October 29th, 2010

Week’s Top Stories: October 23 - October 29, 2010

Posted at 10:00 AM ET

Typhoon Megi:   Megi, which developed on October 13 and subsequently strengthened to become the seventh typhoon of the West Pacific season, made landfall in northern Philippines earlier today as an intense super typhoon, according to the Joint Typhoon Warning Center (JTWC). Reports said Megi made landfall near Palanan Bay in the province of Isabela at about 11:25 local time, pounding nearby areas with winds of up to 160 mph (260 kmph). Megi is currently located 185 miles (300 kilometers) north-northeast of Manila and the storm is expected to weaken as it moves across the Philippines today. Megi is expected to emerge in the South China Sea after exiting the Philippines and re-intensify as it heads for southern China. The JTWC said typhoon-force winds currently extend around 45 miles (70 kilometers) from the center of the storm while tropical storm-force winds extend around 165 miles (265 kilometers).

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The Future of the Florida Property Market:   As U.S. property/casualty insurers begin to focus on their January 1, 2011 catastrophe renewals, they face a number of complex issues. The first challenge is effectively managing exposures in 2011 after an unexpectedly quiet hurricane season, in terms of losses. Following on the heels of the first six months of 2010, which saw significant losses from global catastrophes including higher levels of wind and hail losses in the Midwestern United States, the Atlantic hurricane season was forecasted to be an active one.

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U.S. Property Cat Rates and Opportunities for Making Excess Capital Productive:  It feels like 2007 all over again. Following contained increases in the United States in 2009, property-catastrophe reinsurance rates fell again in 2010, continuing a trend that has been the norm since Hurricanes Katrina, Rita and Wilma struck in 2005. Low levels of catastrophe losses, abundant capital at attainable prices (generally) and advances in risk and capital management practices are some of the main reasons why rates have generally fallen. Even when they did increase in 2009, influenced by the 2008 financial crisis and Hurricane Ike, they did not skyrocket.

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Tropical Storm Richard:  Tropical Storm Richard became the seventeenth named storm of the 2010 hurricane season after it developed in the Caribbean Sea on October 21. The storm is located approximately 235 miles (380 kilometers) south-southeast of the Cayman Islands and packs sustained winds of around 40 mph (65 kmph), according to the National Hurricane Center (NHC). Richard is currently nearly stationary in the Caribbean Sea and little forward motion is expected today. A slow westward motion with a gradual increase in forward speed is expected tomorrow. A general west-northwest track is forecast thereafter and Richard is expected to strengthen into a hurricane over the weekend before making landfall in Belize on October 25. The NHC said tropical storm-force winds extend 105 miles (165 kilometers) from the center of the storm, predominantly to the north and east.

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Coping with Solvency II: 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.

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And, you may have missed…

Capital Management Strategies Forced to Mature: As with everything that happened last year, the (re)insurance industry’s 2008 full-year financial results are open to interpretation. One could focus on the Guy Carpenter Global Reinsurance Composite’s shareholders funds decline of USD19.7 billion - not to mention a total net loss of USD6.1 billion - or zero in on the fact that most of this came from unrealized investment losses and note that most companies showed underwriting profits. Either way, capital has been depleted, and the capital positions that carried us through 2008 are not around this year. More than ever, capital management should be a top priority for every bearer of risk.

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