November 20th, 2009

Week’s Top Stories: Nov 14 - 20, 2009

Posted at 1:00 AM ET

Group-Level Implications of Solvency II: Group support will not be permitted when Solvency II becomes effective in 2012. As a result, the flexibility to use capital held anywhere in the group in calculating the Solvency Capital Requirement (SCR) will not be available. Rather, each entity will have to calculate its SCR based on the capital it has, regardless of its group’s position as a whole. This last-minute change to eliminate group support could prompt some European insurance groups to change their structures — or at least rethink how much risk they will take in each entity.

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Protect Your Balance Sheet from Casualty Catastrophe Risk: Indications of an economic recovery and fairly flat renewal are already beginning to obscure the experience of the past year. For professional liability insurers, this is particularly disconcerting, for even as balance sheets grow stronger, the implications of the largest casualty catastrophe in more than 70 years are still unfolding. The lawsuits and claims may take years to resolve, suggesting that the effects of September 2008 will be with us for quite a while. As the situation develops, professional liability insurers should use what they learn to revisit accumulations in their portfolios and take action to protect their capital — and shareholder value — from future worldwide chain reactions of liability exposure.

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Inflation: Not All Bad News for European (Re)Insurers: Inflation is always a major risk factor for the casualty industry. For the past seven years, monetary inflation has been low across most of Europe, and this has helped keep interest rates low. For casualty insurers, this can lead to a challenge, because the key cost-drivers of long-tail liability claims — salaries and wages, pensions and most notably medical care costs — have been growing much faster than monetary inflation.

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Stability Returns: At the end of 2008, the normal pre-renewal uncertainty was magnified by the effects of the most severe financial crisis in more than 70 years. Financial markets were in turmoil, and the cost of capital was rising. Yet, these pressures were counterbalanced by capital positions that remained sufficient, despite the impairment of investment assets. The outcome was relatively benign, but anxiety was endemic before the January 1, 2009 reinsurance renewal. Now, 12 months later, the marketplace is much different, indicating the remarkable recovery that has occurred in 2009.

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Near-Term Capital Management: Hidden Opportunity: We’ve had a fairly quiet catastrophe year, making it easy for risk managers to slip into a false sense of comfort. But, the situation could have been much different, especially if Hurricane Bill had taken a slightly altered course. A single storm can affect the insurance industry profoundly, especially if it makes landfall where there is a high accumulation of risk. When the unexpected begins to take shape, the range of options available to risk bearers shrinks rapidly, and even the most thorough of plans can be thwarted. Any measure that can help carriers protect their capital as a storm is bearing down on its insureds can have an impact all the way to market capitalization.

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And, you may have missed …

Cat Risk in a Solvency II Environment: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) refined the evaluation of non-life catastrophe risks under Solvency II in its Consultation Paper 48 “SCR Standard Formula: Non-Life Underwriting Risk” issued in July 2009.

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