November 5th, 2010

Week’s Top Stories: October 27 - November 5, 2010

Posted at 10:00 AM ET

Reinsurance: An Efficient Source of Contingent Capital and Risk Protection: Insurers today are faced with challenges including lower pricing, long-term low interest rates and diminishing reserve redundancies, not to mention increasing natural catastrophe activity in peak risk zones such as Florida. Effective capital allocation and earnings protection are crucial to ensuring profitability and financial flexibility in this environment. The reinsurance purchasing decision is an integral aspect of both risk and capital management. In terms of risk, reinsurance protects insurers against peak or ‘extreme’ events, enabling them to continue providing cover in the wake of disasters. In terms of capital management, reinsurance is an efficient source of contingent capital that allows carriers to enter new business lines, satisfy changing regulatory requirements or simply maintain creditworthiness.

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Update: Hurricane Tomas: Tomas has continued to move in a westerly direction in the Caribbean Sea as a tropical storm over the last 24 hours. The storm is currently located approximately 355 miles (750 kilometers) south of Port-au-Prince in Haiti and packs sustained winds of around 50 mph (85 kmph), according to the National Hurricane Center (NHC). The storm is currently traveling in a westerly direction and a turn towards the west-northwest and then the northwest is expected over the next 48 hours. Forecasters said Tomas could re-intensify into a hurricane later this week. The NHC said tropical storm-force winds extend 115 miles (185 kilometers) from the center of the storm. Earlier, Tomas swept over islands in the eastern Caribbean as a category 1 hurricane on October 30, causing significant damage and power outages in Barbados, St. Lucia and St. Vincent and the Grenadines.

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Third Quarter 2010: P/C M&A Activity Update: 2010 has seen a modest level of property/casualty mergers and acquisitions activity through the third quarter of the year - far less than what Guy Carpenter expected to see going into the year. Twenty eight transactions with an aggregate deal value of almost USD3.2 billion have been announced and closed through the third quarter of 2010. This pace lags 2009 levels and is well off prior years’ activity.

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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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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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Protect Your Balance Sheet from Casualty Catastrophe Risk: Indications of an economic recovery and fairly flat renewal are already beginning to obscure the experience of the past year. For professional liability insurers, this is particularly disconcerting, for even as balance sheets grow stronger, the implications of the largest casualty catastrophe in more than 70 years are still unfolding. The lawsuits and claims may take years to resolve, suggesting that the effects of September 2008 will be with us for quite a while. As the situation develops, professional liability insurers should use what they learn to revisit accumulations in their portfolios and take action to protect their capital - and shareholder value - from future worldwide chain reactions of liability exposure.

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