May 12th, 2010

Top 10 Stories: April 2010

Posted at 1:00 PM 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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Catastrophe Bond Update: First Quarter 2010 - Heavy Smoke, Some Fire…Encouraging Conditions Persist*:   In the first quarter of 2010, two catastrophe bond transactions were completed, and USD300 million of risk capital was issued. In response to strong investor demand, both transactions closed within initial price guidance and were upsized relative to announced placement targets. While this activity furthers the integration of the capital markets into the risk management processes of protection buyers, on balance, issuance volumes for the quarter were perhaps a bit lighter than expected at the close of 2009.

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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.

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Explosion and Fire at Offshore Oil Rig, Gulf of Mexico:   An explosion and large fire on an oil rig in the Gulf of Mexico left 11 workers missing and 17 others injured on April 20. The blaze on the Deepwater Horizon drilling rig, which broke out around 22:00 local time, sent flames and smoke high into the sky about 40 miles off the coast of Louisiana. Seventeen workers were injured, three critically, and rescuers are still searching for 11 missing people. It was not known whether the missing workers were able to make it to one of the rig’s lifeboats. Reports said the rig, which is owned by Transocean Ltd, was under contract to the oil giant BP at a cost of USD533,000 (EUR 395,000) a day and doing exploratory drilling. The rig is listing badly and threatening to topple over, the US Coast Guard said. Reports said the rig, which was built in 2001 in South Korea at a cost of about USD350 million, has a replacement value of up to USD700 million today.

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Solvency II In Depth: Guy Carpenter & Company, LLC sponsored this extended roundtable discussion that considered the progress made by (re)insurance as the Solvency II regime approaches. Held in London, it was attended by a number of UK and continental Europe industry leaders, including Guy Carpenter Managing Director and European Solutions Group Leader Eric Paire. We present the text of the roundtable discussion here as it appeared in Reinsurance Magazine.

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Solvency II - Approval of Internal Models: Part I, Introduction & Prerequisites for Approval:   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.

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Chart: Update on April 1 Reinsurance Renewals, US Property Catastrophe: Market Quoting Behavior, Increased Variation in Quotes:  Guy Carpenter & Company, LLC has performed further analyses based on the availability of more quoting detail: We have found increased variation from January 1 renewals in reinsurer quotations across all regions, but the range remained consistent at down by 11 percent to up by 11 percent.  Broader quote variation is expected as reinsurers position their portfolios more actively in the wake of January 1 renewal results.

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Chart: Update on April 1 Reinsurance Renewals, US Property Catastrophe: Market Quoting Behavior, Quotes by Market Segment:   Guy Carpenter & Company, LLC has performed further analyses based on the availability of more quoting detail:  Against a smaller number of renewal transactions at April 1 we observed the UK becoming more aggressive and the Bermuda market less aggressive in the Gulf region relative to their respective positions at January 1.

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Reserve Risk and Future Inflation:   Accurate capital assessment requires assessing reserve risk, and while there are many ideas of what “reserve risk” encompasses, there are no clear definitions. As a result, insurers are not sure how to proceed. The North American actuarial profession has yet to establish standards of practice for measures and disclosures of insurer reserve risk; without such standards in place, companies are understandably reluctant to venture into unknown territory. A sound measure of reserve risk is vital to the executive team and Board, who need to understand the margin of error and potential bias in the reserves.

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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.

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