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Von Bomhard gives gloomy outlook on crisis
08 June 2009
This year's International Insurance Society conference opened strongly today (June 8) with an executive panel of world leaders. However, the panellists gave a gloomy outlook towards economic conditions in the coming year.
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International Insurance Society
Nikolaus von Bomhard
Prem Watsa
This year's International Insurance Society conference opened strongly today (June 8) with an executive panel of world leaders. However, the panellists, which represented firms from Germany, Japan, the US and Canada, gave a gloomy outlook towards economic conditions in the coming year.
Nikolaus von Bomhard, CEO of German reinsurer Munich Re, warned that he did not expect the crisis to be over quickly.
“We think that somewhere in 2010, probably in the second half, we will see a change. The fundamentals are such that liquidity in the market is still being used to deleverage,” Von Bomhard said. “It is better to stay conservative and miss the first green shoots but be there for the recovery.”
Prem Watsa, chairman and CEO of Canadian firm Fairfax Financial Services, gave an equally ominous verdict on the state of the US economy. With unemployment in the US around 9.5%, Watsa said it was worth remembering when unemployment in 1929 was at 2% and a recovery had been predicted.
“They didn’t really think they had a depression. By 1932 unemployment was 25% and stayed there right through to 1941,” Watsa said. “The worry for us is whether the US government with all its might and power can stimulate the economy to offset the deleveraging taking place.”
“The stock markets are down 50% so there is a tremendous opportunity in the market but the economy is a worry,” he added.
However, there were some positives to be had from the panellists’ discussions about the severity of the global recession. Bijan Khosrowshahi, president and CEO of Fuji Fire and Marine in Japan, pointed to emerging economies as offering a glimmer of hope.
He said he expected them to recover quicker than advanced economies such as the US.
“It is different to the past. Look at those economies that are still growing and are still able to sustain the power to grow domestically,” he said. “The more dependent an economy is on the export market the recovery becomes much more difficult. Some more dynamic economies that do not rely on export may be able to recover if they push domestic consumption.”
Levelling his crosshairs at investors, Von Bomhard said much of the blame for the market’s present ills could be attributed to greed. He said that while the media often focused attention on managers, his focus was on investors who demanded unrealistic growth targets.
“It is about greed in the first instance. If you talk to a CEO who complains about accounting rules, systemic risk and staff incentives, they are taking the easy way out. It comes down to risk management and that is in our hands,” he said.
Von Bomhard added that the responsibility for making sure firms have the right risk management protocols in place fell squarely at the feet of the chief executive. But even with the best risk management and most technical models there is no substitute for just being financially strong, said Watsa.
“Auto company revenues are down 50%. No matter what planning you have, there is no way to prepare for that,” Watsa said.
Khosrowshahi added that the credit crunch had served to highlight the deficiencies that are still there in risk management.
“If we do a stress test when the Nikkei market average is 14,000 we wouldn’t stress test it at 6,000. The credit crunch tells us we should,” he said. “We look at things we can control such as good underwriting and stress tests on the asset management side so if things like this happen we have some protection.”
American International Group (AIG), one of the highest profile casualties of the financial crisis, brought up the question of whether insurance firms are systemically important. Geoffrey Bell, executive director of Group of Thirty, a non-profit organisation that aims to deepen understanding of international economic and financial issues, said AIG had shown that those firms regarded too big to fail would be safe from bankruptcy.
“If you have a problem you know that you will be secure come what may, Bell said. “Systemically important companies will look a lot more like public utility firms than in the past.”
But Von Bomhard said that as long as insurers stuck to their core business they would pose relatively little systemic risk. He added that Munich Re did not want to get labelled along with other firms as being systemically important.
“Those firms will be treated differently and I don’t want to be in that group,” he said. “It could turn competition upside down. We see central bankers all over the place and I am very afraid.”
Von Bomhard added that he also has grave misgivings about the European Commission’s plan to create an EU-wide body to identify and tackle system-wide risks. The European Commission recently proposed a set of ambitious reforms to the architecture of financial supervision within the European Union, with the creation of a new European Systemic Risk Council (ESRC).
The ERSC would be chaired by the president of the European Central Bank and include financial supervisors and central bank representatives from each country. However, Von Bomhard is not happy with the insurance industry’s representation on the council.
“It is a group of 35 people looking at macro risk of the insurance world and includes only one insurer. That scares me to death,” Von Bomhard said.