Case Study: Munich Re

As a leader in the reinsurance business, Munich Re has consistently demonstrated that it is a capable leader in the field. According to Lascu (2008), “Munich Re was founded in 1880 by Carl Thieme, who with a vision far ahead of his time, created the reinsurance business: He convinced investors of the insurance companies’ need for reinsurance as a means of redistributing risk (and loss) among insurance firms, thus allowing them to take advantage of opportunities that otherwise they could not afford to consider” (p. 65). In order to distribute the perceived cost of risk, reinsurance companies must thoroughly investigate potential threats. While some risks can be easily calculated, political risks present unique challenges in the insurance business. Munich Re, like everyone else, failed to predict the terrorist events of September 11, 2001. This new element has caused the organization, and the insurance industry, to carefully reconsider how they conduct business.

Since the inception of the first commercial insurance agencies, insurers have worked hard to assist their consumers in alleviating the very risk that they were insuring against. In addition, insurers quickly ascertained the need to conduct inspections of insured facilities as well as insured individuals in order to correctly inculcate policies and rates. “Historically, insurance has blended risk transfer with incentives to reduce risk” (Freeman & Kunreuther, 2003, p. 165). In insuring buildings against fire, for example, premiums were reduced for measures taken to prevent damage by a fire event. While the insurance industry seemed to have developed efficient systems to account for the inherent risk, they failed to predict the extent of political risk associated with modern terrorism. While some marketing and strategy specialists sought to write terrorism out of policies, the organization might have been better served by a strategy that attempted to embrace terrorism insurance.

In order to adjust the insurance business to new trends, managers must perpetually evaluate the potential for emerging risks. Success in the insurance business relies on the accurate assessment of risk coupled with measures to aide the insured consumers against those risks. Like any threat, there are steps that organizations can take to help reduce the likelihood of a terroristic attack. According to Lascu (2008), “Companies have some control, however, in reducing their likelihood of becoming victims of terrorism by training employees in terrorism avoidance, such as briefing personnel on what to expect when entering high-risk areas and offering training for eluding roadblocks and avoiding hazardous encounters” (p. 44). While it would seem prudent for companies to take such measures, the insurance company could insist on anti-terrorism training as a pre-requisite to acquiring a policy. Additional measures to secure buildings and grounds could further aide in terrorism prevention. The insurance premium, like that of other policies, would then be linked to the steps that the company had taken to prevent an event rather than based on broad averages. “Premiums based on industry averages encourage firms that believe they are less risky than the average to self-insure” (Katztnan, 2003, p. 787). The combination of risk aversion techniques and premiums based on individual risk potential could increase the profitability of Munich Re.


References

Lascu, Dana-Nicoleta. 2008. International Marketing (3rd ed.). Mason, OH: Cengage
Learning.

Freeman, Paul & Kunreuther, Howard. 2003. Managing environmental risks through insurance.
On-line. Available from Internet,
http://opim.wharton.upenn.edu/risk/downloads/03-07-HK.pdf, accessed 12 March
2009.

Katztnan, Martin. 2003. Environmental Risk Management Through Insurance. On-line.
Available from the Internet, http://www.cato.org/pubs/journal/cj6n3/cj6n3-4.pdf, accessed 12 March 2009.