by the end of July 2009. The overall volume for 2009 is expected to be around US$ 3bn.

19MUNICH RE TOPICS

FROM KNOWLEDGE TO SOLUTIONS

As a full-range provider, we are active in the ILS seg-ment on a variety of levels: we transfer our own risks to the capital market, act as an investor on the cat bond market and, through our Risk Trading Unit, off er our clients a wide range of ILS services – from product development to structuring and placement. The combination of our risk capacity and our under-standing as a risk carrier enables us to develop indi-vidual ILS solutions which optimally link alternative risk transfers with traditional reinsurance products. As part of our latest cat bond transaction “IANUS Capital Ltd.”, we have added our own risk to a client’s risk to be transferred and thus improved the economic viability of the concept and increased the attractive-ness of the transaction for the client.

Outlook – ILS under Solvency II

ILS have become fi rmly established with investors as an alternative investment class and with insurers as an instrument of risk transfer. Under the new frame-work conditions of Solvency II, ILS will continue to gain in importance for insurers as the impact of risk transfer on the balance sheet will no longer be based on the form of the instrument but on its economic eff ect (“substance over form” principle) .

Other advantages of ILS under Solvency II result from the explicit consideration of the counterparty risk when measuring the amount of solvency capital to be held. As the transactions are usually fully secured (AAA security), the ceding insurer has lower capital requirements in this respect compared with a trad-itional reinsurance solution.

Round-table talks in Monte Carlo and Baden-Baden

The past and future development and potential of the ILS market will be at the centre of the autumn 2009 talks organised by Munich Re. These events will give investors, insurers, brokers, rating and mod-elling agencies the chance to discuss this subject at length and in great detail.

Turkish earthquake risk of TCIP is fi rst trans-ferred to Munich Re by means of a reinsurance agreement. Munich Re adds European wind-storm risk to the client’s risk from its own book of business and transfers both risks to the Irish special-purpose vehicle IANUS Capital Ltd. by means of a fi nancial contract.

The proceeds from the bond emission are invested in puttable fl oating-rate notes issued by the Kreditanstalt für Wiederauf-bau/KfW (with a guarantee from the Federal Republic of Germany) and held in a securities deposit.

INVESTORS

IANUS Capital Ltd. issues an insurance-based bond in the capital market. The pro-ceeds from the bond issue serve to cover potential payments by IANUS Capital Ltd. to Munich Re from the fi nancial contract.

HOW CAT BONDS WORK: IANUS CAPITAL LTD.

IANUS CAPITAL LTD.Securities deposit€50m

Puttable fl oating-rate notes (issuer: Kredit-anstalt für Wiederauf-bau/KfW)

3-month EURIBOR – x BP

Issue proceeds

2

Issu

e pr

ocee

ds

3-m

onth

EU

RIB

OR

+ x

BP

3

1

2

3

Inde

x-ba

sed

paym

ent

Risk

pre

miu

m

Fina

ncia

l co

ntra

ct

Reinsurance agreement

TCIP (Turkish Catastrophe Insurance Pool)

MUNICH RERisk premium

Claims payment

1

Repa

ymen

t of

(rem

aini

ng) c

apita

l

20 MUNICH RE TOPICS

21MUNICH RE TOPICS

SOLVENCY II – THE KEY TO THE FUTURE OF THE INSURANCE INDUSTRY

The fi nancial crisis has demonstrated that risks cannot be artifi cially calculated away. Strict risk- and principle-based rules are therefore needed more than ever. If Solvency II had not already been designed as a modern supervisory system for the European insur-ance industry, it would have to be now.

SOLVENCY II

22 MUNICH RE TOPICS

SOLVENCY II

Joachim Oechslin

Solvency II adopted

Following hard negotiations, representatives from the EU member states and the European Parliament have agreed on new supervisory rules. Solvency II constitutes a major step forward for the insurance sector and an important milestone in increasing stability in the fi nancial markets. It will create a modern supervisory system that provides for the proper economic evaluation of risks on both sides of the balance sheet. This overall view will enable cap-ital requirements to be calculated with much greater precision.

The importance of this was illustrated by the fi nancial crisis, which was at least in part a consequence of reckless handling and inadequate evaluation of risks. As capital requirements will in future be strictly aligned with the risks incurred, risk management will need to become even more professional, key factors being both a holistic view of risks and value-based management of the business.

Munich Re has been successfully applying the Solvency II principles in practice for some consider-able time. In our Group, risk-management tools and processes are closely interlinked with our Group-wide value-based management system. Risk man-agement is present in our everyday work. The expert knowledge we have forms the backbone of our risk assessment – for risk management is not only based on quantitative methods, but also relies to a large extent on experience and plain old common sense.

Reinsurance as part of a risk-management strategy The change from a rule-based to a principle-based supervisory approach will aff ect many areas of the insurance industry, and under Solvency II the added value of reinsurance will be much more visible. As it will in future have a direct impact on the balance sheet, it will become an even more eff ective capital- and risk-management tool. It would also be desirable for the increased risk transparency to bring more discipline into pricing.

It is already apparent that Solvency II is setting standards and becoming a model for supervision beyond Europe’s borders, because it provides protec-tion for consumers and is the key to the future of the insurance industry, as it strengthens companies’ long-term management and competitiveness. As a reinsurer with exceptional experience in all aspects of risk – early identifi cation, assessment, databases and an organisation and culture adapted to handling risks – Munich Re is in a position to support its clients, with both analyses of their risk-capital requirement and tailor-made risk-transfer solutions.

“As capital requirements will in future be strictly aligned with the risks incurred, risk management will need to become even more professional.”

23MUNICH RE TOPICS

Solvency II will mean profound changes for the insurance industry. Board members Thomas Blunck (left) and Joachim Wenning talk to Topics about what it will mean for Munich Re’s business strategy.

SIZE IS AN ADVANTAGE Reinsurance under Solvency II

Topics: The Solvency II framework directive has been approved and the new requirements have to be met by 2012. What will change at Munich Re? Thomas Blunck: In contrast to the current rules, Solvency II adopts a holistic approach consisting of three pillars – quantitative risk modelling, qualitative risk management and transparent risk positions. The new system will have an impact on our business model. In future, in addition to being a pure provider of reinsurance services, we will need to position ourselves more strongly as consultants with a detailed understanding of our clients’ risk situation and able to provide appropriate solutions. Joachim Wenning: Solvency II basically poses the same challenges for insurers and reinsurers. The main diff erence is in the degree of diversifi ca-tion. If we assume that most reinsurers are more diversifi ed than insurers, Solvency II will provide us with a host of new opportunities, in risk-capital relief for example.

Are primary insurers adequately prepared for the challenges they will face? Joachim Wenning: There is no doubt that there are still some gaps, but we expect everyone to be in a position to cope by 2012. Some companies have been getting ready for a long time, particularly the global players. Thomas Blunck: Solvency II does adopt the principle of proportionality, so that the degree to which the rules are applied depends on a number of factors – how complex a company’s business is, its risk levels, whether it is a multiliner or a monoliner. This is to ensure that small and specialised insurers will be able to meet the new requirements.

24 MUNICH RE TOPICS

What are the main issues that this process raises for Munich Re? Joachim Wenning: There are three separate phases with diff erent require-ments. During the preparation phase, insurers must ask themselves “What exactly are the requirements of Solvency II and how do we implement the new regulations at our company?” Munich Re can provide advice and support here. In the second phase of Solvency II implementation, we will be exchang-ing information with our insurance clients on risk issues that we hardly used to have on our agenda. This gives us an opportunity to create new solutions beyond traditional business. In the third phase – the enhancement stage following entry into force of Solvency II – we will be in a position to provide customised solutions to reduce risk-capital costs, particularly to our less diversifi ed clients.

