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.
Risk Management Lessons from the Olympics: Guy Carpenter’s Chief Actuary Offers Some Observations: We were all thrilled with the spectacle of the just-completed 2010 Olympic Winter Games from Vancouver. Winter sports are known for their inherent high levels of riskiness, so it should not be too surprising that some valuable lessons related to “personal risk management behavior” can be drawn from the way the athletes make decisions and how the competitions are conducted and judged. As risk professionals, when we watch the action on the snowy mountains and icy rinks, we can get another view on the choices made in the taking of risk or in mitigating risk. Here are just a few lessons that offer additional insights.
Rates Retreat as Capital Rebounds: Global Reinsurance Renewals at January 1, 2010: Reinsurance rates for most lines of business decreased at the January 1, 2010 renewal. The Guy Carpenter World Catastrophe Rate on Line (ROL) Index decreased by 6 percent in response to a swift and substantial recovery in the capitalization of the reinsurance sector. The combination of the rally in investment markets, much reduced catastrophe loss activity and recessionary effects on demand resulted in an excess of supply and increased competition. This was reflected in a slow renewal in which many contracts closed very late in the season as buyers sought to gain maximum advantage. The overall movements in pricing have also occurred against a complicated background of exposure adjustments, model revisions, program changes and other market noise.
Risk Profile, Appetite, and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness: Prior to the recent turbulence in the financial markets, insurers and reinsurers were increasing their use of Enterprise Risk Management (ERM) to make risk and capital management decisions. While this was driven in part by rating agencies and regulators, many carriers began to recognize the value of metric-based frameworks and capital models in evaluating their portfolios.
Windstorm Xynthia: A powerful Atlantic storm named Xynthia battered Western Europe with hurricane-force winds, surging seas and driving rain on 27 and 28 February, causing widespread property damage and disrupting transport networks. According to recent estimates, the storm has left at least 56 people dead across France, Germany, Spain, Portugal and Belgium, and more than 1 million households have been left without power. At least 47 of the fatalities have occurred in France, which has been the country worst-affected by the windstorm.
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.
Directors and Officers Renewals - Stabilization in Pricing: In general, Directors & Officers (D&O) insurers continued to experience some stabilization in pricing and a normalization of exposure in both the Commercial and Financial Institutions segment. For commercial risks with attractive risk profiles, the market remained competitive with average primary rate changes ranging from flat to a decline of 8 percent. After two years of dramatic rate increases, the financial institution segment showed signs of moderation as rate increases slowed.
Florida Hurricane Catastrophe Fund Approves 2010 Premium Formula for Development and Final Adoption: The Florida Hurricane Catastrophe Fund (”FHCF”) Advisory Council (”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.
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. Consultation Paper (CP) 37 addressed the procedures for approval of internal models. It was followed by a final paper entitled “CEIOPS Advice for Level 2 Implementing Measures on Solvency II ‘The procedure to be followed for the approval of an internal model’”, published in October, 2009. This series reviews the implementation measures described in the final papers. Implementation measures for the use of partial internal models are briefly described in these two CEIOPS papers. A separate consultation paper, CP 65, proposed specific implementation measures for approval of a partial internal model when it is used in conjunction with the Solvency II Standard Formula. Those specific implementation measures will be covered in a future briefing.
Update: 8.8 Mw Earthquake in Chile: A massive earthquake struck off the coast of Maule in Chile at 06:34 UTC on February 27 (03:34 local time), causing severe damage across of the country and claiming more than 700 lives in Chile’s biggest earthquake for around 50 years. The earthquake, measuring 8.8 Mw, was located 60 miles (100 kilometers) north-northwest of Chillan and 200 miles (325 kilometers) southwest of Santiago, according to the US Geological Survey (USGS). The USGS added that the quake was centered about 21.7 miles (35 kilometers) underground and was felt in Argentina. This is the joint fifth largest earthquake ever to be recorded, according to the USGS. Around 150 aftershocks have hit the region since the main earthquake, the most powerful at 6.9 Mw.