November 29th, 2009

Top 10 Stories: November 2009

Posted at 1:00 AM ET

1. Impact of Earnings on Volatility Price/Book Ratios: The link between a company’s earnings and its share price is intuitive and well documented. Equally logical, although far less studied, is the correlation between the volatility of earnings and share price. The favorable impact of stable earnings on market valuation is intuitive considering market capitalization represents a view of future discounted cash flows and unexpected earnings volatility reduces the predictability of those cash flows.

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2. Finding (Re)Insurance Innovators: It seems that everybody claims to be on the leading edge when it comes to the best tools and latest ideas for the (re)insurance industry. Capital models, dynamic financial analysis and Enterprise Risk Management (ERM) practices abound. So, how can you sift through all these toolboxes to find the most valuable, genuine and applicable instruments of innovation?

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3. GC Podcast 12 — Cat Modeling (John Tedeschi): John Tedeschi, Managing Director and Chief  of Catastrophe Modeling in Guy Carpenter’s Instrat® Unit, discusses catastrophe modeling in this new GC Capital Ideas podcast. Click the audio player below to listen to the interview, or download the interview in a file that will work with your iPod.

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4. 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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5. Update: Risk Profile, Appetite, and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness: In April 2009, Guy Carpenter’s Financial Intelligence Team published a briefing entitled Risk Profile, Appetite and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness. That briefing included definitions of Risk Profile, Appetite and Tolerance and how these concepts fit into an Enterprise Risk Management (ERM) framework. It also presented the results of our initial Risk Tolerance Benchmarking study, which summarized the information publicly disclosed in this area.

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6. 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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7. (Re)Insurers and Capital Markets: Viable and Reliable*: A year ago, (re)insurers’ access to capital markets was in doubt. A worldwide financial crisis decimated balance sheets, sent equity values tumbling and caused credit markets to come to a standstill. Today, however, the situation has changed completely. Catastrophe bond issuances have resumed, and the mergers and acquisitions (M&A) market is gaining momentum. (Re)insurers are turning to capital markets to address a wide range of strategic and tactical needs. It is clear that this source of capital remains both viable and reliable.

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8. 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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9. Capital Modeling in the Age of Systemic Risk, Part I: Hidden risks lurk in nearly every insurance portfolio. Unexpected accumulations, correlated threats and unimagined financial market developments can take shape quickly and severely. When disaster strikes — either because of a storm or an economic shift - insured and asset losses can drain balance sheets, impair return on equity (ROE) performance and destroy shareholder value. The cost of systemic and hidden risks can impact every link in an insurer’s financial supply chain, with today’s losses causing capital costs to rise for months, even years.

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10. ERM Advanced by Financial Crisis: As expected, insurers have continued to accelerate their development of Enterprise Risk Management (ERM) practices following last year’s financial crisis. The impact to both sides of the balance sheet emphasized the importance of tracking every risk a carrier faces and protecting capital from a wide range of threats. As ERM practices evolve, clear definitions and terminology become critical. A common language and framework will facilitate process and technical innovation, improving the transfer of practices across companies and simplifying the disclosure process — all of which will lead to more accurate risk evaluation.

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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, Inc. 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.

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