“In future, in addition to being a pure provider of reinsurance services, we will need to position ourselves more strongly as con-sultants with a detailed under-standing of our clients’ risk situation and able to provide appropriate solutions.”

25MUNICH RE TOPICS

Thomas Blunck: Risk-capital relief is the core issue. Thanks to our broadly diversifi ed, worldwide portfolio, we can supply risk capital at a price that is lower than the client’s cost of holding it. However, there will be many additional opportunities around this core product. I’m thinking here of risk-modelling services and helping clients set up dependable risk management, not to mention the whole issue of asset-liability matching, which has a major eff ect on risk capital. They need to know how best to structure their investments, taking account of the liabilities in the balance sheet. A huge amount of risk capital is tied up unproductively if assets and liabilities don’t match. One of the services we provide is to manage this position and minimise its eff ect on risk capital.

How great do you think the need for risk-capital relief is? Thomas Blunck: It depends on the cedant. Major insurers operating world-wide, which are usually already well diversifi ed, will be mainly looking for peak-risk relief. We believe that small insurers, monoliners and specialised companies will need more risk capital and will therefore be looking for relief to reduce their capital costs. Joachim Wenning: Since risk capital costs money, every company will have to look for the least expensive option. This has long been the case for other costs, for example in administration. In the developed markets, this can be clearly seen in the cession rates in life. If an insurer considers that it can obtain the risk capital it needs to cover its retention from a reinsurer at a lower price than from other sources, it will cede more risk to reinsurers. Hence, Solvency II will change insurers’ purchasing behaviour.

“Since risk capital costs money, every company will have to look for the least expensive option. Hence, Solvency II will change insurers’ purchasing behaviour.”

26 MUNICH RE TOPICS

SOLVENCY II

Thomas Blunck: In the past, insurers have had a fi xed budget for reinsurance. Under Solvency II, they will ascertain what risk-capital relief is available at what price and then seek reinsurance. This is a complex process and we as reinsurers must be in a position to off er even more detailed advice at an earlier stage and provide the right solution. Joachim Wenning: Major companies, of course, are already making use of the advantages that reinsurance off ers them. This will continue to be the case, but a whole new potential will be opened up, because Solvency II is aimed at all of an insurance company‘s risks, not just underwriting risks on the liabilities side of the balance sheet.

Will there be more diff erentiation between life and non-life? Joachim Wenning: The Solvency II rules for life and non-life are actually identical, but their eff ect will be diff erent because of the diff erent risks inherent in the lines of business. In life, the biometric risks typically require less risk capital, but the market risks need more due to the fi nancial guarantees given in life business. Under Solvency II, life insurers will fi nd that biometric risk, which can be closely managed, requires less risk capital than with Solvency I, whilst companies that have given their customers large fi nancial guarantees will need to hold much more. A reinsurer able to take advantage of its size and assume these capital-market risks, hedging and diversifying them in the capital markets, will be in a position to off er lower risk-capital costs. This is the approach we are adopting in life. Thomas Blunck: It is clear that, in non-life, natural-catastrophe risks dom-inate in many markets. As this will be even more the case under Solvency II, the need for reinsurance will increase, which will further exacerbate existing shortages of capacity. In certain other non-life markets however, most of the required risk capital will relate to loss reserves, predominantly for motor liability. We can provide solutions in this area as well. Joachim Wenning: For that reason I also think that the diversifi cation argu-ment will become much more relevant for non-life under Solvency II, in con-trast to life, where the focus will be on putting together asset-liability solutions. We can also analyse the various eff ects that Solvency II will have on the balance sheet. A reinsurance solution aff ecting the liabilities side of the balance sheet will provide more value in non-life than in life, which does not have the margin necessary to make the most of the benefi ts of reinsurance, so that solutions linking assets and liabilities will be needed to fully exploit the potential avail-able.

27MUNICH RE TOPICS

SOLVENCY II

Will Solvency II signifi cantly change competition? Thomas Blunck: Solvency II is aimed at introducing eff icient risk manage-ment. This will have consequences for product and investment policy and will ultimately result in companies being more professionally managed from an economic point of view and more resistant to stress situations such as the current fi nancial crisis. In the long term, insurers complying with Solvency II will doubtless have a competitive advantage over those sailing close to the wind. Joachim Wenning: As reinsurers we have the potential advantage of risk expertise and size, which we will be able to exploit in many cases, though possibly less so in our dealings with global insurers. Time will tell. Reinsurer credit risk, which was disregarded under Solvency I, will be properly taken into account in future and will therefore be more important.

Could Solvency II be a worldwide model? Thomas Blunck: In my opinion, yes. We can expect to see regulatory systems converging in the long term. That doesn’t mean that all supervisory authorities will adopt the Solvency II rules word for word, but the principles will be taken on board. A number of countries such as South Africa, Australia and Japan have already started down this path. Joachim Wenning: Solvency II is convincing because it is intuitively correct and, unlike Solvency I, takes appropriate account of risks, which is why I expect the systems to converge. It is diff icult to say what calibrations the system will be based on, but in any case calibrations constantly change as more informa-tion becomes available.

“Solvency II is convincing because it is intuitively correct and takes appropriate account of risks.”

28 MUNICH RE TOPICS

For risk transfer to be fully eff ective in future, reinsurance will have to be even more closely tailored to insurers’ individual needs. What impact will the trend towards individual solutions, data transparency and a total balance-sheet view have? Joachim Wenning: In the Solvency II environment, we will work with our clients to identify their risks and consider which structure and which products will provide them with the largest amount of relief or the highest added value, off ering one-stop advice and solutions. Thomas Blunck: In future, reinsurers will be even more dependent on receiving reliable data from their clients and we will need to work with them to achieve the required transparency. The more precise the data, the easier it will be to come up with a genuinely specifi c and economical reinsurance programme. That said, we already have a high degree of data transparency with the majority of our clients.

Solvency II has set in motion a process that is far from over. What are Munich Re’s aims? Thomas Blunck: Solvency II and the expertise needed to cope with it constitute absolute core business for Munich Re. Clients rightly expect us to possess this expertise at the highest level. It encompasses traditional aspects such as specifi c reinsurance solutions, to which service components are added. These include not only providing information on issues relevant to Solvency II, but also, for example, the actuarial tool PODRA, which clients can use to optimise their reinsurance solution. We are now placing greater emphasis on the second Pillar, off ering risk-management consultancy in workshops.

Mr. Blunck, Mr. Wenning, thank you very much for this interview.

Margarita von Tautphoeus

PRICE CAPACITY VALUE OF REIN-SURANCE

CAPITAL RELIEF

Trad. balance sheet

VBM2 view

Supervisory/solvency view

PRICE CAPACITYVALUE OF REIN-SURANCE

29MUNICH RE TOPICS

ADVICE AND SUPPORT FOR SOLVENCY IIMunich Re’s range of services

Implementing the new European super-visory requirements is a major challenge for many insurers. Munich Re’s Solvency Consulting Team aims to heighten clients’ awareness of this important issue and prepare them for the imminent changes they face. The positive feedback we have received encourages us to make constant enhancements to our service.

Solvency II will have a fundamental eff ect on the signifi cance of reinsurance, because the impact of the new rules on cedants’ risk-capital requirement and economic balance sheet are clear. This means that the eff ect of reinsurance can be precisely meas-ured. However, as a result, companies’ expectations of risk-transfer structures will rise, with traditional, substantially standard reinsurance programmes making way for solutions fi nely tailored to their risk profi les and balance sheets.

