What Does Solvency II Mean for Insurance Groups?: When Solvency II becomes effective in 2012, group support — which would have allowed capital held at the group level to cover the requirements of any company in the group — will be not permitted. This prohibition will require group entities to hold capital according to the Solvency Capital Requirements (SCR) in each individual entity. The application of group-level diversification benefits to individual entities will not be allowed. This last-minute change to the original framework directive may cause some groups to change their structures.
Cat Bond Update: Second Quarter 2009*: The catastrophe bond market continues to advance, though issuances are down from 2008. The activity represents a positive rally from the hiatus during the second half of 2008. For the first half of 2009, nine bonds have been issued, with aggregate risk capital of USD1.38 billion. The continuing stabilization of financial markets and a decrease in catastrophe bond spreads, however, could result in more issuance activity in the second half of the year, particularly for sponsors which had considered issuances in the first and second quarters but deferred their plans because catastrophe bond spreads were considered to be too wide (i.e., catastrophe bond protection was considered to be too expensive).
Five Ways to Allocate Capital: No single approach to capital allocation is objectively superior. Those that are more effective require an investment of time and resources, while the simpler methods sacrifice accuracy. A tradeoff is required based on a (re)insurer’s priorities and capabilities. Before you make a choice, however, be sure you’re aware of the alternatives.
Solvency II — Summary of CEIOPS March Consultation Papers: Technical Provisions — Elements of Actuarial and Statistical Methodologies for the Calculation of the Best Estimate: The best estimate is defined as “the probability-weighted average of future cash-flows, taking account of the time value of money (expected present value of future cash-flows) using the relevant risk-free interest rate term structure.” It is to be calculated gross, with recoverables from reinsurance or special purpose vehicles (SPVs) calculated separately.
Update: Hurricane Bill: Hurricane Bill is located approximately 425 miles (680 kilometers) south of Bermuda and packs sustained winds of around 120 mph (195 kmph), according to the National Hurricane Center (NHC). The storm is travelling in a northwest direction and a gradual turn to the north-northwest is expected later today. On this track, Bill is expected to pass between Bermuda and the east coast of the United States on August 22, 2009. The NHC said Bill is a large cyclone with hurricane-force winds extending 115 miles (185 kilometers) from the centre of the storm and tropical storm-force winds extending 290 miles (465 kilometers).
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Accident at Power Plant, Siberia, Russia: At least 12 workers were killed and 64 others are missing after a water pipe burst at Russia’s largest hydroelectric plant on August 17, 2009. Federal investigators said a change in water pressure caused the pipe to burst during repair work at the Sayano-Shushenskaya plant in southern Siberia, flooding a turbine room and destroying walls and ceilings. The accident damaged equipment and forced the power station to shut down. However, reports said there was no damage to the plant’s dam, a massive structure that stretches more than half a mile across the Yenisei River. The plant’s operator, RusHydro, said the damage would run into “billions of roubles.”
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* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.