August 13th, 2010

Week’s Top Stories: August 7- 13, 2010

Posted at 9:00 AM ET

Catastrophe Bond Update: Second Quarter 2010 - Activity Surges …Reflecting Favorable Issuance Conditions and Strong Investor Demand*:  In the second quarter of 2010, eight catastrophe bond transactions were completed, and USD2.05 billion of risk capital was issued, making it the second most active second quarter on record. USD1.70 billion of this total (and all but one transaction) included exposure to U.S. wind as sponsors and investors focused on this peril, leading into what is expected to be an active North Atlantic hurricane season.

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Long Tail Liabilities and Reserve Volatility: Dynamic Reserve Model (DRMTM): The convergence of a variety of pressure points at this time is leading to a set of unique circumstances that present opportunities around business strategy and capital allocations for the insurance industry. Future inflation is one of the pressure points. Inflation and uncertainty about its extent and timing is a function of untested but powerful monetary and fiscal policy actions. In addition to inflation’s potential effect on insurer liability management there is also an impact on the volatility of assets backing the liabilities. A reignition of the kind of severe inflation last seen in the 1970s is most likely not factored into any current insurer management practices for establishing reserves or setting capital levels.

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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.

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Reinsurance Renewal July 1, 2010: Capital Cushion Continues to Impact Pricing, Part I:  Introduction and US Property: Further erosion of rates was evident at the July 1, 2010 reinsurance renewal. Property rates were down by as much 15 percent despite substantial catastrophe loss activity in the first half of 2010. Heavy losses from the Chilean earthquake were insufficient to turn prices outside the areas immediately affected by the earthquake, despite the announcement of large increases in estimates from the largest European reinsurers. In the energy and casualty sectors, conditions were flat or down, but the Deepwater Horizon rig disaster may exert upwards pressure as more information emerges. Excess capital remains available to absorb losses as evidenced by continuing share buy-backs and the substitution of equity capital with less expensive debt.

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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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And, you may have missed…

GC Videocast - Risk Tolerance Influences Economic Capital: Guy Carpenter’s Global Chief Economist Joan Lamm-Tennant describes how economic capital is a function of the risk profile that comes from simulation based models, but it also requires knowing the company’s risk tolerance. She reviews how hedging frees up the need for economic capital and reduces volatility.

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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, Inc. 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.

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