How will this aff ect cedants? Since reinsurance will become a key capital- and risk-management tool, any reinsurance structure will have to take account of these two aspects, which will create additional challenges for many companies – at a time when they are already more than fully occupied with the multi-faceted preparations for Solvency II. Insurers have the following options to deal with this situation.

They can– invest large amounts in building up their own

resources, – purchase the required know-how and processes

from consultants,– approach reinsurance brokers when they have risk-

measurement and transfer issues or, of course, – turn to a reinsurer that has already built up the

required expertise for its own purposes.

To play in the reinsurance fi rst division in the future, reinsurers will have to constantly discuss the develop-ment of cedants’ risk and capital situations with them and be able to provide the best possible individual risk-transfer solutions based on the clients’ own data. It was precisely with this in mind that Munich Re set up its Solvency Consulting Team as a part of Integrated Risk Management in 2006.

Traditional function

REINSURANCE 2.0

ERM1 eff ect

Under Solvency II, reinsurance will go beyond its traditional role and have an impact on the balance sheet.

1 Enterprise-risk management 2 Value-based management

Source: Munich Re

1 year 3 years ... years

30 MUNICH RE TOPICS

SOLVENCY II

Our workshops go a stage further. They likewise aim to present complex topics in a concise and compre-hensible way, but add an interactive component, ensuring that participants not only feel that they have increased their knowledge but also that they can introduce the necessary changes at their com-panies with confi dence and commitment. We are aware from our own implementation at Munich Re that it is important to use the right method of dis-seminating knowledge, in particular for extensive subjects like Solvency II that entail many new analy-ses and processes.

Workshops for life and non-life

MISS-Life (Munich Re Interactive Solvency II Sem-inar) and MISS Non-Life are one-day seminars that use case studies to demonstrate how various rein-surance programmes aff ect the economic balance sheet and, more especially, the solvency ratio of a specimen insurance company. Following an intro-duction to Solvency II methodology and the Quanti-tative Impact Studies (QISs), participants work through the subject in working groups before taking part in a discussion. They learn to appreciate the risk-capital-relief eff ect of reinsurance and its impact on the balance sheet and profi t and loss account. MAIS is a three-day workshop that uses a business game to illustrate the introduction of value-based management and the impact of business-strategy and reinsurance decisions on risk capital and the return achieved on it.

In addition to Pillar I, which deals with quantitative aspects, Pillar II establishes qualitative risk-manage-ment requirements as an important factor. The GoST (Governance Solvency II Training) workshop, which is also a one-day event, provides participants with basic guidance on the role of reinsurance in Pillar II. It covers the qualitative identifi cation and control of risks and specifi c governance rules and processes. GoSt also includes interactive components, thus motivating participants to analyse their own com-panies to identify the risks. The workshop demon-strates that a detailed risk analysis and a carefully structured transfer of risk contribute to meeting the Pillar II requirements. It also becomes apparent in the workshop that under Solvency II there are closer similarities between many processes at life and non-life insurers than has been the case in the past.

Our services in detail

The team off ers a wide range of services, from providing basic knowledge to supplying specialist actuarial and risk-management expertise built up by the Munich Re Group over many years for its own use. Its information and training services are available to clients and staff alike.

Our “Knowledge series” publications, appearing at regular intervals on our website, www.munichre.com, provide basic information on Solvency II, giving an overview of current issues, the current status of the consultations at EU level and specifi c topics. The Knowledge series has been designed in such a way as to present a comprehensible explanation of even complex subjects in a concise form, which readers not yet fully familiar with Solvency II fi nd very useful.

Focus on the practical

Our guiding principle in the Solvency Consulting Team is practical relevance – for instance when demonstrating the eff ect of reinsurance under Solvency II. A good example is our analysis “Impact of reinsurance on risk capital”, which uses the bal-ance sheet of a fi ctitious property-casualty insurer to illustrate the relief provided by reinsurance. The subject is covered in one of our Knowledge series publications, but it is also very suitable for a presen-tation lasting one to two hours.

“The team off ers a wide range of services, from providing basic knowledge to supplying specialist actuarial and risk management expertise.”

31MUNICH RE TOPICS

SOLVENCY II

With Solvency II, insurers can use a standard formula to determine their risk-capital requirement. In the QISs, companies are able to ascertain whether this formula approach captures their risk situation satis-factorily or whether it would make more sense to use stochastic modelling, in which case our Solvency Consulting Team with its actuarial expertise will assist in fi nding appropriate solutions.

Open-Source Platform PillarOneThrough its sponsoring of the PillarOne Open-Source Modelling Platform (www.pillarone.org), Munich Re provides support for modelling non-life business – of particular value for small and medium-sized insurers. This platform forms the basis of PODRA (PillarOne Dynamic Reinsurance Analysis), which we have been using since the beginning of 2009 to calculate the risk-capital requirement and the eff ect of various reinsurance structures for client portfolios. In addi-tion, in life we also off er BRiSMA (Biometric Risk Stochastic Modelling Approach), a service for calcu-lating the biometric risk, which generally provides a calculation that refl ects the actual risks more closely than the standard formula does.

Even if European insurers are gradually adapting to the requirements of Solvency II, the need for detailed analysis of the risk profi le and above all individually negotiated reinsurance solutions is continuing to grow.

Munich Re’s Solvency Consulting Team provides a service that certainly compares well with that off ered by consultants and reinsurance brokers. We repeat-edly receive very positive feedback following our seminars and workshops, in which we take a clear stance on Solvency II.

It will be interesting to see how consultants, brokers and reinsurers position themselves in future under Solvency II. It is in Munich Re’s interest to maximise its clients’ awareness of the issue, which is why we strive constantly to improve our competence as “preferred partner in risk”.

MAIS

MISS(Non-)Life

GoST

PODRABRiSMA

CAPITALEAGLE

KNOW-LEDGE SERIES

Intensity of client contact

Munich Re service resources

SERVICES PROVIDED BY THE SOLVENCY CONSULTING TEAM

WorkshopInformation on Munich Re website Software-based service

The vertical axis, “Service resources”, indicates the level of resources used by Munich Re. The horizontal axis, “Intensity of client con-tact”, covers several aspects, including our share of a client‘s reinsurance cessions, its commitment to particular brokers or consult-ants, or its membership of a group, the rela-tionship with which is managed in accord-ance with overriding principles. The larger the circle in the graph, the more intensely we discuss the eff ect of reinsurance on the bal-ance sheet and solvency position of the client.

The appropriate services for each interested client can be selected from the range in close cooperation with Client Management.

Source: Munich Re

32 MUNICH RE TOPICS

33MUNICH RE TOPICS

CLIMATE CHANGE SOLUTIONS

There is now broad consensus that climate change is one of the greatest risks facing mankind. With over 35 years’ experience of researching the factors involved, we can do much to combat the eff ects of climate change. We apply this knowledge to our product development, risk management and invest-ment strategies.

CLIMATE CHANGE

34 MUNICH RE TOPICS

CLIMATE CHANGE

Mathias HörmannRalf HungerbühlerJork Nitschke

Renewable energies have a big part to play in helping to miti-gate and combat the eff ects of climate change. Munich Re off ers a number of solutions that promote the use of these new technologies.

35MUNICH RE TOPICS

CLIMATE CHANGE

Insurers can promote climate-friendly actions through innovative coverage concepts for renewable energies. We quantify risks by means of commensurate pre-miums and provide decision-makers with arguments for eff ective preventive action. Through our know-how and long-standing experience, we also support the expansion of low-carbon technologies. By linking our expert network to the underwriting know-how in our operational units, we are able to devise extensive coverage concepts and turn them into practical insurance solutions. As such solutions also include certain enterprise risks, the risk of investing in new technologies can be reduced signifi cantly.

Cost factor of climate change

The consequences of global warming will cost the economy billions of dollars. Adaptation measures are much cheaper by comparison – a view shared by both the IPCC and Lord Nicholas Stern (see page 39). Munich Re is directly aff ected by these consequences, as losses from climate change are increasing every year. Countermeasures are therefore essential and political objectives have been upped accordingly: the European Union is seeking to cut its CO2 emissions by 20% by the year 2020 (compared with 1990) and at the same time increase energy eff iciency by 20%. European countries also hope to cover 20% of their energy requirements from renewable energy sources by 2020.

One of the central tasks facing the global economy in the coming years therefore will be to switch to a low-carbon energy supply: wind and solar power in particular are indispensable elements in reducing CO2 emissions. In future, solar thermal power plants or the direct conversion of solar energy into electricity (photovoltaics) will play just as important a role as such other technologies as the generation of elec-tricity and heat from geothermics (see page 45), generating energy from biomass, hydrogen technol-ogies, tidal and wave power plants. As a risk carrier, Munich Re makes a signifi cant contribution to this development by giving investors the planning cer-tainty they need through our capital strength and innovation capacity.

Energy: A growth market

Total investment in renewable energies has risen signifi cantly in the last few years – and is likely to grow at double-digit rates in the future as well. US$ 155bn was invested in 2008 alone. However, as the systems technology is frequently still new, investors and operators need the security provided by new risk-transfer solutions. This will open up tremendous economic opportunities in a dynamic growth sector. Munich Re off ers innovative solutions to help companies and investors make the most of these opportunities and manage the risks associated with the new technologies. In this way, we also help our clients to profi t from this growth sector.

The example of satellites highlights the important role the insurance industry has always played in the introduction of new technologies: in fact, without the development of innovative products to cover sat-ellite launch and operational risks, the breakthrough of this technology for commercial purposes would have been virtually impossible.

Risk-transfer solutions for all cases

Munich Re off ers risk-transfer solutions for practically all types of renewable energies. Whether classic renewable energies such as wind and water power or new methods of power generation involving solar thermal plants or photovoltaics, they all have certain aspects in common: before they go on grid, all projects fi rst need conventional covers such as EAR and CAR insurance, and cover against natural haz-ards such as windstorm and torrential rain. However, the more diff icult conditions involved in the case of off shore wind farms, for example, have to be taken into consideration for such covers. Once operations have started, other covers are required such as machinery breakdown, fi re business interruption, business interruption and liability insurance.

600

500

400

300

200

100

02004

33.258.5

92.6

148.4 155

370*

500*

US$ bn

2005 2006 2007 2008 2015 2020

DEVELOPMENT OF WORLDWIDE INVESTMENT IN RE NEW-ABLE ENERGY SOURCES AND ENERGY EFFICIENCY**

Annual investment in renewable energy sources and energy eff iciency from 2004 to 2008, with projection to 2020. * Prognosis** Includes new investment in energy supply,

re-investment, expenditure on research and development, and small-scale projects; excluding corporate take overs and fi nancial trans actions.

Source: New Energy Finance 2009

36 MUNICH RE TOPICS

CLIMATE CHANGE

Off shore wind farms – A special challenge

As the energy exploitation of wind farms at sea is around 40% higher than from those on land, expecta-tions are high as regards this particular technology. According to the European Wind Energy Associa-tion, Europe alone is likely to build wind farms with an overall capacity of 40 GW by the year 2020. This is equivalent to the output of around 50 conven-tional fossil-fuelled power plants. The ambitious expectations, the lengthy construction period of three years and the frequently rough conditions during construction and operation of the plant present a huge challenge for all involved in terms of risk prevention and management.

Munich Re has supplied the development of this technology since 2001 with adapted coverage con-cepts and has thus been able to gather valuable experience along the way. We are a market leader in this fi eld and have extensive information on all plants built in the North Sea and the Baltic. In addi-tion, the fi ndings from our decades-long involve-ment in off shore oil and gas business stand us in good stead for the challenges we face with off shore wind farms.

We also work closely with the Marine Warranty Sur-veyors: these independent experts support the oper-ators of the plants in ensuring safe transport and problem-free assembly. Their work is now seen as a standard part of such projects and is regarded by most risk carriers as an absolute must for insurabil-ity. This cooperation and our combined expertise directly benefi t our clients: they can rely on the best possible risk management.

Covering technological and meteorological risksAnother thing that links the diff erent forms of renewable energies is that, once installed, the oper-ating costs are usually low. The major problem is the substantial investment required and the fact that relatively new technologies are being used on such a large scale. Moreover, the most important produc-tion factors in these plants are very much subject to the vagaries of the weather: while it is true that the primary energy forms of sun and wind are available free of charge, their supply is by no means constant. This results in technological and meteorological risks for investors and operators which can easily exceed an acceptable level. In these times of limited liquidity, the banks are particularly keen to cover their returns from such projects as well as possible and to minimise volatility. Munich Re has developed a variety of innovative individual covers especially for this purpose. These individual insurance solutions are adapted to the specifi c coverage needs of each company, investor or fi nancing bank.

The diagram shows fl uctuations in average wind speed per month in the years 2004 to 2006. 2004 2006

11.25

7.50

3.75

0

Average wind speedkm/h

Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec.

FLUCTUATING WIND CONDITIONS PUT EARNINGS AT RISK

37MUNICH RE TOPICS

CLIMATE CHANGE

Solar power plants

Solar thermal plants have one important advantage over photovoltaic plants. They off er the possibility of storing thermal energy and can therefore help to cover the baseload power. However, solar power plants are economically viable only above a certain size, and planning and construction costs can there-fore soon come to several hundred million euros (see Desertec article on page 46). The components used for such plants may come from tried-and-tested tech-nologies but the sheer scale of their use is unpreced-ented. It is therefore entirely possible, especially for the fi rst production series, that there will be costly serial losses due to faulty design, material defects or bad workmanship. In order to cover these risks, we off er a special serial losses cover for the production of components. It runs to the end of the manufacturer’s guarantee period and thus provides much-needed planning certainty.

Delayed completion or insuff icient availability or out-put of a plant due to unforeseen problems in using the new technologies involves signifi cant risks for the builders of the plants in terms of contract penal-ties, which cannot be covered by means of traditional insurances. Munich Re closes this gap in cover by way of an innovative solution: penalty insurance on a fi nancial-year basis. This covers the extreme aggre-gation of penalties in the course of a year and so protects the plant engineer from excessive fi nancial burdens.

Compensating for fl uctuations

Operators of photovoltaic plants can already pur-chase a “lack of sun” cover off ered by Munich Re. This product covers income against fl uctuations in the amount of sunshine. Operators of wind farms face a similar problem. Wind turbines can produce electricity with a wind speed of at least 4 m/s. What counts is the wind speed at the height of the turbines and output rises linearly as wind speed increases. At 12 m/s to 15 m/s (depending on the type of turbine involved) the turbine can produce maximum output (rated output). If the wind speed exceeds 20 m/s, the turbine has to be switched off to prevent damage from mechanical overloading. Loss of income from insuff icient wind speeds can be covered through a “lack of wind” insurance. Together with the operators of wind farms, Munich Re has developed a range of diff erent solutions based on the specifi c conditions in each case.

