Cover Notes: “Reporting: the good, the bad & the unnecessary”: a conversation with Christoph Jurecka

First of all, thank you for the invitation and the opportunity to spend some time with you and talk about reporting, obviously a very relevant and important topic for us as well. We at Munich Re have sustainability generally as an integral part of our corporate strategy, our ambition 2025 strategy. We're looking back now at almost 50 years of opinion leadership in climate risk management. Munich Re is well known for its expertise about climate change and natural catastrophes. We have always been very outspoken about that and have been investing quite heavily in that area for many decades. Our climate strategy nowadays is very much aligned with the targets of the Paris Agreement. We would like to support the achievement of these targets. Our strategy is centered around three pillars: the first pillar covers ambitious decarbonization targets for ourselves, the second pillar is comprehensive climate risk management, and the third pillar is the provision of innovative risk transfer solutions to support the transition. This strategy goes across all our business, across assets, liabilities, and our own operations. So it's a very exhaustive and very comprehensive exercise.

Sure, absolutely. Let's start maybe with the insurance business on the liability side. We support the upscaling of innovative low-carbon technologies by providing insurance cover for those technologies to cover the associated risks. We focus on energy, not only the generation of energy but also the storage of energy, distribution, power grids, and across many of the renewable energies: photovoltaic, wind power, energy storage systems, biomass power plants. To give you a bit more flavor, at the end of last year our Green Tech solution unit alone insured more than 900 projects and manufacturers from about 80 countries, and the nominal output of these businesses was 55 gigawatts. So it's quite significant.

Well, of course I can. Indeed, we have been facing very large projects over the last decade in reporting and regulation, and I myself experienced all of them. But maybe I start from a different angle and explain how we set these things up in a group. We are a very diverse group, doing business across the entire globe, from Australia to the Americas, across all continents. Whenever we do something, we have to make sure we do it in a very efficient way across the entire globe. We always choose very centralized setups, either a central IT system or use existing central IT systems to collect the data, and we make sure the interpretation of the standards is the same everywhere and the processes are consistent. By doing so, we have a very efficient setup, but despite that, the costs have been huge. Let's start with Solvency II. In the implementation phase, we spent 300 to 400 million euros, and the running costs are about 50 million per year. Then IFRS 9 and IFRS 17, I think the same order of magnitude, probably even more. Sustainability reporting is earlier days, but I think it's fair to say our estimate is that it will be for sure 100 million euros in cost for us as a group, and maybe more.

That's a tricky question because it's hard to quantify the return on regulatory investment. Let's try to put it differently. We as a group always welcomed these regulatory changes. We're very outspoken about how much we like Solvency II, we are fans of IFRS 17. We support regulation when it's sensible and reasonable and really helps the industry to improve. Solvency II enhanced the risk management capabilities of the entire industry significantly, so it was worth introducing it. Even for us, we had an internal model before, but having the alignment now between our internal model and what regulators ask us to do is a significant advantage. Likewise with IFRS 17, the transparency is very good, the international comparability is also very good. For us, the transparency helps that the value creation we see internally becomes also much more transparent for external stakeholders. Many stakeholders can understand our numbers now much better than before. Admittedly, complexity is quite high, but I'm pretty sure in a few years from now everybody will be talking only about the big advantages of IFRS 17 and IFRS 9. But let me add something on a more general basis. New regulation is often very reasonable and makes sense. However, if you look at the overall reporting effort, only looking at new regulation is sometimes not the right perspective. We have a lot of old regulation still in place. What I did not see so much in the last decade is that old regulation had been discontinued. We are not good at stopping old regulation. Whenever we introduce something new which is reasonable, we should stop something from the past. Then the overall effort would be more in balance, and that's something we didn't do a lot.

