Munich Re: COVID-19 pandemic serves as a stark reminder for low-probability risks that bear tremendous loss potential

21 October 2020 — Cosmin CONCEATU
Following years of eroding rates caused by excess capacities and low major-loss expenditure, particularly in European markets, low interest rates - likely to remain even lower for even longer due to the coronavirus pandemic - are impacting the profitability of reinsurers, Munich Re said.

Insurance covers are likely to become more expensive, particularly for long-term risks in third-party liability and other lines. Against the backdrop of the coronavirus crisis, it is increasingly likely that the current interest-rate environment will continue to affect low-risk investments for the foreseeable future. These circumstances mean that sustained profits, in long-tail business and elsewhere, will only be possible if prices match the assumed risks.

Doris Hopke, Member of the Board of Management responsible for Europe and Latin America, Munich Re, said:

"Interest rates will remain low for quite some time. In turn, income for insurers must come from risk assumption itself, and that includes long-tail business. Relying on interest income, or hoping that statistically likely losses will not occur, is an unsuitable basis for the long-term assumption of major risks. We want to support our clients reliably and in the long run with our financial capacity and our knowledge of risks. We devote considerable attention at Munich Re to sound underwriting as well as appropriate prices, terms, and conditions."

The sheer scale of the COVID-19 pandemic serves as a stark reminder that we must always properly assess and manage low-probability risks that bear tremendous loss potential, Munich Re mentions. Recent experiences following the lockdown of public life and the business world in many countries have been a wake-up call regarding the staggering potential for systemic risks to result in losses that subsequently trigger many different repercussions. Yet it is by definition impossible to insure risks that lead to losses everywhere at the same time, thus violating the fundamental criterion of insurability.

The coronavirus pandemic has also indirectly affected the rapidly growing insurance segment for cyber risks: the lockdowns forced most office staff to work from home and a lot of companies to migrate many business operations online, followed by a sharp rise in cyber attacks.


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