The basic requirement for a profi table wind farm is a high level of availability and output throughout the year across the entire plant. However, individual tur-bines do sometimes break down. A serial loss can even lead to the stoppage of the entire plant. The loss that the plant engineer suff ers due to perform-ance guarantees given can be substantial and can even lead to insolvency. To combat this problem, we have developed a special insurance product that helps to cushion such losses.

If there are unexpected major breakdowns in the operation of a wind farm, revenues can fall so much that the operators may not be able to meet their fi nancial obligations to the banks. In such cases, we can off er a special “income protection” to help cover debt servicing. This cover can signifi cantly reduce the risk of fi nancing projects for operators, investors and the banks.

Individual solutions Coverage concepts for renewable energies have to be tailored to the needs of the individual policy-holder, both in the case of customised solutions for individual risks and for standardised products that ensure primary insurers are able to sell policies eff ectively. To this end, Munich Re works closely with policyholders, primary insurers and brokers in order to come up with solutions that are workable for all parties involved.

Publication: Munich Re newablesMore detailed information about our activ-ities in the fi eld of renewable energies can be found in our recently published brochure “Munich Re newables – Our contribution to a low-carbon energy supply”. The publication also provides information on the relevant contact people for the diff erent covers.

38 MUNICH RE TOPICS

December 2009: The long-awaited climate summit in Copen-hagen will negotiate a successor agreement to the Kyoto Protocol, which expires at the end of 2012. This supplementary protocol to the United Nations Framework Convention on Climate Change will defi ne binding targets for the emission of greenhouse gases and stipulate climate change adaptation measures.

WORKING TOWARDS A POST-KYOTO AGREEMENTMunich Climate Insurance Initiative (MCII)

Peter Höppe

From Kyoto to Copenhagen

The Kyoto Protocol, with its objective of slowing global warming, was a milestone in international cli-mate policy, as it was the fi rst agreement to stipulate internationally binding emissions targets within a clearly defi ned time-frame. In eff ect since 2005, it defi nes the extent to which emissions have to be reduced for the period 2008 to 2012. To ensure the continuity of climate protection targets beyond the initial commitment period after 2012, the participat-ing countries agreed at the 2007 Bali Conference (COP 13) to start negotiations on a detailed agree-ment. The UN Climate Conference in Copenhagen (COP 15) will set out the framework for such an agreement.

Indeed, an eff ective agreement is urgently needed if the global rise in temperature is to be confi ned to 2°C, an increase at which the consequences of global warming can probably be contained. To achieve this, however, the emission of greenhouse gases would have to fall by 50% by 2050 (compared with 1990 fi gures), and even by 80% in industrialised countries. An important factor in this objective is the further development and more eff icient use of renewable energies.

Industrial and developing nations in the same boatMany industrial countries have long since acknow-ledged their responsibility in combating climate change. Following the change of government in the USA, there is now the real prospect that the world’s largest economy will soon be pursuing the same objectives as the EU. However, the emerging coun-tries pose a major problem, as their emissions are set to increase enormously in the years to come on the back of further economic growth. The climate protection objective for such countries must be to delink economic growth from CO2 emissions. This objective has become a key problem area in inter-national climate agreements. Emerging countries are only prepared to commit to emissions reductions if industrial countries take the lead with ambitious targets of their own. Poorer nations cannot achieve reduction targets without the help of the industrial-ised world. For this reason, a climate protection regime is to be set up in Copenhagen – a fi nancial structure that would help developing nations to cut their greenhouse gas emissions and to adapt to the already clearly obvious consequences of global warming.

39MUNICH RE TOPICS

CLIMATE CHANGE

RESEARCH FIND-INGS FOR INNOVA-TIVE SOLUTIONS Cooperation between the LSE and Munich Re

“The Economics of Climate Change and Opportunities for the Insurance Indus-try” – this is the name of the research programme on which Munich Re and the London School of Economics and Political Science (LSE) have cooperated since October 2008. The objective of this fi ve-year cooperation project at the interface of climate research and economics is to analyse the opportunities and risks that climate change brings for the insurance industry. To achieve this objective, it will be necessary to quantify the specifi c eff ect climate change has on the economy and on the insurance industry. At the same time, the benefi t of adaptation and prevention strategies will also be quantifi ed. The analyses focus particularly on the expansion of low-carbon and renewable technologies for power generation and the opportunities and eff ects of emissions trading systems. These fi ndings will show us new ways to achieve innovative solutions and help us to support our partners in politics and industry in their decision-making.

Two symposiums in the fi rst year

The results of our research are presented regularly to clients, representatives from politics and industry, and the public. The fi rst symposium was held in London in late July 2009 and focused on the subject of models. With numerous representatives from science and the fi nancial sector in attendance, the present-ers – developers and users of climate and loss models – discussed the possibil-ities of diff erent economic and climate models, their scope for interpretation and their role in decision-making. If applied properly, models can certainly be an aid to users in their decision-making. However, all models permit only an approxima-tion of reality, so that proper handling of models requires a high level of knowledge on the part of the user in terms of the inherent uncertainties in the results. The symposium, especially the podium discussion and the event’s interdisciplinary character, provided a greater understanding of the possibilities and limits of diff erent types of models and thus increased the ability of users to assess the quality of models. Methods were demonstrated on how to eff ectively deal with model uncertainties and how decision-making processes can be optimised.

The second symposium on 7 October 2009 in Munich is eagerly anticipated. At this event a presentation on the role of adaptation in international agreements will be given by Lord Nicholas Stern, former Chief Economist at the World Bank who heads the Centre for Climate Change Economics and Policy (CCCEP) with which the research programme is aff iliated. The symposium will also present its latest fi ndings, which will make it possible to put an exact fi gure on the costs of climate change for the fi rst time. This is a crucial requirement for developing fair and workable solutions. As it is mainly people in developing and emerging nations that are disproportionately aff ected by climate change (e.g. extreme weather-related natural catastrophes), the symposium will also focus on the development and design of insurance mechanisms (e.g. microinsurance) for these countries. Munich Re has been working with various partners since 2005 as part of the Munich Climate Insurance Initiative to achieve these objectives. With an eye on the World Climate Conference (COP 15) in Copenhagen in December 2009, the second symposium will once again focus attention on the urgency of this matter.

Further activities

In addition, Munich Re and the LSE will also jointly hold so-called Industry Round-tables. Principally directed at Munich Re’s clients, these events will facilitate detailed discussions on subjects of topical interest and relevance to operational business. The fi ndings from these talks will be incorporated in industry briefi ngs – short written summaries of the round-tables exclusively available to our clients and business partners. Munich Re also participates in the scientifi c debate on the economics of climate change through various “technical papers” that we publish in collaboration with the LSE.

Philipp Hasenmüller

Nikolaus von Bomhard, Chairman of Munich Re’s Board of Management, with Lord Nicholas Stern at the signing of the cooperation agreement.

Website

You can fi nd further information at www.munichre.com >> Business & Solutions >> Natural Hazards >> Climate change and insurance

40 MUNICH RE TOPICS

CLIMATE CHANGE

Insurance mechanisms as part of the solutionThe 1992 UN Framework Convention on Climate Change and the Kyoto Protocol both included insurance solutions as a possible way of adapting to climate change. Developing countries are worst aff ected by climate change, as most are located in regions where climate change threatens their very means of existence and because they lack the nec-essary capacity to adapt. This is what prompted Munich Re to establish the Munich Climate Insurance Initiative (MCII) in 2005. MCII is an association of insurers, scientists, NGOs and political represent-atives. These diff erent groups are united in the goal of formulating and putting in place insurance-related solutions in developing countries without functioning insurance markets to help combat the rising losses. This would help to mitigate the fi nancial consequences of the increasing number of extreme weather events.