Maybe let's start where we currently are. We are finalizing our materiality analysis currently. To explain what the materiality analysis is, according to the standards you have to go through all the various aspects of sustainability for your entire business and analyze if you have a material impact or if there is a financial materiality for you as a company. This is already a lot of work, a huge effort. Given our group's global footprint, it's significant work. At the same time, we are already setting up processes and IT systems to be able to deliver the numbers once we have decided what is material, because we can't wait. We have to deliver in 2025 for the year 2024 for the first time, and 2024 is about to start. So we are doing the two things in parallel, which is more complex but the only chance to make progress. The biggest challenge for us is still how extensive the reporting requirements are. The materiality analysis helps, and there has been effort to reduce the amount of data, but it's still significant. The second challenge is the uncertainty when it comes to the interpretation of the standard. It's not always clear how to interpret it, and you have long discussions in the company to come up with a joint view. I'm worried that comparability between various groups will be limited because there is room for interpretation. Another challenge is the timing. We currently only have sector-agnostic standards. If we can expect a sector-specific standard to be drafted in a year or two, and we implement the agnostic one now, there is a significant risk of double work. The earlier we could get a sector-specific standard, the better. Another challenge is international comparability or interoperability between the various standards. The ISSB is coming up with standards, IFAC has put their standards forward, and the question is how to comply with all of them at the same time. We are lacking a clear statement to what extent they are really interoperable. Finally, the timeline is a challenge. To be able to report in 2024 already means a lot of your infrastructure has to be in place by the end of this year, which is very challenging.

Sure. Generally, the idea of steering capital to flow towards sustainable investments is very useful. Also that the standards start from a principle of materiality is the right idea. In the latest version of the ESRS standards, the direct link to PAI for insured emissions is no longer there, which makes sense given that sector-specific standards are about to come. Also, EFRAG is working on interpretation guidelines for the value chain and materiality analysis, which is very helpful. What is less useful is that the amount of data required is still very excessive. The lack of global alignment is not useful at all. The extent to which certain risks have to be reported for the entire value chain, where it's not clear what the value chain is for insurance companies, is also not useful. It's hard to interpret and the impact is questionable. Looking at the amount of money we are spending on reporting across the value chain, you could argue that if you spent that money to implement changes in the real world, maybe we would achieve more than just by reporting about our insurance position.

First of all, we need the data absolutely. Whenever we take investment decisions, we need granular and good data to really understand the sustainability aspect. On our investment side, sustainability is absolutely key. We invest a lot into renewable energy, and also into forests, which are a great investment from an economic and sustainability perspective. However, we have to be careful. The ESRS data will take some time until the data quality and amount is good enough. Some of the issues we see as a preparer would also affect us as a user. If there is too much room for interpretation, it's hard to interpret the data you get. Sometimes less data but higher quality or more precisely defined data points would be more helpful. But yes, we are in need of more high-quality data, particularly for our investment business.

We really welcomed the initial initiative by the EU Commission to reduce by 25%. I was nearly enthusiastic about it. But now I'm a little bit afraid that for insurance, the current proposal doesn't go far enough. There is a significantly higher need for reduction than what we see. If you look at what is available right now, a reduction or harmonization of existing regulations, there is plenty of room for reductions. New regulation is not always the issue, but we should also discontinue part of the old regulation. If there is something on European level, think about what could be discontinued on a local country level. We are so good at inventing new things, we should sometimes also think more about discontinuing things of the past.

Solvency II first of all is a huge success story. It worked well and it was a model for many other countries. The key element is to maintain Solvency II, don't change it too much, and make sure it continues to work in the future. In particular, when it comes to internal models, it's important that we maintain them as they are. On top of that, reporting requirements are quite heavy in Solvency II and should not increase. There is a significant risk they will increase, so I'm highlighting that. Thirdly, on the more technical items, we fully support Insurance Europe's positions. For us, the two most important ones are that the internal models are what they are, and the risk margin is quite excessive and very high. There are very good reasons for a reduction of the risk margin.

I can't surprise you anymore. Reduce bureaucracy wherever possible would be my first request. Then maybe more generally, a focus on global competitiveness would be really great.

Thank you.