Chart: Insurance Linked Securities Issuance, by Peril, 1997 Through April 1, 2010*: On a standalone basis, the two most frequently securitized perils are U.S. hurricane USD (7.08 billion) and U.S. earthquake (USD 4.71 billion). Other perils securitized on a standalone basis include European windstorm, Japanese earthquake and, to a lesser extent, Japanese typhoon. Multi-peril transactions, in which the same dollar of risk principal is exposed to at least two or more perils accounts for 42 percent of total risk principal issued. Insurance linked securities (ILS) investors typically prefer single-peril / single-zone transactions as they provide greater ability to construct granular portfolios according to each investor’s risk preferences. ILS sponsors however, particularly large national and global writers with aggregate concerns across multiple perils and geographic zones, often prefer to economize risk transfer spend by applying a single limit across different non-correlated perils, for example U.S. hurricane and earthquake.
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.
Solvency II - Approval of Internal Models: Part III, The Approval Timeline, Approach for Group Internal Models & Conclusions: This series continues its review of the implementation measures described by CEIOPS regarding procedures to be followed for the approval of an internal model. Development of internal models will have different impacts on different Guy Carpenter clients. Looking at the Level 1 requirements and latest CEIOPS recommendations for the approval of internal models, the development of internal models should not only influence the way the SCR will be calculated, but how it also will impact the data quality and the decision process. The efficiency of risk transfer should also be reviewed in line with the impact on the internal model.
Chart: Japanese Earthquake Catastrophe Excess of Loss: Market Capacity & Pricing: At the April 1, 2010 Japan renewals, price declines averaged 5 percent. Earthquake excess of loss remains a popular class with reinsurers and there was continued overcapacity. There were no capacity issues on the major placements.
7.2 Mw Earthquake in Baja California, Mexico: A magnitude 7.2 earthquake struck the Mexican peninsula of Baja California at 22:40:41 UTC on April 4. According to the US Geological Survey, the earthquake was centered approximately 104 miles (167 kilometers) east-southeast of Tijuana and 38 miles (60 kilometers) south-southeast of the city of Mexicali and occurred at a shallow depth of 6.2 miles (10 kilometers). Reports say that the quake is considered to be one of the strongest to have hit the region in years.
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Capital Modeling in the Age of Systemic Risk, Part I: Hidden risks lurk in nearly every insurance portfolio. Unexpected accumulations, correlated threats and unimagined financial market developments can take shape quickly and severely. When disaster strikes - either because of a storm or an economic shift - insured and asset losses can drain balance sheets, impair return on equity (ROE) performance and destroy shareholder value. The cost of systemic and hidden risks can impact every link in an insurer’s financial supply chain, with today’s losses causing capital costs to rise for months, even years.
*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. 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.