Munich Re has attended all the climate summits from the very beginning and has been involved as an author or reviewer in all the IPCC’s reports. MCII acted as an off icial adviser at the post-Kyoto negoti-ations and was given the opportunity to present its concept to the plenary session of delegates at the World Climate Conference in Posen in December 2008.

The MCII proposal

The MCII presented a risk-management module to promote adaptation to climate change, based on two pillars: prevention and insurance.

The objective of the prevention pillar is to reduce human and economic losses. To do this, processes and incentives will be introduced which fi rstly reduce susceptibility to such losses and secondly give people the chance to adapt to the new risk situation.

The insurance pillar has two levels: the fi rst consists of a “Climate Insurance Pool” covering a predefi ned proportion of major loss events in developing coun-tries. The annual costs of US$ 5bn would be raised by the industrial countries by means of an adapta-tion fund. Ideally, premiums could be charged through an emissions trading system under which every tonne of emitted CO2 would see a few cents diverted to the adaptation fund. However, other fi nancing models are possible. Munich Re could also support the pool on the business side of things by off ering reinsurance cover.

The second level, the “Climate Insurance Assistance Facility”, will actively promote public-private part-nerships and private climate insurances covering smaller loss events. This idea would focus on local institutions able to create microinsurance capacity on a local basis. The costs for this programme are put at around US$ 3bn. The total costs of the risk- transfer system proposed by MCII, including sup-port of preventive measures of US$ 2bn, come to US$ 10bn a year.

GREENHOUSE GAS EMISSIONS (TONNES PER CAPITA)

Brazil ChinaGermanyEuropean UnionIndiaIndonesiaUSA

3.8

3.1

12.3

8

1.1

1.5

23.55

The per-capita emission of pollutants varies tremendously from country to country. However, the diagram clearly shows that emissions in the industrial-ised nations are signifi cantly higher.

Source: UNFCCC

41MUNICH RE TOPICS

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Interview with Ronaldo Gutierrez, member of the Philippine negotiating delegation at the UNFCCC

Many delegates from developing and industrialised countries welcome the MCII concept. It is an important prerequisite for implementing the proposals.

Topics: A worldwide insurance system for climate change certainly seems to make sense. Why though should we have payers on the one side and benefi ciaries on the other? Ronaldo Gutierrez: Primarily because vulnerability to climate risks is not spread out evenly and the historical responsibility for climate change does not directly correspond with the vulnerable countries and sectors. In other words, the ones aff ected by climate change are generally not the ones responsible for it. Climate insurance, if properly designed, can alleviate the plight of the vulnerable groups by sharing globally the burden caused by this global problem while providing a positive incentive to adapt and take proper risk-management strategies among the vulnerable groups.

Let us assume that we will actually have an appropriate resolution. A number of years may pass before this is transferred into national legislation. Aren’t we running out of time? I agree but time is relative as with many issues in climate discussions. For those aff ected, time is a luxury they can ill aff ord.

How do you assess the proposal of the Munich Climate Insurance Initiative? Do you see such insurance mechanisms as part of the Copenhagen outcome? The MCII is a good and concrete start and I would like to see insurance mech-anisms be part of the Copenhagen outcome. What is essential is that the busi-ness-as-usual mentality is removed and that the projected climate impacts are seen less as a business opportunity than as a continuing global crisis that will need every sector‘s support. The insurance industry, with its decades of experi-ence, has much to off er.

42 MUNICH RE TOPICS

CLIMATE CHANGE

CLIMATE CHANGE AND JUSTICEA Munich Re Foundation project

Since autumn 2007, this obvious injustice and possible solutions to the challenges we face have been the focus of the project “Climate change and injustice – climate policy as a component of fair globalisation and sustainable poverty reduction”. This study, which combines economic and humanitarian aspects, has been developed by the Potsdam Institute for Climate Impact Research (PIK) and the Institute for Social and Development Studies (IGP) at the Munich School of Philosophy/LMU. The project is fi nanced and supported by the Munich Re Foun-dation and the Catholic relief agency Misereor. What makes this project unique is its interdisciplinary approach, as each partner contributes its own special expertise and so helps to reveal important correlations that may well have been overlooked if considered in isolation.

Two key questions

What form could a climate policy take for it to be ethically sound, fair and sus-tainable? What politically, technically and economically viable “energy paths” (strategies and options) could keep dangerous climate change in check and at the same time support national and international eff orts to fi ght poverty rather than jeopardise them?

The fi rst question is being investigated by IGP. At the same time, Misereor is conducting numerous dialogue forums throughout the world on the subject. After all, policies cannot be made without the involvement of those directly aff ected. The second issue is being dealt with by PIK under the leadership of its Chief Economist Professor Ottmar Edenhofer, head of the IPCC’s Working Group 3, which won the Nobel Peace Prize in 2007. On the basis of the primary energy sources available worldwide and projected energy consumption, scenarios are developed which are designed to keep climate change within the two-degree-centigrade threshold, generally accepted as the limit of dangerous climate change. These scenarios are based on all forms of energy in use today and avail-able in the future in order to ensure the assumptions are as realistic as possible.

Global deal

Edenhofer sees the climate as a public good and advocates a global deal which comprises various components and lends a prominent role to global emissions trading. The funds that developing nations would receive from such a deal could be used to invest in energy, education or healthcare.

The role of the Munich Re Foundation

The Munich Re Foundation not only brings its benefactor’s expertise and know-how on natural catastrophes and extreme weather events to such projects but also makes important contributions on climate change adaptation measures. It has built up tremendous knowledge in the fi eld of microinsurance, an area which is likely to play a vital role. New and innovative insurance concepts can already help to reduce the risks that poorer people face, as it is primarily low-income families that are being dragged further into poverty by economic crises from weather-related natural catastrophes. Especially promising solutions include microinsurance and innovative agricultural and livestock products.

It is hoped that concrete recommendations and options can be identifi ed and developed by 2010, which can then be presented in publications for experts and the general public alike.

Poverty makes people vulner-able, especially to extreme weather events. While the industrial nations and their extremely high consumption of natural resources have had the greatest impact on the climate for many decades, it is the poor countries of the world that suff er most from the eff ects of climate change.

Thomas Loster

Further information

www.munichre-foundation.orgwww.klima-und-gerechtigkeit.de

43MUNICH RE TOPICS

The idea behind this is quite simple and the relevance to our core business obvious. Insurance companies are subject to strict security and return requirements, as they have to ensure that their pol icyholders’ money is invested both profi tably and safely. At the same time, they are also aff ected by growing losses from climate-change-related extreme weather events. Each euro spent today on CO2 prevention will be repaid in savings many times over in the medium term as claims costs are avoided.

For this reason, we are not just looking for insurance solutions that help to avoid emissions. We actively consider sustainability aspects as an integral com-ponent of our corporate policy and invest accord-ingly in such projects. Today’s investors can profi t from a medium-term rise in energy prices and from favourable legal parameters. A return of between 5% and 8%, as is currently possible with photovoltaic projects in Germany and Italy, would be diff icult to achieve elsewhere in the present market environ-ment. Another advantage is that such investments are far less susceptible to price fl uctuations and can be used towards achieving carbon neutrality.

CLIMATE-FRIENDLY PROJECTS GENERATE MOUNTING INTERESTMunich Re’s sustainable investments

Gernot Löschenkohl

Munich Re today invests a large proportion of its funds on the basis of sustainability criteria (socially responsible investments). Some €100m has already been invested in renewable energies alone (of a total asset volume of around €65bn for the reinsurance group), and our commitment in this sector is set to increase in the future.

