Jeworrek says CBI cover must change and urges risk managers to up efforts

As Munich Re discussed the line between uninsurable and insurable risk at this year’s Monte Carlo Rendez-vous, Mr Jeworrek said limits must be placed on cover for CBI.

Unknown CBI exposures to events such as the recent Japanese earthquake and tsunami have ‘convinced’ various reinsurers, including Munich Re, that for severe catastrophe scenarios policies and cover cannot continue as before, added the reinsurer.

“We cannot afford to give blindly additional business interruption or contingent business interruption as a consequence of all possible cases or original causes,” he said. “That is not possible as otherwise we over-line ourselves and our exposures.”

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CBI present various risk identification problems for the risk transfer industry, said Mr Jeworrek, which has to learn lessons from the recent events in Japan.

“We have an unknown accumulation exposure, which comes on top of the known earthquake exposure in the region of Japan. Similar situations apply to other exposures around the world,” he explained. “I can assure you we have a very high ambition to keep CBI coverage under the property polices insurable. But we are convinced that for the severe catastrophe scenarios around the world we need a change.”

He admitted that Munich Re has not yet decided how it should deal with this growing risk that is a major concern for many risk managers around the world.

But, he said his company will be in touch with insurers and insurance buyers to propose changes in coverage.

There will then be a twelve to eighteen month transitional period to allow all concerned time to adjust to any changes in policies.

“We will identify together with insurance companies those cat scenarios in the world where we could have the highest loss intensities, certainly earthquake exposures and maybe hurricane exposures, and then we would like to implement loss limits as a result of those cat events,” explained Mr Jeworrek.

Risk managers may be alarmed to hear that cover may be further restricted when they have complained that policies currently in the market are insufficient as it is.

But Mr Jeworrek called on the risk management community to better get to grips with their supply chain management.

“You could ask what does it mean for the customer? I think the customer has to put these sorts of changes into their risk management and make sure in the case of the failure of their supplier resulting from such cat events they are in a position to replace them,” the Munich Re man explained.

CBI will be a big issue at the coming 2012 reinsurance renewals for the reinsurer along with obvious discussions over pricing.

It expects the rating environment to be similar to the previous set of renewals, with higher pricing for catastrophe business particularly in loss-affected areas but also for areas indirectly affected or not affected at all.

Munich Re said it has witnessed price increases in US cat business of roughly 10%. Given the current situation in the international catastrophe markets it expects the market to continue to develop in this way.

In other lines it expects a continuation or flattening of prices with sideways movement.

The situation in the capital markets is a concern for the risk transfer industry said Mr Jeworrek, as is the historically low interest rate environment that is affecting investment income across the board.

“We as an insurance industry face difficulties in projecting our long and mid-term future. We have to anticipate a long-term recession with very low interest rates. What does that mean for our product pricing? Can we translate this insufficient interest rate on the cash flow side into additional price charges—maybe not. It is a big problem for us,” he said.

Speaking in more general terms on the complex accumulation of risk and emerging risks in a globalised economy, Mr Jeworrek said that the insurance industry must get on top of exposures before they suffer major losses.

The reinsurance industry wants to ensure that these risks—such as CBI, terrorism, natural catastrophe and longevity risks—are insurable, but they represent a big challenge for risk management within the industry and in terms of product design, he added.

But he stressed that these risk are only insurable if the potential losses are measurable and if they are independent of other risks.