June 3rd, 2010

Top 10 Stories: May 2010

Posted at 1:00 PM ET

1. 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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2. Solvency II - Non-Life Underwriting Risk in Light of QIS 5: On April 15th, 2010, the European Commission published its draft technical specifications for the next Quantitative Impact Study (QIS) 5, which will be implemented from August to November of 2010. Based on empirical evidence, the general calibration of the standard formula solvency capital requirement may fall between the calibration of QIS 4 and the calibration seen in the rigid proposals of the various consultation papers submitted during 2009. This article takes a deeper look at the calibration of non-life underwriting risk as part of the overall SCR calculation.

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3. GC Videocast - Trends in Global Catastrophe Losses: Chris Klein, Guy Carpenter’s Head of Business Intelligence, reviews trends in global catastrophe losses along with insured losses. Guy Carpenter’s ten year moving average of losses ticked down in 2009 to USD36.2 billion.

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4. GC Videocast - US PC (Re)insurers’ Earnings Have Been Supported by Releases of Prior Year Loss Reserves: Can This Be Sustained?  Chris Klein, Guy Carpenter’s Head of Business Intelligence, reviews the relationship between accident year initial loss picks and subsequent calendar year development for that accident year. Good years appear to get better and bad years appear to get worse.

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5. Update: 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 the 11 missing men are now feared dead. Reports said the rig, which is owned by Transocean Ltd, was under contract to the oil giant BP at a cost of USD533,000 (EUR395,000) a day and doing exploratory drilling. The rig was listing badly as it was consumed by flames and it eventually sunk on April 22, leaking oil into the Gulf of Mexico. The well is currently leaking oil at a rate of about 1,000 barrels per day.

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6. GC Videocast - Key Issues Around the June 1 Florida Reinsurance Renewals:   Guy Carpenter Managing Director Kevin Stokes reviews key issues and developments around the Florida market for property reinsurance. He offers early predictions of the June 1, 2010 renewal season.

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7. GC Videocast - Property Catastrophe Reinsurance Forecast:   Guy Carpenter Managing Director Kevin Stokes provides a forecast of events leading up to the July 1 renewals for property catastrophe reinsurance. The first quarter loss events will likely not have a major impact on pricing. He also reviews the 2010 Guy Carpenter storm forecast.

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8. 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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9. 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 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.

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10. Guy Carpenter Asia-Pacific Climate Impact Centre: 2010 Predictions of Seasonal Tropical Cyclone Activity over the Western North Pacific:  Real-time predictions of the annual number of tropical cyclones affecting the western North Pacific and the South China Sea were first issued in 2000 by the Laboratory for Atmospheric Research at City University of Hong Kong (CityU) and annually thereafter until 2008 when such predictions were issued by the Guy Carpenter Asia-Pacific Climate Impact Centre, also at CityU. Verifications of the predictions for the past ten years have shown that the predictions are mostly correct within the error bars.

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*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. Chi Hum is a registered representative of MMC Securities Corp.

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