An interview with Jörg Schneider, chief financial officer, Munich Reinsurance company

What does your role involve?

I am CFO of Munich Re and in that function also responsible for risk management; the CRO reports to me.

How much impact does regulation have on your work?

Jörg Schneider For us, the work for regulatory duties is just a small fraction of what we do for our internal purposes. As we are a reinsurance and primary insurance group, risk management is our business anyway. Risk management and risk measurement are important elements in our value-based management and of our overall steering of the group. That means that the risk measurement function and the risk-steering function are a substantial part of what we and I, in my managerial function, must do for the whole group. So regulation is essentially only a side factor in terms of what we do here.

What do you think are the key risks facing a group like yours?

This is an extremely wide area. I would like to categorise it in five items.

First of all, we face general insurance and investment risks, the latter with a very strong weight on market risks. In our insurance business, we are exposed to all kinds of risks like natural or man-made catastrophes, longevity, mortality.

Second: each enterprise faces reputational risks which are becoming more and more important. Warren Buffet once said: “It takes 20 years to build a reputation and five minutes to ruin it”, and this has become obvious in a couple of cases recently.

“Another risk is perhaps that of undue regulation and what we would call the 'socialisation' of insurance.

Jorg Schneider, CFO, Munich Re

Third: Modelling risks. As a cornerstone of our risk management, we have built up very strong quantitative models and a specific risk there is over-reliance on the results of this quantitative modelling. Quite clearly, if you just base your decisions on the outputs of the modelling, that would fall short of what should be required. An important part of management is applying good business judgement to what you see as the outcome of quantitative modelling.

Fourth: Another important risk is missing a critical emerging risk or underestimating adverse long-term trends.

Fifth and finally, another risk is perhaps that of undue regulation and what we would call the ‘socialisation’ of insurance. We recently saw an example of this in Florida where the state – and therefore the tax payers – just took over the risks without requiring any great compensation for this.

What do you think will be the challenges going forward?

There is a quantum leap in the upcoming regulation under the heading of Solvency II. I am convinced that this EU initiative is going in exactly the right direction. In future capital requirements will be driven by real risk exposure instead of premium or reserves volume numbers. Good risk management practices will be rewarded by lowered capital requirement. That means that regulatory systems will reflect economic realities and converge with our internal steering principles. We will be able to use a lot of our risk management and measurement for regulatory purposes. On the way to the Solvency II regime, there is still a lot of work to do for the EU and national legislators, and naturally also for us with the further refinement of our tools.

How do you think risk management adds value to your activities?

As a reinsurer and primary insurer, our business is about risk taking and risk management. Risk management is not a back office or side activity but a very central piece of our business model, adding enormous value to the group in the interest of its clients, shareholders and employees.