Susan E. Witcraft, Managing Director
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In the 1980s many large general insurance companies investigated the use of dynamic financial analysis for corporate decision making. Only a small number of insurers and reinsurers, (1) many of which were European, were able to develop dynamic financial models that were adequate for use in decision making. The primary obstacles
to implementation were actuarial knowledge and computer technology. By the early 2000s, technology had improved, actuaries had developed techniques that allowed better quantification of insurance risks and dynamic financial analysis had evolved
into enterprise risk management (ERM) supported by economic capital models. With these improvements, regulators began to develop solvency rules that create incentives for insurers to implement economic capital models. Although the current impetus for economic capital models is regulatory, the original purpose of enhanced strategic decision making is still valid and companies that use their economic capital models for ERM will be industry leaders.

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Medical Professional Liability Renewals Update:     Insurers continued to post favorable results, with the medical malpractice class generating the highest return on equity for all commercial lines. The record industry profitability was fueled by historically low claims frequency, moderate claims severity and the release of loss reserve redundancies.

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Casualty 1/1 Renewals in Key Regions: Part I, Overview and United Kingdom:    Casualty insurers, not immune to declining exposure on which their rates are based, saw declines in premium income. The leading concerns for motor and employers liability insurers were rises in frequency and severity of bodily injury awards and a reduced ability to bolster results with prior year reserve releases or investment returns. In addition, the recessionary environment resulted in more fraudulent claims. The pricing outlook for 2010 is more positive, but threats continue to loom on the horizon. Capacity remained abundant and the Internet promises to keep motor insurance competition sharp as price comparison websites become more prevalent. Motor reinsurance rates varied widely depending on country experience.

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Risk Management Lessons from the Olympics: Guy Carpenter’s Chief Actuary Offers Some Observations:     Winter sports are known for their inherent high levels of riskiness, so it should not be too surprising that some valuable lessons related to “personal risk management behavior” can be drawn from the way the athletes make decisions and how the competitions are conducted and judged. As risk professionals, when we watch the action on the snowy mountains and icy rinks, we can get another view on the choices made in the taking of risk or in mitigating risk. Here are just a few lessons that offer additional insights.

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Aviation Market Struggling to Rebound: Part I, Disastrous 2009 and New Capacity: Despite the slight rate increases that aviation underwriters experienced in the final quarter of 2008, as 2009 began they could foresee another difficult year ahead. The events of September 11, 2001 left the insurance and reinsurance markets reeling. Immediate rate rises enabled the market to rebound. However, an improvement in aviation operational safety standards and a lack of major liability losses in the intervening years created an environment where premium levels fell, year on year. Aviation insurers had cause for concern.

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1/1 Renewal: Personal Accident:    On the primary side, the personal accident market continued to attract new entrants globally. Despite material personal accident losses from the Colgan Air and Air France air crashes, direct rates continued to see downward pressure along with demands for larger limits. Reinsurance capacity in the personal accident segment continued to grow as a function of the new entrants in the Life/PA catastrophe space. New markets willing to write catastrophe risk were also willing to entertain per person risk.

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Lloyd’s: A Resurgent Market, Part I: Overview, Underwriting and Operating Performance:    Lloyd’s, poised to strongly capitalize on opportunities as 2009 began, saw its competitive position continue to strengthen during the year. The resilience of operating performance and capitalization to the very challenging economic environment of the past 18 months, coupled with a continued reduction in the number of legacy issues, has been rewarded. Market share gains, rating affirmations and continued strong investor interest prevailed.

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Growth for primary writers is extremely challenging in the current economic environment. Organic growth due to higher incomes has slowed and, in some cases, is actually negative as higher paid workforces have been declining in number. Also, economic conditions aren’t ideal for generating new insured policies. Against this need for growth, experience for most plans has been unexpectedly good. These two factors have led issuers to consider or implement higher retentions, driving marked reductions in ceded reinsurance. In this environment, reinsurers have to compete strongly to win business.

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The primary market is somewhat soft, despite increased costs. For reinsurance programs with good experience, clients are looking to keep increases to leveraged trend or less. For programs with higher than expected losses, many cedents were willing to increase retentions to keep costs down. This motivates reinsurers to compete strongly for available business despite uncertainty around the potential impacts of health insurance reform on business performance.

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Rates in this sector were very competitive on the primary side and, accordingly, cedents in this market were highly price sensitive and actively managed their reinsurance purchases. Excess of loss reinsurance renewals were generally orderly with rates in line with target loss ratios plus a reinsurer margin. Typically cedents saw excess of loss rates flat to increasing 5 percent.

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Spencer M. Gluck, Senior Vice President
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The merits of enormous stimulus packages are being debated while enormous budget deficits are on the rise. How long will their impacts last? When - if ever — will there be the political will to rein them in? Is there a serious bout of inflation in the future? No one can pretend to know the answer to these questions, and it may be futile to enter the debate. But what is not debatable is the tremendous economic uncertainty faced today. There may be uncertainty about whether inflation will rise, but there is no doubt that the risk of future inflation is at a level not seen in a generation.

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Focus on Asia Pacific

The main concern for the insurance market in the Asia/Pacific region is the frequency of loss, with several carriers having more than one loss occurrence in the year.

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GC ForeCat is a product developed by Guy Carpenter in collaboration with WSI Corporation, the world’s leading provider of weather-driven business solutions, that provides pre-season hurricane landfall forecast rates for different regions in the United States. GC ForeCat revolutionises hurricane forecasting by estimating the rate of landfall for regions along the US coastline. Four different regions (Gulf, Florida, Southeast and Northeast - see Figure 1) are derived with associated likelihood of tropical cyclones making landfall in each area. Monthly updates are anticipated up to and including May.

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Primary insurers are operating in a competitive pricing environment with declining exposure bases putting their premium income under pressure. Particularly in the large to mid-size insured environment there is aggressive competition for new business that is preventing rate increases and in many instances resulting in rate decreases, especially if insureds have not obtained competitive bids in the last few years. In the small insured and personal lines business there is more stability and in some instances rate increases were warranted because of loss experience. The outlook for primary insurers in 2010 is for continued flat to 5 percent decreases in average rate due to a strong competitive environment, subject to remaining above minimum premiums or a substantial change in exposure bases.

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The very competitive pollution liability and combined general liability/pollution liability segment exhibited insurance rate changes that were in a range from flat to a 15 percent decrease. The competitive market led to more insurers offering coverage for non-owned disposal sites (NODS) on a blanket basis and broadened mold clean-up coverage. The cost cap segment is a smaller market exhibiting signs of hardness not seen in the other environmental segments with primary rate changes ranging from flat to 10 percent increases. Developing issues in the environmental space include Chinese drywall, global warming-related litigations and green house gas effects.

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