ERM Did Not Fail in 2008, Part I: A Year of Significant Loss: The profound financial damage that began last year has left the insurance industry looking for answers. Diligent underwriting and conservative investment strategies were not enough to prevent natural and financial catastrophes from bleeding balance sheets. Both firm leadership teams and key stakeholders have questioned the value of Enterprise Risk Management (ERM) frameworks, yet the conclusion that ERM failed may be hasty. After all, the insurance industry actually survived the events of 2008 reasonably well, with at least some of the credit going to their ERM efforts. Where risk management did fail, the underlying causes were deeper.
1H2009 Reinsurer Financial Update: Capital Returns: Underwriting and investment gains contributed to a general increase in capital in the first half of 2009. Some reinsurers have even regained half or more of what they lost as a result of last year’s hurricanes and financial shocks. Financial market stability has opened several options unthinkable nine months ago, including share buybacks, dividends and even maintaining a bit of extra capital as a cushion — after all, it was the excess capital held at the beginning of last year that helped reinsurers withstand the effects of the financial crisis.
Wildfires in California: Six wildfires, fuelled by hot temperatures and extremely dry brush that has not burned in more than 40 years, have forced thousands of people to evacuate their homes in parts of California over the past week. The most threatening blaze, the Station Fire, is located about 12 miles (20 kilometers) north of central Los Angeles. Thousands of residents have fled the flames, and some 6,600 homes are under mandatory evacuation orders.
ERM Did Not Fail in 2008, Part II: Expectations and ERM: Did Enterprise Risk Management (ERM) work: yes or no? Opponents argue that this supposedly advanced thinking on the management of capital failed to keep balance sheets healthy through the economic crisis. Insurers losing more than 30 percent of their capital cannot be faulted for concluding that ERM did indeed fail. Alternatively, though, supporters could point out that the capital was depleted because it absorbed unexpected loss-arguably a core function of insurer capital. The holistic approach to risk management meant insurers were beaten but not broken.
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).
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Neal Bill Update: On July 30, 2009, Rep. Richard Neal (D - MA) introduced H.R. 3424, which would limit the deduction taken by a U.S. insurance company for non-taxed reinsurance premiums paid to foreign affiliates. The purpose of the bill is to address a concern that reinsurance is being used to shift profits from the United States to low-tax or no-tax jurisdictions, creating a competitive advantage for U.S. subsidiaries of foreign corporations.
* 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.