March 26th, 2010

Week’s Top Stories: Mar 20 - 26, 2010

Posted at 11:00 AM ET

Corporate Decision Making Using Economic Capital Models: Part I: Introduction, Quantifying Corporate Risk:  In the 1980s many large general insurance companies investigated the use of dynamic financial analysis for corporate decision making. Only a small number of insurers and reinsurers, many of which were European, were able to develop dynamic financial models that were adequate for use in decision making. The primary obstacles to implementation were actuarial knowledge and computer technology. By the early 2000s, technology had improved, actuaries had developed techniques that allowed better quantification of insurance risks and dynamic financial analysis had evolved into enterprise risk management (ERM) supported by economic capital models. With these improvements, regulators began to develop solvency rules that create incentives for insurers to implement economic capital models. Although the current impetus for economic capital models is regulatory, the original purpose of enhanced strategic decision making is still valid and companies that use their economic capital models for ERM will be industry leaders.

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Florida Hurricane Catastrophe Fund Approves 2010 Premium Formula for Development and Final Adoption:   The Florida Hurricane Catastrophe Fund (”FHCF”) Advisory Council held a regularly scheduled meeting on March 18, 2010, during which it reviewed the 2010 FHCF Reimbursement Premium Formula. FHCF base rates are to increase 4.76 percent due to the rapid cash build up factor moving from 5 percent to 10 percent. Aside from the change to the rapid cash build up factor, overall FHCF rates remain flat. FHCF base rate will increase 4.81 percent pending adoption of the cat fund fix legislation (SB1460 HB949), which sets the FHCF retention on the previous year’s exposure.

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Corporate Decision Making Using Economic Capital Models: Part II: Identifying Capital Needs:  Capital needs can be defined from a number of different perspectives: Regulatory: which focuses on the probability of insolvency; Rating agency: which focuses on both the probability of insolvency and the ability to continue with the current rating; and Going concern: which focuses on the ability to continue to implement current plans. The perspective determines the types of metrics that will be used to establish the level of capital required.

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Aviation Market Struggling to Rebound: Part I, Disastrous 2009 and New Capacity: Despite the slight rate increases that aviation underwriters experienced in the final quarter of 2008, as 2009 began they could foresee another difficult year ahead. The events of September 11, 2001 left the insurance and reinsurance markets reeling. Immediate rate rises enabled the market to rebound. However, an improvement in aviation operational safety standards and a lack of major liability losses in the intervening years created an environment where premium levels fell, year on year. Aviation insurers had cause for concern.

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GC ForeCatTM Predicts Above-Average Hurricane Landfall Rates in Northeast, Southeast and Florida Regions for 2010 Season:   GC ForeCat is a product developed by Guy Carpenter in collaboration with WSI Corporation, the world’s leading provider of weather-driven business solutions, that provides pre-season hurricane landfall forecast rates for different regions in the United States. GC ForeCat revolutionizes hurricane forecasting by estimating the rate of landfall for regions along the US coastline. Four different regions (Gulf, Florida, Southeast and Northeast) are derived with associated likelihood of tropical cyclones making landfall in each area. Monthly updates are anticipated up to and including May.

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And, you may have missed…

Get the Most Out of Cat Models, Part I: Manage the Unknown: Insurer and reinsurer reliance on catastrophe models has become part of the fabric of risk management. Though they provide guidance rather than clear courses of action, these tools help quantify risk and deploy their capital as effectively as possible. But, they aren’t perfect. Every catastrophe model has specific strengths and weaknesses, which is why risk-bearers tend to use several models to evaluate exposures, with the final decisions on whether to cover a particular risk shaped by loss history, company objectives and risk manager judgment. As a result, models are crucial to (re)insurer success … as long as they are used properly.

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