Rate Concerns

As Retirees Cash Out and Interest Rates Remain Low, Munich Re CEO Sees Seeds of Next Financial Crisis

  • Why it matters

    Why it matters

    The head of Munich Re said continued low interest rate fiscal policies and growing pension commitments may lead to the next financial crisis.

  • Facts

    Facts

    • Nikolaus von Bomhard, the Munich Re CEO, calls the surplus of capital in the market “breathtaking” with the Euro prime interbank lending rate at 0.15 percent.
    • Insurers are wary of investing in stocks, but are deeply interested in infrastructure investments.
    • Mr. Von Bomhard blasted the political maneuvering surrounding attempts to reform Germany’s generous pension system.
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    Audio

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Munich Re Hauptversammlung
Munich Re Chief Executive Nikolaus von Bomhard warned that continued low-interest-rate fiscal policies and an aging public cashing out their retirement packages could translate into the next global financial crisis. Source: DPA

 

It was a pleasant summer evening when Nikolaus von Bomhard, chief executive officer of the Munich reassurance group Munich RE, invited journalists to meet in the company’s lush garden, but the picture painted by the chairman of the world’s largest reassurance group was exceedingly bleak.

Calling liquidity in the markets “breathtaking,” Mr. von Bomhard said, “Monetary and financial policy weapons are currently losing their impact.”

Munich RE has never been shy about its opposition to low interest economic policies, he said, but there is a point where the disadvantages are greater than the benefits. “We are close to this point in Europe,” he said.

The European Central Bank lowered its prime rate in June to an all-time low of 0.15 percent. The bank’s remedial measures are controversial, especially in the insurance industry. Insurers are looking to invest billions on behalf of their customers, but they see few lucrative investment opportunities, while the low interest policy has meant tangible losses for German savers.

 

File photo of books bearing the logo of the world's biggest reinsurer Munich Re are pictured in office building in Munich
Munich Re is the world’s largest reinsurance company. Source: Reuters

 

Mr. von Bomhard is staunchly on the side of the critics. Financial policies are battering savers and creditors alike, he said, but he’s also deeply worried about the risk premiums for corporate bonds, which he describes as “unhealthily” low and “not infinitely elastic.” This, he said, is hiding the danger of the next financial crisis, which he believes could occur if there is a collapse of confidence in available credit.

“Something is happening here at the moment that should fill us with worry,” he said. If risk premiums for corporate bonds expand by 100 or 200 base points, he said, some companies will “be left stranded high and dry. Problems in the bond markets likely will have a strong impact on the insurance industry, which has invested a major portion of its funds in bonds in hopes of a high return.

Many insurance managers, on the other hand, are reluctant to invest in stocks, including Munich RE, which has less than five percent of its total capital investments in stocks. Mr. von Bomhard defends the conservative approach his company has pursued for several years against critics who say it was unwise. “That is our strategy,” he said. “Buy yourself stocks or don’t, as you wish. We don’t.”

“Something is happening here at the moment that should fill us with worry,”

Nikolaus von Bomhard, Munich RE CEO

Instead, Munich RE looks to generate results from its insurance business with only a minimum from its investment side. Yet Mr. von Bomhard also has advocated for making investments in infrastructure easier for the industry, which would open up more investment opportunities.

“We are more or less desperately searching for diversification and, plain and simple, for investment possibilities,” he said. “We need them. I believe this to be a win-win situation.”

The industry has been banging its head against a brick wall with demands like those until now. The European Insurance and Occupational Pensions Authority recently confirmed there would be no special provisions for infrastructure investment in new regulations to be introduced in 2016.

Mr. von Bomhard also harshly criticized the politicization of pension reform in Germany, which is a hotly debated topic in the fastest-aging country in the European Union. Initially, Chancellor Angela Merkel pointed out a demographic time bomb and advocated for a rise in the retirement age to 67- from 65-years-old, but in her third term overseeing the “grand coalition” between her center-right Christian Democratic Union and the center-left Social Democratic Party, she has proposed raising pension payments for older mothers. The Social Democrats, meanwhile, are calling for certain workers to be allowed to retire at age 63.

“The crassest and most blatant example of how things were not done as we think they should have been is, of course, the pension reform,” Mr. von Bomhard said. “Particularly abroad, it is considered beyond all comprehension and, I must admit, beyond mine as well. The largest budgetary item in the budget today is already the subsidy for pension insurance. And it will have to keep growing.”

This will come at the expense of the taxpayers and contributors to the pension fund and will disproportionately affect young Germans. “To my mind, that is an unfair, asymmetric risk distribution between the generations,” Mr. von Bomhard said.

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