October 27th, 2010

Coping with Solvency II

Posted at 1:24 AM ET

flandro_david1lefebvre_claude_gcci1David Flandro, Global Head of Business Intelligence, and Claude Lefebvre, Director, Global Analytics UK & Continental Europe
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The timing of Solvency II regulations may create a “perfect storm” for insurers as they struggle to cope with challenging pricing and lower investment returns. Solvency II is expected to be finalized in 2011 and implemented by 2013. Under the Standard Formula, companies will be required to maintain more capital per unit of risk, encouraging diversification. Although these are good objectives in principle, they may compound an already difficult operating environment in the short-term.

Certain insurers may be tempted to deal with these stresses by implementing “quick fixes” that actually squander valuable opportunities. This may cause some firms to return capital to shareholders, contract certain business segments, seek additional capital or to diversify their businesses at a time when many lines are softening. The most successful companies will optimize their operating potential under the new regime without sacrificing net premiums, counterparty diversification or negotiating power.

Guy Carpenter & Company provides insurers with an array of alternatives to those offered by direct reinsurers through our analytical and advisory services. This expertise will provide insurers with value-accretive decisions that fuel revenue growth, profit and market share, and ultimately, increase in shareholder wealth.

Guy Carpenter Offers:

  • Our economic capital model, MetaRisk®, provides users with a robust platform for optimizing their use of capital, generating competitive advantages beyond the Standard Formula. MetaRisk, in development over the past 20 years, is the most advanced economic capital model currently available in the industry. The model also offers a user-friendly interface for evaluating and comparing various scenarios via its proprietary Reinsurance Decision Tool (RDT), the only one of its kind in the industry. It offers a multi-dimensional view of the benefits under various scenarios, factoring in several decision metrics simultaneously.
  • Access to a diverse panel of reinsurers. This may reduce counterparty risk (even if not explicitly recognized under Solvency II). Dealing with only one or two large direct counterparties reduces negotiating power on pricing as well as on terms and conditions.
  • A broad and comprehensive array of solutions available for contingent capital needs through our advisory offering and GC Securities*. Reinsurance transactions may be evaluated against other alternatives, such as catastrophe bonds or industry loss warranties.
  • Excellent perspective on the market is provided along with advisory services on areas ranging from risk and capital management to identifying and pursuing growth opportunities. The perspectives are attained through our broad and deep exposure to the reinsurance market.

Utilizing Guy Carpenter services may help insurers more fully evaluate options and improve operating results. Those insurers working only with direct reinsurers in pursuit of “quality capital,” size and scale in the run up to implementation of Solvency II may not be optimally maximizing shareholder value.

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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.

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