CEOInterviews.AIForum Manager 08.07.12, Nikolaus von Bomhard

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Mark Beise0:17

Welcome again to Forum Manager, the interview show of Phoenix and Süddeutsche Zeitung. We are in Munich for the first time, at the ifo Institute. The ifo Business Climate Index tells us how the mood is in the German economy. Currently it's not so good, but Nina Ruge, my colleague and Phoenix moderator, is in good spirits. She and I are hosting this show, along with the main moderator Mark Beise. Our guest today is Dr. Nikolaus von Bombard, Chairman of the Supervisory Board of Munich Re. Welcome.

As is our custom, please introduce your company in 30 seconds.

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Nikolaus von Bombard1:24

We are an insurance group, conducting both primary and reinsurance under one roof. Our business is the professional handling of all kinds of risks. We receive risks from individuals, companies, and also from insurance companies. We create value by understanding these huge risks well, mixing and diversifying them, and covering them more cheaply than the cedants could themselves.

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Mark Beise1:54

So your core business is catastrophe, at least protection against catastrophes.

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Nikolaus von Bombard2:01

There have never been as many losses as today. 2011 had Fukushima, Thailand floods, New Zealand, with 4.5 billion euros paid out. But we don't need to worry about our 47,000 employees, shareholders, or customers. Last year was probably the worst in over 130 years, yet we still posted a profit.

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Mark Beise2:49

Can you explain reinsurance for those who don't know why it's necessary?

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Nikolaus von Bombard3:01

Reinsurance homogenizes portfolios. For homogeneous risks like auto insurance, less reinsurance is needed. But in industrial fire insurance, large individual risks need to be homogenized to optimize capital. Also, cumulative losses from a single event can hit many risks simultaneously, so the reinsurer assumes that risk, as with last year's 4.5 billion.

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Mark Beise3:56

You have 207 billion in deposits. You must be a better asset manager than a bank to be safe.

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Nikolaus von Bombard4:16

Security is key. We run from the liability side; capital investment replicates expected payouts. We want a return, but security and liquidity come first. We must understand liabilities so we can pay when a bad year comes.

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Mark Beise5:15

We are in the fourth or fifth year of crisis. How can one manage safely?

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Nikolaus von Bombard5:47

By aligning capital investment with liabilities. Getting the duration right is important. We know when we must pay out, and we replicate those expectations. The crucial value creation is at that interface.

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Mark Beise6:48

Where can you invest safely now? You had billions in Mediterranean bonds and Greece.

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Nikolaus von Bombard7:11

Diversification. For a partial euro breakup, invest in German and US bonds and real assets. For a fiscal union scenario, also periphery bonds. We mix to avoid being caught off guard.

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Mark Beise8:36

That's good advice for our viewers: mix many different investments.

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Nikolaus von Bombard8:56

Mixing is right, but you must understand what you invest in. Age matters: younger can take more risk. Get advice, but understand what you buy.

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Mark Beise9:38

What do you do personally? Do you have life insurance?

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Nikolaus von Bombard9:42

Personally, I've been more risky, heavily in equities. My private mix is not as broad as I preach. Many stocks have high dividend yields now.

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Mark Beise10:16

We ask again: a term life insurance?

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Nikolaus von Bombard10:24

I considered savings life insurance early on. It depends on company benefits and what you trust your family to handle. I trust them a lot.

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Mark Beise10:46

On fiscal union: you prepare for it, meaning inflation. Isn't that a risk?

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Nikolaus von Bombard11:01

Inflation is a risk for savers. We can protect with real assets, equities, inflation-indexed bonds. Low interest rates are a challenge for insurance. This cannot go on forever, or the saver pays the bill.

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Mark Beise12:04

Now, do you offer insurance against a euro crash?

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Nikolaus von Bombard12:28

No, we don't insure investment risk. 98% of our business is not taking over others' investment risks.

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Mark Beise13:21

Are you honest and tell us whether you believe in the euro short term?

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Nikolaus von Bombard13:36

Yes, unreservedly. The euro will survive. But whether Greece stays in, I wouldn't bet on it.

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Mark Beise14:00

Is it good for Greece to stay in the euro? It's stressful. Is the social contract intact?

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Nikolaus von Bombard14:40

Germany's commitments are mostly conditional payouts. I believe serious work is happening. Germany is not at its limit.

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Mark Beise15:17

Are you optimistic because you are part of the financial industry that wants the game to continue?

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Nikolaus von Bombard16:00

No, we are conviction-driven. Insurers are long-financed, stable, and not part of speculative systems. So we are above suspicion.

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Mark Beise16:40

Are you a cool dog? You remain relaxed despite 70% of your operating result being wiped out.

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Nikolaus von Bombard17:20

Preparation helps. Three years ago, preparing for both a euro breakup and a fiscal union seemed absurd. Now we do, and it reduces the menace. We took write-downs in Greece, bitter but prepared. Private sector involvement was a mistake.

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Mark Beise18:20

One could say you are calm because it's not your own money.

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Nikolaus von Bombard18:40

I see my task as standing for the interests of insured, shareholders, and employees. The art is to remain calm and not assume you know the solution. Preparing for multiple scenarios means returns can't be optimal.

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Mark Beise19:20

Not every manager shares that attitude. We've seen managers focused on quick profit.

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Nikolaus von Bombard19:50

The insurance industry has a long-term business model. Short-term thinking and insurance are mutually exclusive.

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Mark Beise20:28

Can we call you a cool dog? You believe in capitalism with a human face?

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Nikolaus von Bombard20:40

Absolutely. It's in the hands of citizens, consumers, employees, and management. Consumers play a key role. The manager is important but not everything.

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Nina Ruge21:15

But what is a good person? I can't imagine it.

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Mark Beise21:40

Capitalism with a human face means not betting against countries but giving them a chance. That is an illusion.

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Nikolaus von Bombard22:00

Self-interest is not bad. The framework must be set correctly. In finance, the framework was wrong. There are bad people, and society must react.

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Nina Ruge22:20

Yes, but there is a limit. Self-interest and profit are part of the economic order. Politicians set the framework; within it, actors can err. Society hasn't reacted sufficiently.

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Mark Beise22:40

That capitalism with a human face is a quote from you, isn't it?

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Nikolaus von Bombard22:50

I wouldn't claim that formulation, but I agree that in a social market economy, one can act humanely.

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Nina Ruge23:10

Speculation for or against states isn't bad per se. Selling Greek bonds is a vote of no confidence.

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Nikolaus von Bombard23:30

Speculation is vague. We position ourselves daily. The issue is leverage and information. Greece's own behavior made selling rational.

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Mark Beise23:45

Banks triggered the crisis, but little has changed. They remain brazen.

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Nikolaus von Bombard24:00

Regulation is incomplete. It should be global, but you can't wait; you must start nationally. The financial transaction tax is a blunderbuss for curbing speculation; it's too imprecise. Target specific practices instead.

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Mark Beise24:30

So you favor gradual regulation starting nationally, despite competitive disadvantages.

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Nikolaus von Bombard24:45

He who always waits for others often ends up with nothing.

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Mark Beise25:00

And the financial transaction tax? If introduced, business will leave.

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Nikolaus von Bombard25:30

If the goal is raising taxes, it may fit. If curbing speculation, it's imprecise. Politicians want the money; it's a political football.

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Mark Beise26:00

Now to primary insurers. You have Ergo, known for the Ergo scandal. Last year Ergo became very famous, but...

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Nikolaus von Bombard30:15

Not like you did. I didn't think of it first. Ergo consists of much more, but that is a dark chapter in recent Ergo history. The group has only existed since the mid-90s. It goes back to 2007 when two employees organized an incredible event. The group investigated and apologized, but it coincided with a marketing campaign. The impact was fatal. Life goes on. I wish the association would end someday, but it was widely covered in the media. I think it's slowly declining, and the good core will prevail.

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Nina Ruge30:30

Were there actually damages besides image damages? Were there damages for you? Image again, but were there fewer new contracts?

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Nikolaus von Bombard30:32

We could not determine significant changes. The only thing we noticed is that recruiting young sales employees became more difficult. So in terms of business, actually no significant impact, not in new business, not in the stationary, and not with existing employees in sales, but young sales employees have become a bit more difficult.

And for you personally? First of all, enormously time-consuming, a defocusing from what I actually think I should be doing. Highly unpleasant. Five years ago, or when it became known, you can't turn it back. Of course, I asked myself if we had missed something. At the time of introducing compliance rules, did we involve the self-employed field force enough? I suspect not, because with 47,000 employees, there are always those who don't follow rules. We need to keep the risk as small as possible. That was a lesson for everyone. I would say something like that won't happen again, but I would have preferred to do without the lesson.

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Nina Ruge30:51

May I ask a personal question? We've touched on this: you are described as very calm, modest, reserved, controlled. Did you ever lose your cool during this scandal?

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Nikolaus von Bombard30:55

I never lost my cool in the office, I freely admit. I was terribly annoyed. But when it's many years back, it's difficult. The two employees are no longer with the company. You can only ask yourself what we missed. But getting upset doesn't help. I was furious every time we had to deal with it. It releases negative energy, keeps people from work. The greatest damage is to the employees themselves. 35,000 Ergo employees are damaged by two employees. It's hard for them; they are not responsible.

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Nina Ruge31:15

But you could have prevented this at the outset. When you took over, Munich Re was in bad shape, even making losses. You focused the business, concentrated on core areas. There were smart people who advised you to sell the entire primary insurance business, the direct customer contact with sales agents who push products. But you deliberately didn't do that. Did you want to keep the good earnings, or why?

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Nikolaus von Bombard31:23

No, because I consider it strategically important. As I mentioned earlier, the mix of portfolios is crucial. Reinsurance is extremely exposed to catastrophes and large risks. The addition of primary insurance from a risk perspective dampens that, expressed in risk capital. Also, the businesses have different cycles. Reinsurance has cycles of hard and soft markets; primary insurance has other cycles. Bringing them together creates a less volatile business model for shareholders. That's the decisive reason.

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Nina Ruge31:36

You became CEO in 2004. You said yourself you had to learn a lot as CEO. That's a very open and honest statement. What was that about?

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Nikolaus von Bombard31:38

You underestimate the networks. You don't know what's coming at you in the beginning. Especially things related to people, which you haven't experienced in such density even as a manager before. The Ergo scandal is extreme, but there are countless other good and bad things involving people. The hardest thing is deciding who should take responsibility where. That's the heaviest burden. I always say if you have a 50% hit rate in selecting people for important positions, you're probably above average. It's incredibly difficult and weighs on you.

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Nina Ruge36:38

There are basically two ways to lead a huge company: delegate or control. I read that you are a total order fanatic, that you would immediately pick up a tissue lying around. Is that true? And if so, are you the controlling type?

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Nikolaus von Bombard36:58

The tissue thing would probably be true. If you saw my desk, you'd wonder how that fits. It looks different. The question of control vs delegation is an art of management. I would say I'm not control-freak. The company is far too complex for that. The key is to have trust in important employees. Then you can delegate and let them do it. It's about staying informed without being in an ivory tower. I claim I am curious enough to know what's happening in the businesses, but that doesn't mean I do it myself. We have a kind of virtual holding where business units operate; we hold back from operational business.

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Nina Ruge38:03

But you seek direct contact with employees at all levels. You also go to the cafeteria, right?

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Nikolaus von Bombard38:11

Rarely, but occasionally. Too rarely. The hierarchy of the reinsurer I come from was always very flat. When I started, the reinsurer had about 1,500 employees, and you knew almost everyone. In the areas I directly manage, I know many of the clerks. I don't always go through the chain because it takes too long, but I coordinate with the managers. So I know many employees, but it's not possible to live that way as much as I'd like. When I leave Munich, the Ergo alone has thousands of employees who aren't in Munich. It's objectively almost impossible. You can only do large meetings, but that's scratching the surface. I wouldn't overestimate the cafeteria thing; it's in every management book that you should go occasionally. But you have to do it out of conviction. I hear about suggestion boxes where the CEO answers all emails himself. If it's a real suggestion box, it's impossible because of the volume. So I don't do that. But if I get an email, I answer it myself, and I make sure I don't get too many.

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Nina Ruge39:44

We have 19 minutes left. We want to talk about the future of life insurance, Solvency II, climate change, and your family.

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Nikolaus von Bombard40:04

Let's talk about life insurance because it concerns many listeners. You hear that it doesn't pay off anymore because you need a decent interest rate. We have a low-interest phase at 1%. Does life insurance still make sense? I think yes. You have to distinguish three things: whether you already have one or want to buy one, whether you are a saver or a shareholder, and interest rate expectations. If you already have a life insurance policy with a minimum guarantee of 4% from the 1990s, keep it. That is excellent compared to current yields. If you buy new, the minimum interest is 1.75%, still better than ten-year government bonds. Plus professional asset management and biometric coverage. This package is unique in Germany. If you want more yield, you take on more risk by buying corporate bonds or stocks. Munich Re stock pays 6% dividend. But Solvency II will require insurers to hold more risk capital for these guarantees, which may lead to product redesign. That is a good development, but unfortunate to implement it during the crisis.

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Nina Ruge44:41

Now let's talk about climate, something everyone thinks they can comment on. As a reinsurer, are you interested in keeping the world intact? What will happen to the climate?

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Nikolaus von Bombard45:12

If I had to scale hope and pessimism, I am more pessimistic about climate than about the euro. Climate has been pushed down the priority list by the financial crisis. In the US, there is euphoria over fossil gas, in Canada over tar sands. These increase climate burden. We are convinced that climate changes are significant and partly man-made. Not everything, like geophysical events. But weather-related hazards: floods, storms, droughts, fires. Too little is being done. Rio+20 showed the topic slipped off the agenda. For politicians, it's fatal: they have to do something now that burdens people but results come in 30-50 years. That's almost unsellable in a democracy. We are engaged because we have knowledge we think is relevant for others. We act as a warning voice, talking to politicians, investing in renewable energy. For me, climate change is one of the three great human problems: the other two are the gap between rich and poor, and population development.

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Nina Ruge47:48

Your Corporate Climate Center says there is great danger. Does that mean you will increase premiums?

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Nikolaus von Bombard47:55

Yes, premiums are constantly being adjusted. Climate change is a trend risk, and we try to reflect that in pricing. It's not an exact science, but we use simulations and scenarios. We have our own scientists in this area. The volume of work in the world on this topic is growing, but our staff is relatively small compared to 40 years ago. We can theoretically insure any risk for a price, but it becomes uneconomical if the premium just covers the next year's loss. Then it's better for the customer to self-insure. We create value by pooling risks. We struggle with risks where there is massive moral hazard, like terrorism, or where accumulation is problematic, like floods or nuclear. For floods, adverse selection is a problem. For earthquakes and storms, we can do it. Drought is an underestimated risk.

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Nina Ruge51:58

Another personal question: How do you handle private insurance like liability insurance? Are you overinsured because you are risk-aware from your job?

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Nikolaus von Bombard52:13

Everyone defines their own risk aversion, but there are insurances you must have: liability insurance because the damage potential is asymmetric. For own-damage insurance like household, you can consider. I have it and recommend it because if you have a fire or burglary, you don't want to deal with payment. Also, you get service. For life insurance, it's a matter of opinion. I recommend it but it's not mandatory. For young people, especially those starting a family, disability insurance is very serious to consider.

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Nina Ruge53:23

We just came from climate change. What do you personally do? Do you bike to the office?

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Nikolaus von Bombard53:30

Everyone must see how they arrange their life. I don't bike to protect the climate; that would be exaggerated. I bike because I enjoy it and it's the fastest way for me in Munich. But everyone should be conscious of where they contribute to problems. There are senseless energy wasters at home that should be avoided. Also, keep the topic alive in conversations with politicians. Small things matter.

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Nina Ruge54:36

Your two daughters are in the audience. If you asked your family, what role would they say you give them? In your personal ranking, would they say they are number one? What would you say?

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Nikolaus von Bombard54:56

They would not answer number one, and that is a correct perception of the family. I am no master of balancing work and private life. The family's assessment is unfortunately correct. I won't improve in the last years of my career. I know people who do it better. While I've been in this profession, I am irretrievably lost in that regard. The family fights, I fight, and opinions never align, but the family is right.

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Nina Ruge55:45

You are in your mid-50s. You can work a long time. Is there a rule at Munich Re that you have to retire at 60? Why is that different? Many companies think the CEO is less capable after 60.

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Nikolaus von Bombard56:02

Concretely, contracts are only renewed annually from 60. So the supervisory board has the option to say enough. But 65 is definitely the end. I am almost exactly 56, so not in the second half of the 50s yet. But I think one should stay in the job until 60. From then, you have to see where you and the company stand. There comes a point where the company needs different leadership, where wear and tear sets in. I try desperately to avoid the ivory tower, but no matter what I do, attrition happens, and eventually it's good to leave.

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Nina Ruge57:26

Will you at least discuss with your wife when you want to stop?

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Nikolaus von Bombard57:33

Yes, when the time comes.

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Nina Ruge57:38

What do you dream of doing then? I offer three options: Option 1: Stay in Munich, sit on supervisory boards, found a consulting firm. Option 2: You love Spain and France, walk the Camino de Santiago. Option 3: Go to Brazil, speak Portuguese, open a bar in Sao Paulo.

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Nikolaus von Bombard58:48

You don't allow mixing. I notice. The dream that involves movement like the Camino appeals to me. Not necessarily the Camino itself, but living somewhere else for a period, away from everything.

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Nina Ruge59:07

Then nothing will come of the bar. We wanted to set a date. Thank you very much for being here. We covered a huge range and learned a lot about you. Thank you to the audience. See you next time at the Forum Manager from Munich, ifo Institute. Bye!