Munich Re’s capital requirement jumped 19% in 2019

Falling interest rates forced German reinsurer Munich Re’s solvency capital requirement (SCR) higher last year, contributing to a 13 percentage point decline in its Solvency II ratio.

The firm’s SCR climbed to €17.5 billion ($18.7 billion) at end-2019 from €14.7 billion the year prior. The insurer said that last year’s slide in interest rates added a net €2.2 billion.

This effect was spread across SCR risk categories. The market risk SCR increased 10% to €10.1 billion over the year, and makes up the largest single component of its overall capital requirement. The property and casualty SCR climbed 16% to €8.8 billion and the life and health SCR 21% to €6.4 billion. Life insurance capital requirements are highly sensitive to interest rate movements, as the present value of long-term policyholder obligations are discounted using rate curves.


Munich Re’s Solvency II ratio – its eligible own funds divided by its SCR – declined to 237% from 245% at end-2018. Without planned dividends and buybacks, however, it would be 250%.

Eligible own funds hit €41.5 billion, up 15% on end-2018. 

What is it? 

An insurer’s Solvency II ratio is found by dividing its eligible own funds by its solvency capital requirement (SCR). The latter is calculated as the amount of own funds needed for a firm to honour policyholder obligations after a one-in-200-year stress event. The SCR is calibrated to each insurer’s risk profile, either through the application of a regulator-set standard formula or the use of a firm’s own internal model.

Why it matters

The European Central Bank’s deposit rate was cut to -0.5% in September 2019 and has languished in negative territory since 2014. This inflicted a cost on insurers with large life books, as the present value of liabilities is pushed higher as rates decline. Duration risk also increased, as the proceeds of fixed income instruments now have to be reinvested in lower-yielding securities.

Rates are being cut dramatically around the globe in response to the coronavirus crisis, though the ECB has yet to join it. An insurer with Munich Re’s global footprint is sure to see its SCR vault further in response.

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