January 2nd, 2010

Top 10 Stories: 4Q2009

Posted at 1:00 AM ET

1. Cash and Capital: An Abudance of Choice: 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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2. Cat Bond Update: Third Quarter 2009*: The third quarter is traditionally quiet for the catastrophe bond market, and 2009 was no exception. Two transactions were closed, resulting in USD412 million in new risk capital. Nonetheless, risk capital issued was up by a third relative to the same quarter last year, as both catastrophe bonds issued were upsized considerably. The consensus estimate for the entire year remains USD3 billion to USD4 billion, implying a strong fourth quarter for primary issuance.

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3. 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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4. Guy Carpenter Fifth Annual Specialty Insurance Program Issuing Carrier Survey, Part I: A Steady Marketplace: The Program Administrators and Managing General Agents (PA/MGA) market has remained remarkably consistent from 2008 to 2009, despite the outbreak of the worst financial crisis in more than 70 years. While the number of respondents perceiving market growth has declined since last year, the outlook remains quite upbeat, especially given the year’s tumultuous market conditions.

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5. Five Ways to Manage Innovation: 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.

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6. Casualty Clash and Casualty Catastrophe Risks, Part I: Clashing and Catastrophic Casualty Events: Remoteness has been used to downplay the threat, causing carriers to overlook a more immediate, though less menacing, concern. A substantial loss may not imperil company operations, but it could lead to an unexpected earnings hit, the effects of which would be magnified for shareholders. Unanticipated large losses typically result in a disproportionate impact on market capitalization. Casualty clash and catastrophe protection, consequently, can be a vital tool in managing overall financial performance.

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7. MGA M&A Appetite Remains: Program administrators and managing general agents (PAs/MGAs) appear to be interested in making acquisitions. This year, 72 percent of participants in Guy Carpenter’s Fifth Annual Specialty Insurance Program Issuing Carrier Survey indicated an interest in growing through acquisition, up slightly (though not materially) from 70 percent in 2008. A mature segment of the insurance industry, this remains one of the few ways to accelerate top-line growth and capture market share.

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8. 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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9. Five Ways to Achieve Competitive Compliance for Solvency II: Solvency II compliance should provide more opportunity than burden … if executed properly. The ability to use approved internal models results in a Solvency Capital Requirement (SCR) that’s tailored to the risks in your portfolio - which in itself is advantageous. This benefit translates into more effective capital management, as it reflects the risks you actually cover (rather than the output of a standard formula). Improved operations through the internal model approach may also free capital for deployment elsewhere — if the model-determined SCR is lower than that from the Solvency II standard formula. The newly available capital can be invested in any number of initiatives that can lead to a competitive advantage.

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10. Turn Solvency II into a Competitive Advantage: The emerging consensus seems to be that Solvency II will cost a lot and make the (re)insurance business more complicated. If conventional approaches to regulatory compliance are applied, this is likely to be true. After all, compliance tends to be seen as just another expense. This does not have to be the case for Solvency II, however. Choosing the right approach could free capital for investment elsewhere, ultimately resulting in a competitive advantage. “Competitive compliance,” consequently, can create an upside where most would perceive only a cost to be managed.

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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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