Top: These photovoltaic modules on the top of an equestrian arena in Würzburg have been in operation since August 2008.

Bottom: Photovoltaic modules with an out-put of some 138 KWp were installed at the Frankenstadion in Nuremberg in May 2006.

44 MUNICH RE TOPICS

CLIMATE CHANGE

We are not just looking for attractive returns with these projects, but are seeking to leverage the syner-gies that exist between such investment and our core business. We fi rmly believe that our insurance and technical know-how from our core business will help us to make better investment choices. At the same time, we can also learn a lot from working together with other partners on these projects, which we can then put to good use in developing new insurance products. As investment in renew-able energies is frequently a highly capital-intensive aff air, appropriate insurance solutions need to be found before any fi nancing can be given the go-ahead. This gives us the opportunity to off er our clients a wide range of products along the whole value chain (cross-selling), to provide them with an excellent all-round service and to enhance customer loyalty.

Sustainable investments – environmen-tally sound and profi tableSustainability is becoming an increasingly important aspect of investment, and eco-investments off er above-average growth opportunities. As climate change involves such a wide range of risks across the whole spectrum of the economy, it is likely to remain a major factor for investors in the years and decades to come. Evaluating investments according to “green criteria” is much more than just a passing fad.

Activities so far

The starting point for our investment activities in renewable energies is the welivit new energy GmbH, a subsidiary of KarstadtQuelle Versicherungen. Founded in 2005, welivit is part of the Munich Re Group and specialises in developing and implement-ing projects in the renewable energies segment, with current focus on solar projects in Germany and initial projects in Italy and Spain. It serves as a plat-form for pooling such direct investments. As at the end of 2008, the installed capacity of the solar projects run and managed by welivit new energy came to some 18 MWp.

Welivit also manages Munich Re’s investments in photovoltaics, with a current volume of €65m. Examples of such projects include our investment in a 1 MW photovoltaic noise barrier on the motorway near Töging (see photo) and in a total of 7.4 MW on rooftop installations in southern Germany. The photo-voltaic plant in Gioia del Colle became the fi rst in Italy to be connected to the power grid at the end of May 2009. A similar project in Spain is also being considered.

What will the future bring?

Munich Re and MEAG are currently conducting a project called RENT (Renewable Energies and New Technologies) to analyse the potential of strategic investments in renewable energies and new tech-nologies, for example in the fi eld of enhancing eff iciency and storing energy. Investment in these segments requires our extensive reinsurance know-how in terms of technology and locations. It is quite clear that such projects are of great interest from a risk-return point of view and if further analyses prove positive, a higher level of investment will be considered, for example in wind farms or solar projects. Other attractive projects in the fi eld of renewable energies and new technologies to mater i-alise, such as geothermal energy, biogas or tech-nologies that enhance eff iciency, would also come into consideration.

The photovoltaic installation at the side of the A 94 motorway near Töging went into operation in December 2007.

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ENERGY FROM THE EARTH’S CORE Cooperation with KfW to pro-mote the geothermal industry

The so-called exploration risk has always been the one of the main obstacles to attracting investors to deep geothermal drilling projects. In order to produce electricity from geothermal energy eff iciently, a water temperature of at least 100°C is required. But if, in spite of extensive preliminary studies, insuff icient quantities of hot water are found or the temperature is lower than expected, investments totalling over €10m per project may be lost. Munich Re has supported the geothermal industry from the very beginning and developed the world’s fi rst exploration risk insurance back in 2003.

In addition, the German Federal Ministry of the Environment, KfW and Munich Re joined forces at the start of 2009 in order to promote deep geothermal drill-ing ventures. Their objective was to make greater use of the heat within the earth as a means of halting the process of climate change and to remove the most signifi cant barrier to investment by covering the exploration risk. The KfW grants loans through commercial banks to fi nance deep geothermal drilling projects. If a project cannot be continued after completion of the drilling phase due to inadequate conditions, the investor is released from repayment of the outstanding loan amounts as soon as the project is declared a failure. The Federal Ministry of the Environment, KfW and Munich Re each provide coverage of €20m for this purpose.

Before a loan is granted, Munich Re experts assess the exploration risk and the chances of success of the individual projects. Besides the usual loan interest, the KfW loans also contain a “risk loading” for coverage of the exploration risk. In addition, one-off fees have to be paid when the loan is applied for and when the loan agreement is signed in order to cover the costs of KfW and Munich Re. In return, the investor receives an expert assessment and support for its deep geo-thermal project before and during the drilling phase.

Stephan Jacob

Geothermal drilling rig in Mauerstetten in the Allgäu region of Germany

46 MUNICH RE TOPICS

ELECTRICITY FROM THE DESERT The Desertec Industrial Initiative (DII)

Munich Re supports the Desertec Industrial Initiative in order to help realise the vision of a low-carbon energy supply. At the same time, we are demonstrating how corporate interests, sustainable development and social responsibility can be reconciled.

Ernst Rauch

Andasol 1 in Spain: Parabolic mirrors capture the sunlight, thus heating a thermal oil. The water vapour produced is then used to drive a turbine to generate electricity.

47MUNICH RE TOPICS

CLIMATE CHANGE

economic, political, social and ecological framework for carbon-free power generation in the deserts of North Africa and the Middle East. The aim, in the medium term, is to produce around 15% of Europe’s electricity needs and a substantial portion of the power needs of the producer countries.

Next steps

The signing of the MoU on 13 July 2009 signalled the start for the DII. Further founding members are expected to sign by the end of 2009, although DII will actually be established as a legal entity before this date. Detailed implementation plans for the Desertec concept will then be developed within three years, thus forming the basis for the beginning of concrete investment input.

A range of advantages

Besides the tremendous business opportunities for the participating companies, the project also off ers other important economic, ecological and social potential: it will give greater energy security to the EUMENA countries, and substantial private invest-ment will increase growth and development oppor-tunities for the MENA region. At the same time, the producer countries will be able to use the additional energy supply to operate desalination plants and thus improve their supply of drinking water. And last but not least, the DII will help to reduce carbon-dioxide emissions and achieve international climate change targets.

The equatorial sunbelt, most of which is desert, off ers by far the largest technically accessible source of energy for our planet – the earth’s deserts receive as much (solar) energy in six hours as man-kind consumes in a whole year. Solar power plants in the desert covering an area of 130 x 130 km – no more than about a third the size of Holland – could supply all of Europe’s electricity needs. It is no won-der then that the idea of using the desert as a source of renewable energy has long been a cherished goal. Now this vision is fi nally taking shape.

The foundations for this ambitious project were laid on 13 July at Munich Re when twelve companies signed a Memorandum of Understanding (MoU). Ludwig Bölkow had already drawn up initial plans for supplying Europe with energy from solar power plants in the Sahara as far back as 1980. The Trans-Mediterranean Renewable Energy Cooperation (TREC) initiative of the Club of Rome took up the idea and developed the Desertec concept, which outlines the perspectives for a sustainable power supply for all regions of the world by using the energy potential from direct solar irradiation in the deserts. The regional focus is on Europe, the Middle East and North Africa (EUMENA). Back in 2005, the German Aerospace Center (DLR) completed a study on behalf of the German Federal Ministry of the Environment, confi rming the feasibility of such a project and indicating the probable investment vol-ume required. According to this study, €400bn will be needed to realise this project – €350bn for the solar thermal power plants, and a further €50bn for the transmission lines. The task of the DII planning entity will be to analyse and develop the technical,

VISION OF A RENEWABLE POWER SUPPLY

This is how the electricity supply for the EUMENA regions may look in the future: a combination of diff erent sources of energy.

