Julian Alovisi, Assistant Vice President, Instrat®

In direct contrast to 2008, no significant insured losses arose from tropical cyclones in 2009. In fact the 2009 hurricane season in the Atlantic was notable only for its below-average activity. For the first time in three years, no hurricanes made landfall in the United States, which explains why insured losses were substantially down in the country compared to the pervious year (see Figure 1). Figure 1 shows the amount and frequency of insured US property losses since 1992.

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With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.

Cats and Credit Push Prices Up: Reinsurance rate increases were moderate on average at the January 1, 2009 renewal. The Guy Carpenter World Rate on Line (ROL) Index rose 8 percent, in response to the dual pressures of a financial catastrophe and the second most expensive property catastrophe year on record. The degree to which prices increased was tempered by large capital positions at the beginning of 2008, enabling carriers to absorb the year’s losses, but this is where the generalizations end. Loss history, geography, and line of business led to wide differences in pricing. Expectations of another above-average storm year and the uncertainty surrounding the credit crisis underscore the need for continued capital management discipline in the coming year.

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Prop-Cat Reinsurance Rate Increases Steady at July 1 Renewal: Property-catastrophe reinsurance rate increases were steady at the July 1, 2009 renewal. In the United States and Latin America, capacity was sufficient to meet demand. U.S. property-catastrophe reinsurance rates increased 15 percent year-over-year, in line with the trend from January to June. In Latin America, preliminary data varied by country, but upward pressure on pricing was offset by supply and local market competition to keep reinsurance rate increases contained. For the marine sector, rates were up 5 percent to 10 percent, based mostly on loss history and catastrophe exposure. With four major renewal periods covered this year, a sense of calm has emerged. The general reinsurance market is tepid, with a few hotspots based on region- or program-specific factors.

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2009 has seen an impressive recovery from last year’s financial crisis and the uncertainty caused by losses from Hurricane Gustav and Hurricane Ike. This recovery has been driven by the easing of financial markets and low catastrophe activity. A very quiet hurricane season, coupled with relatively low losses for other weather-related events, meant insured losses reached USD24 billion in 2009(1), the lowest figure since 2006 and a significant fall from USD52.5 billion(2) in 2008.

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ERM Offers Competitive Compliance for Solvency II, Part I >>

ERM Offers Competitive Compliance for Solvency II, Part II >>

ERM Offers Competitive Compliance for Solvency II, Part III >>

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Richard Booth, Vice Chairman
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Cash and capital have returned to the (re)insurance industry. Despite the severity of last year’s financial crisis, the discipline that helped carriers persevere has become the foundation for recovery — and a plethora of strategic alternatives. Balance sheets have improved, and cash positions have surged. This remarkable change of circumstance will certainly have a substantial impact on the coming reinsurance renewal. Rates are likely to remain flat at January 1, 2010, thanks to stronger capital positions across the industry. Even with last year’s price increases, we are unlikely to see rates return to 2007 levels.

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Tropical Cyclone Laurence developed in the Timor Sea on December 13 and underwent rapid intensification on December 15 to become a category 4 storm that packed winds of up to 215 kmph (132 mph) as it skirted the sparsely populated northwest coast of Australia. Laurence subsequently weakened slightly and, according to the Joint Typhoon Warning Center (JTWC), it made landfall near Kuri Bay on the north Kimberley coast in Western Australia State as a category 2 cyclone earlier today.

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Don Mango, Chief Actuary and John Tedeschi, Chief of Catastrophe Modeling
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To cut through the claims of innovation in the market, you need to know what you’re looking for. There are plenty of capital models, catastrophe models and Enterprise Risk Management (ERM) practices in the (re)insurance industry, but which are the most valuable innovations? The right choices can protect your capital, help you deploy it optimally and ultimately bolster shareholder value … but faux innovation can slow your growth — or leave you exposed to unexpected risk or still leave you exposed when you thought the gap had been filled.

As you evaluate the solutions available in the (re)insurance industry, here are five ways to make sure you’re choices are on the leading edge:

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Don Mango, Chief Actuary
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For Solvency II, regulators have not yet announced plans to approve specific software platforms. Instead, they will focus on the model’s capabilities, embeddedness, implementation and use. For example, Guy Carpenter’s proprietary economic capital model MetaRisk® can be used as the basis for an internal model for Solvency II. MetaRisk is among the fastest, most robust and easiest solutions to use in the (re)insurance industry, making it possible to model countless combinations of risk and capital, identifying the optimal levels and enabling companies to make the allocation decisions that will yield the most favorable results for a given risk tolerance profile.

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Don Mango, Chief Actuary
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Beneath the surface, systemic risks, hidden accumulations and correlated threats also must be explored. These are the risks that cannot be diversified away. Others may result from a chain reaction, such as a casualty catastrophe caused by a class action lawsuit, affecting vast numbers of policyholders. In the extreme, (re)insurers should be ready for simultaneous major loss events that are accompanied by a plunge in asset values, inflation and a disproportionately high replacement cost of capital.

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Don Mango, Chief Actuary
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(Re)insurers face a labyrinth of capital management challenges. Financial markets have proved that they can change the industry’s view of risk swiftly — and with little warning. New risks are emerging, as well, some of which can be difficult to identify, lurking in portfolios for years without detection. The need for Enterprise Risk Management (ERM) is palpable, and risk-bearers are beginning to appreciate that preserving their capital requires metrics-based management and a robust capital modeling discipline. With regulatory requirements such as Solvency II on the horizon, the stakes are even higher, as capital optimization must be accomplished within a compliance framework.

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