April 2nd, 2010

Week’s Top Stories: Mar 27 - Apr 2, 2010

Posted at 11:30 AM ET

April 1 Reinsurance Renewals: Rates Lower; Returns Under Pressure:  The April 1, 2010 reinsurance renewals are dominated by Asia, but were conducted with one eye on the catastrophes that occurred elsewhere in the world. Reinsurance rates in most cases continued the decline experienced at January 1, 2010 which occurred largely because of the effects of healthier (re)insurer balance sheets. The large earthquake in Chile, and, to a lesser extent, windstorm Xynthia in Europe, both striking in the first quarter of 2010, caused pause for thought. There are several significant renewals at April 1 in the US, which did not show signs of any impact from the recent global loss activity. There was some evidence of price tightening in parts of Latin America. The Chile situation remains uncertain and earthquake losses generally develop more slowly than wind events. Up to half of catastrophe loss ratio budgets were consumed, causing reduced headroom for a larger catastrophe later in the year. This scenario, along with buoyant balance sheets, lower investment yields and thinner reserve releases will put pressure on returns, sustaining active capital management and perhaps, in time, stabilizing the market.

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Solvency II - Approval of Internal Models: Part I, Introduction & Prerequisites for Approval:  The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published many consultation papers in 2009 focusing on Level 2 implementation measures for Solvency II. This series reviews the implementation measures on the procedures for approval of internal models described in the final papers. The scope of the model approval process is not limited to the development and implementation of an adequate analytical platform, but consists of a broad set of procedures and analyses.

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Sources of Micro Risk:  While a certain level of risk inheres in every human action, life in the developing world is generally much more risky than life in more developed countries. The reasons for this are many, but they relate primarily to the marginalization of low-income populations. By virtue of their circumstances, individuals at the bottom of the socioeconomic pyramid are forced to live in riskier locations and to undertake riskier activities on a daily basis.

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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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Flooding: The Possible Changes Under Global Warming:  Flood events often occur rather suddenly so there may not be enough time to implement disaster mitigation measures. A good understanding of the causes of individual floods is therefore crucial in increasing the lead time for issuing warnings. From the insurance perspective, such an understanding could provide a better estimate of the possible losses. With global warming being a reality, it would also be of importance to estimate how the frequency of occurrence of flood events may change.

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And, you may have missed…

Lloyd’s: A Resurgent Market, Part I: Overview, Underwriting and Operating Performance:  Lloyd’s, poised to strongly capitalize on opportunities as 2009 began, saw its competitive position continue to strengthen during the year. The resilience of operating performance and capitalization to the very challenging economic environment of the past 18 months, coupled with a continued reduction in the number of legacy issues, has been rewarded. Market share gains, rating affirmations and continued strong investor interest prevailed.

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