July 30th, 2009

GC LiveCat Turns Last-Minute Decisions into a Competitive Advantage

Posted at 1:01 AM ET

harnick_michelle_141pxMichelle Harnick, Managing Director

A hurricane is headed toward a coastal urban center, bringing with it the likelihood of outsized insured losses. The storm is heading into Galveston, Texas. The risk manager, tracking the situation, is concerned that the storm could strike a heavily exposed region. At this point, one of three situations could occur: (1) the storm does not make landfall, (2) the storm does make landfall, causing much more damage than expected, or (3) the storm makes landfall, but the risk manager has laid off some of the risk using livecat cover. 

Using WSI’s 10-day LiveCat forecast and Guy Carpenter’s estimation of conditional expected loss and landfall probabilities by gates, the risk manager decides to manage the imminent threat effectively — to prevent outsized losses and protect shareholder value — by purchasing livecat reinsurance for specified gates where the risk manager has extreme concentrations.

(Re)insurers turn to livecat cover when the risk of insured loss is near and high, and they fear they do not have enough coverage. Historically, this tactic has been viewed only as a way to reduce losses at the last minute - few have treated it as an opportunity to gain a competitive advantage. With timely and accurate information providing fodder for last-minute risk management decisions, carriers can protect their capital, minimize insured losses, and ultimately attain above-market returns on equity (ROE). A (re)insurer that outperforms its peers is likely to see the benefits realized by its shareholders.

Eventually, of course, the early mover’s discovery becomes the industry standard. But, in a competitive market, every early gain, however short, represents an opportunity for growth and market leadership.

With WSI’s LiveCat storm forecast and Guy Carpenter’s LiveCat Index, (re)insurers can potentially exploit a corner of the market that typically has been focused on risk reduction rather than capital optimization and market capitalization preservation. WSI LiveCat’s 10-day forecasts - double the warning time afforded by the National Hurricane Center (NHC) - and GC LiveCat involve the purchase of cover based on live storm information — rather than historical severity. (Re)insurers thus can take early and informed measures to preserve capital, stabilize earnings, and protect shareholder value.

Few Ways to Win

A mature industry is rarely home to secrets. Over time, even the smallest advantages evolve into widely accepted business practices. So, to stay ahead of its peers, a company needs to find the newest developments with the potential to make a compelling difference. This is exactly the problem that (re)insurers face right now. Disciplined risk and capital management, savvy catastrophe modeling, and rating agency management were once competitive differentiators … but now they are part of the price of admission to the marketplace. The next step in this evolution is to make livecat cover accessible based on an imminent risk — not simply historical severity information.

In a fiercely competitive industry, (re)insurers need to look either for new growth opportunities (e.g., products and regions) or find new ways to make existing risk and capital management efforts more powerful. Responsible creativity tends to be rewarded with top-line growth, wider margins, and market share capture. Since the most effective ideas will be absorbed into operations across the industry, early adoption leads to an advantage in a capability that eventually will be the norm.

There are two primary benefits to finding competitive differentiators early. First, the company will enjoy an advantage while its peers are at best in the exploratory stage. Also, by the time the source of this edge becomes an industry standard, the early adopter will have a long track record … and thus the flexibility to find the next wave.

GC LiveCat-driven risk management is among the opportunities that (re)insurers currently have at their disposal. Effectively managing capital in the face of imminent hurricane risks can keep more capital on balance sheets, with lower insured losses translating to protected market capitalization. There are few ways to win decisively in today’s hyper-competitive (re)insurance market - making GC LiveCat’s capabilities disproportionately valuable to risk-bearers.

Manage Imminent Storm Risks

It’s always best to plan ahead, and the (re)insurance companies that do this tend to stand out from their peers. But, when a storm is brewing in the Gulf of Mexico, it’s the actions taken in the coming days that can have the greatest impact. This is the domain of livecat cover, and the goal is simple: minimize insured losses. A lack of information, however, makes this exercise notoriously inaccurate. National Hurricane Center (NHC) forecasts look forward only five days, leaving little room to maneuver. And, a sudden turn can change everything.

In a market where capital is constrained and everybody is fighting for an edge, the prudent deployment of capital when a hurricane draws near can separate the industry’s leaders from the pack. GC LiveCat equips (re)insurers to take the lead in this situation.

GC LiveCat: A Real-Time Solution

Developed in coordination with WSI Corporation, GC LiveCat supplements WSI’s livecat forecast with probabilities of landfall by gate and conditional exceedance probability curves which are updated every 12 hours. WSI’s LiveCat forecast also offers uncertainty estimates. Predicated upon state-of-the-art meteorological models to predict the track and intensity of hurricanes, these unique forecasts contain features previously unavailable to the marketplace, including hurricane predictions up to 10 days prior to landfall - several days earlier than what is currently provided by the National Hurricane Center (NHC) and other tropical forecasting organizations.

Four regional hurricane indices are at the heart of GC LiveCat: Northeast, Southeast, Florida, and Gulf. Guy Carpenter created these indices in response to the (re)insurance industry’s questioning the credibility of the catastrophe models after the 2004 and 2005 hurricane seasons — and (re)insurers’ requirements to better understand and manage their catastrophe risks.

Unlike most indices which do not differentiate by geographic location (and only take into account frequency or severity and historical climatologic information), the Guy Carpenter Hurricane Index not only addresses all the aforementioned information, but also takes into account current meteorological information and forecasts about live events, the forecast landfall location, and the forecast landfall probability and the conditional severity.

The creation of regional indices allows risk-bearers to use targeted insights to gauge and transfer property-catastrophe risk. Forecasts reflect a 10-day time horizon - double what was available previously — enabling carriers to plan farther ahead than ever before. Further, the index values are updated every 12 hours as a storm develops and moves. As a forecast is refined, (re)insurers can fine-tune their assumptions and actions, identifying key risks and securing the appropriate cover.

The GC LiveCat and GC LiveCat indices provide a comprehensive view of a real and imminent threat to carrier capital that provides a foundation for decision-making that minimizes a (re)insurer’s losses at a time when others may simply brace themselves for balance sheet damage. Ultimately, the point of using GC LiveCat is to take action — to transfer risk accurately and quickly.

Optimize Capital, Pick up an Edge

Today, livecat cover is a way to manage some downside risk, but it could become the source of a considerable competitive advantage. Making the right decisions as a storm is approaching can lead to favorable post-loss results, with implications that reach all the way to market capitalization. This approach to last-minute capital management is the latest opening in a tight competitive marketplace. Execute prudently, and earnings will widen, capital will be preserved, and ROE will grow. GC LiveCat focuses you on meeting financial objectives when the competition is simply hoping for lower losses.

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