Solar power

Photovoltaics

Wind

Hydro

Biomass

Geothermal

Source: DESERTEC Foundation

48 MUNICH RE TOPICS

CLIMATE CHANGE

Role and objectives of Munich Re

As a driver of solutions for climate change, Munich Re has always been extremely keen on the vision of a low-carbon electricity supply from renewable energies in the deserts of the Middle East and North Africa. As politics, industry and science will all need to pull in the same direction in order to make this idea become reality, we were eager to drive forward the foundation of the DII. Our participation in the DII is a good example of the Munich Re strategy of mak-ing the future insurable through our know-how and our capacity for fi nding solutions. At the same time, we also want to secure the long-term profi tability of our business: only if future loss burdens from weather- and climate-related natural catastrophes do not rise excessively will it be possible to further develop this fi eld of business in the long term. In the medium term, our commitment to low-carbon ener-gies can bring us new business potential for covers of and investments in renewable energies and at the same time make a contribution to energy security and climate protection. In this way, we are support-ing the fi ght against climate change � as reinsurers,

we have to bear the brunt of its consequences and costs � and at the same time creating value for clients and investors alike.

Munich Re Board member Torsten Jeworrek: “DII clearly sets the right long-term incentives, namely climate protection and a low-carbon energy sector. With our initiative, we are therefore commencing a dialogue with visionary thinkers and companies that, like us, are convinced of the potential.”

Solar thermal power plants in the three areas marked on the map could meet the energy needs of the entire world, the EU (EU 25) and the MENA region (Middle East and North Africa) respectively.

Source: DESERTEC Foundation

THE DESERTEC VISION

WORLD

EUMENA

49MUNICH RE TOPICS

CLIMATE CHANGE

CORPORATE CLIMATE CENTRENetwork of competencies

The Corporate Climate Centre is the fi rst contact point for the DII project and all topics related to climate change.

Munich Re is one of the pioneers of climate research. As far back as 1974, we set up what was later to become the Geo Risks Research Centre of Competence. Today, the Corporate Climate Centre (CCC) deals with all aspects of climate change and considers both the risks and the opportunities involved. There is a network of staff members from all areas within the Group whose business is particularly aff ected by climate change. Our experts from all the relevant dis-ciplines, such as meteorology, hydrology, geophysics and geography, constantly analyse climate change risks.

The specialists in CCC form a knowledge hub for all questions relating to this topic and are the link between geoscientifi c research and operational business. They advise underwriters and clients on the development of future-oriented products.

To keep our internal expertise up to date, to supplement it and make available our many years of experience to others, our experts from the Corporate Climate Centre play an active role in a global network of scientists, associations and organisations in the political arena and are involved in numerous research and development projects.

If you are interested in the development of new covers or sales channels for risk-transfer solutions connected with the topic of climate change, we would be delighted to hear from you. Please send all enquiries to:

CorporateClimateCentre@munichre.com

13 July marked the start of the Desertec Industrial Initiative. Here the signatories proudly present the Memorandum of Understanding.

50 MUNICH RE TOPICS

Dr. Thomas BlunckMember of Munich Re’s Board of Management tblunck@munichre.com

Dr. Michael BösHead of Asset-Liability Management mboes@munichre.com

Dr. Guido FunkeExecutive Manager, Corporate UnderwritingCasualtygfunke@munichre.com

Dieter FreySenior Business Analyst, Risk Trading Unit, Special and Financial Risks dfrey@munichre.com

Dr. Christina GroßerHead of Risk Identifi cation and Control, Integrated Risk Managementcgrosser@munichre.com

Philipp HasenmüllerProject Manager, Corporate Climate Centre,Corporate Underwritingphasenmueller@munichre.com

Prof. Dr. Peter HöppeHead of Geo Research and Climate, Corporate Underwritingphoeppe@munichre.com

Dr. Mathias HörmannUnderwriter, Special Enterprise Risks,Special and Financial Risksmhoermann@munichre.com

Ralf HungerbühlerUnderwriter, Enterprise Risks,Special and Financial Risksrhungerbuehler@munichre.com

Dr. Torsten JeworrekMember of Munich Re’s Board of Management, Chairman of the Reinsurance Committeetjeworrek@munichre.com

Thomas Loster Chairman of the Munich Re Foundationtloster@munichre-foundation.org

Gernot LöschenkohlProject Manager, Divisional Business Development, Special and FInancial Risksgloeschenkohl@munichre.com

Dr. Michael MenhartHead of Economic Research, Group Development mmenhart@munichre.com

Dr. Andreas MüllerHead of Research, Analysis, Marketing,Risk Trading Unit, Special and Financial Risksanmueller@munichre.com

Jork NitschkeHead of Facultative Energy,Global Clients/North Americajnitschke@munichre.com

Joachim OechslinChief Risk Off icer, Group Committee, Integrated Risk Management joechslin@munichre.com

Ernst RauchHead of Corporate Climate Centre, Corporate Underwritingerauch@munichre.com

Margarita von TautphoeusHead of Solvency Consulting,Integrated Risk Managementmtautphoeus@munichre.com

Dr. Joachim WenningMember of Munich Re’s Board of Management jwenning@munichre.com

EXPERTS FEATURED IN THIS ISSUE

© 2009Münchener Rückversicherungs-GesellschaftKöniginstrasse 107 80802 MünchenGermany Tel.: +49 89 38 91-0Fax: +49 89 39 90 56http://www.munichre.com

Supervisory BoardDr. Hans-Jürgen Schinzler (Chairman), Hans Peter Claußen (Deputy Chairman), Herbert Bach, Dina Bösch, Frank Fassin, Christian Fuhrmann, Dr. Peter Gruss, Prof. Dr. Henning Kagermann, Peter Löscher, Wolfgang Mayrhuber, Silvia Müller, Marco Nörenberg, Reinhard Pasch, Dr. Bernd Pischetsrieder, Anton van Rossum, Andrés Ruiz Feger, Richard Sommer, Dr. Ron Sommer, Dr. Thomas Wellauer

Overall responsibility Group Communications

Editor responsibleBeate BrixTel.: +49 89 38 91-38 36Fax: +49 89 38 91-7 38 36E-mail: bbrix@munichre.com

Picture creditsCover: Plainpicture/Greg Conrauxp. 2 top left, 4: Getty Images/Eddy Joaquimp. 2 top right, 7, 8, 10: Robert Brembeck, Munichp. 2 bottom left, 20: Plainpicture/Deepol/Marco Bohrp. 3 top, 32: Plainpicture/Millennium/Edgar Martinsp. 3 bottom, 46: Laif/Paul Langrock/Zenitp. 12, 14: Oliver Soulas, Munichp. 15: Getty Images/DAJp. 17 top: Oliver Jung, Munichp. 17 bottom: Plainpicture/Deepol/Rui Camilopp. 22–28: Oliver Jung, Munichp. 32: Plainpicture/Millennium/Edgar Martinsp. 34: Getty Images/Christopher Furlong/Staff p. 39: Munich Re archivesp. 42: Thomas Loster, Munich Re Foundationp. 43 top and bottom: welivit new energy GmbH/stilbezirk GmbH & Co. KG – Agentur für visuelle Kommunikationp. 44: welivit new energy GmbH/stilbezirk GmbH & Co. KG – Agentur für visuelle Kommunikationp. 45: Oliver Brunner/PIXELIOp. 46: Laif/Paul Langrock/Zenitp. 49: Munich Re archives

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© 2009Münchener Rückversicherungs-GesellschaftKöniginstrasse 107, 80802 München, Germany

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TOPICSFrom knowledge to solutionsSolvency IIClimate change