Munich Re is one of the world’s largest investors. Did the financial crisis cause you sleepless nights last year?

Jörg Schneider: 2008 was a very turbulent year, of course, but I never suffered sleepless nights. Probably because of my conviction that we had made Munich Re crisis-proof at an early stage.
Joachim Oechslin: We had acted very prudently. But I cannot deny that I was a bit tense, perhaps like a student who has prepared very well for his finals but is still nervous the night before the exam.

Why has Munich Re come through the turbulence better than other competitors?

Oechslin: We were well capitalised prior to the crisis - overcapitalised, some players even thought. Today, we are in a solid position and, above all, have kept our options open. We were also more prudent in our investments than some competitors. Without doubt, this was partly due to the fact that the last crisis back in 2002/ 2003 hit Munich Re harder than others. As a result of that experience, we constantly improved our risk management, with consistent implementation of asset-liability management - the matching of investments with the structure of our liabilities.
Schneider: I quite agree. We are also more resilient, because our business portfolio is widely diversified. With primary insurance and reinsurance under one roof, we can compensate better for negative developments in individual segments.

In the opinion of the Financial Stability Forum, an international body comprising representatives of central banks and supervisory authorities, the risk management of the financial sector as a whole failed. What went wrong?

Oechslin: There is no question that risk management failed in significant areas. In particular, many players extrapolated the relatively low-risk period of recent years more or less unhesitatingly into the future. And the supervisory authorities checked risk models mainly for correct calibration on the basis of historical fluctuations. Sufficient attention was not always given to whether the assumptions were reasonable in relation to future developments. This was compounded by political mistakes and management errors. US house prices, for example, became so inflated because the government promoted housing development and deliberately kept interest rates low. In other words, it is too simple to attach all the blame to risk management - but it naturally offers a comfortable explanation.

In his best-seller “The Black Swan”, financial mathematician Nassim Taleb criticises the false certainty of supposed knowledge derived from the conventional consideration of risks. Can models still be relied on or is a dash of intuition also needed?

Schneider: Intuition is good, but first and foremost the head must rule the heart. Around the turn of the century, many companies in the financial sector established risk management systems which seemed to offer certainty. In the belief that risk managers had understood and checked everything, decision-makers took on risks that they did not really comprehend. Common sense was neglected because people believed that protection mechanisms had been institutionalised. We need more of this common sense again. If a new business idea is submitted to us and we do not understand at least its fundamental elements, we seek clarity by talking to experts. If we are not convinced that the risks are controllable, we drop the idea, even if it means forgoing enticing earnings. So intuition does play a part in the end.
Oechslin: For insurers it is absolutely essential not to rely entirely on statistical models but to challenge them, because we know that such tools have their limits. That is why we conduct what we call probable maximum loss scenarios, for instance. In other words, we calculate loss events that normally occur only once in periods of 1,000, 100 or 50 years and add up what can happen.
Schneider: But our risk management even includes what we cannot calculate. Let us take so-called emerging risks. These are risks arising from new processes of information technology, genetic engineering or nanotechnology, or from changes in the legal system - class actions are a case in point. We need to identify and limit emerging risks as early as possible, although we cannot completely avoid them, nor do we want to.
Oechslin: The best example of an emerging risk is still asbestos. If the risks of this material had been considered at an early stage, major damage might have been prevented. Today, we concern ourselves much more systematically with emerging risks and attempt to target potential loss scenarios early on. Nevertheless, you cannot be certain that you have correctly identified the danger that lurks around the next corner.
Schneider: This is why reinsurers charge margins for the unknown in their prices, for something we cannot measure. After all, this risk is also present and exposes our capital.