Challenges in the Reinsurance Industry: A Study of How Changes in the Interest Rate Curve Affect Balance Sheets and Equity

Christoffer Selmer Schou Olsen

Student thesis: Diploma thesis

Abstract

In this paper it will discussed how the changes in the interest rate curve will affect the size of the balance and thus the equity of the reinsurance industry. This thesis uses Munich Re as a case to represent the market, and thus the thesis will analyze data from their balance sheets to answer the problem statement. The thesis provides an overall introduction to the reinsurance industry and will introduce the contract types and the market participants. It will then be discussed how macro- and internal factors are driving the industry. This will be presented in an external and internal analysis of the industry and which strengths, weaknesses, opportunities and threats the industry is facing. The new Solvency II regime will be discussed and which impact this has on the industry. It will further be discussed how the financial markets are impacting the model and how interest rates and bonds are threaded in the model and why rating is utmost importance. A few issues around the handling of the interest rate in the model will also be discussed along with the actuarial methods of determine future liabilities. Interest rate and bond theory will be discussed and the methodology of how to approach, analyze and execute the final analysis of the problem statement will be concluded. An analysis of the Munich Re’s Groups balance sheet will be made using a reformulation of the income statement and the balance sheet. This will, along with the market analysis, form part of the budgeting. The budgeting and the analysis of the balance sheet will provide data for the calculation of the problem statement. The bond categories on the balance sheet will be calculation individually to find the key performance indicators to execute the analysis of the problem statement. Finally, the analysis and the impact of changing interest rates will be calculated. The conclusion of this paper is, that the reinsurance industry will have a negative impact on the size on their balance and sheet and as a consequence their equity.

EducationsGraduate Diploma in Finance, (Diploma Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages112