Christopher Klein, Global Head of Business Intelligence
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The time-honored principle of diversification used in many areas of financial management applies equally well to reinsurance placements. From the ancient days of river commerce in China, where merchants divided their cargo between barges to avoid total loss, diversification has been a key principle of insurance and later reinsurance markets. Given the current financial turmoil in reinsurance markets, there is a legitimate pressure from investors, top management, and the rating agencies for cedents to seek only the highest rated of reinsuring partners. But this worthy objective needs to be balanced with the diversification principle, so that cedents can reduce their probability of zero recovery, as demonstrated in the above analysis.  

This series is limited to consideration of diversification among a panel of reinsurers. Cedents also have options to diversify to other forms of risk transfer, notably risk securitization. In particular, catastrophe bonds as currently structured may reduce the credit risk practically to zero, because they mandate a full collateralization of the limit at risk.

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Reinsurer Diversification: The Guy Carpenter Model: Instrat®, Guy Carpenter’s quantitative services unit, has developed a reinsurer credit model.

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Reinsurer Diversification: Roots and Benefits: Cedents are becoming increasingly concerned about the security of their reinsurers, particularly in light of the global financial catastrophe.

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Chart: GC Reinsurance Composite: Earning Sources at Nine Months: With the majority of Guy Carpenter Reinsurance Composite members’ third quarter results now reported, some clear trends have emerged.

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Get Credit for Your ECM with S&P: S&P has released a new framework for determining whether a carrier’s own ECM can receive partial credit in the S&P capital adequacy evaluation.

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Book Value Update, Nov 17, 2008: As publicly traded (re)insurers continue to report their third quarter results, the impact of the ongoing financial catastrophe is becoming more noticeable.

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Reinsurer Diversification: The Guy Carpenter Model >>

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Christopher Klein, Global Head of Business Intelligence
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Instrat®, Guy Carpenter’s quantitative services unit, has developed a reinsurer credit model. It allows an analyst to input a mixture of reinsurers and measure the impact of the diversification effect. The model allows for the specification of correlation levels for reinsurer defaults. It also allows for the chance of partial recoveries.

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The i-aXs® data management platform has revolutionized risk portfolio management. Guy Carpenter’s award-winning platform gives risk-bearers the power to convert life, accident and health (LA&H) data quickly into clear, concise information that fuels faster, better-informed decision-making. The i-aXs platform contemplates the complex data needs and perils specific to this line of business while providing a combined assessment of property and casualty exposures.

i-aXs products such as Risk Profiler^iX, Accumulator^iX, and RealCat^iX, hep carriers manage their LA&H exposures with a simple way to dig deeper into their own data.

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Unrealized losses, share repurchases, and dividends combined to drive aggregate shareholders’ funds for the Guy Carpenter Reinsurance Composite 16 percent lower for the year by September 30, 2008. Net income was modest, heavily impaired by realized losses.

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Check out the following articles, which were published today:

Reinsurer Diversification: A Risk Metric Approach to Diversification >>

Chart: European (Re)insurers: Earnings Sources at Nine Months >>

GC Capital Tip: Top Stories >>

Christopher Klein, Global Head of Business Intelligence
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In many instances, a common and useful approach to risk management issues involves establishing metrics and monitoring actions in light of certain benchmarks. Risk metrics are generally easier to understand and capture important summary information as opposed to trying to deal with, for example, a comparison of entire probability distributions.

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The “Top Stories” tend to be our most timely, important, or interesting thought pieces. We identify an article on GC Capital Ideas as a top story in order to make sure it is easy to find, particularly during major events on industry milestones, such as key renewal dates, Rendez-Vous, and PCI. If you want to look back at past Top Stories, click the “Read More Top Stories” link.View all GC Capital Tips >>

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Compared to Bermudian carriers, European underwriting results were constrained in the first nine months of 2007. They made up difference with investment income and realized gains. When this source of earnings turned negative in 2008-falling from a gain of USD3.3 billion comprised of realized gains, to a loss of USD12.6 bilion-European P&Ls were affected profoundly.

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