2010 Market Update: Insight from Guy Carpenter’s Credit, Bond and Political Risk Team: Guy Carpenter & Company has released its fourth annual market update from its London-based Credit, Bond and Political Risk Team. Mid-year 2010 results for the leading credit insurers show strong improvements. All key insurers in the class have enacted core underwriting plans to turn around prior results. The general success in avoiding severity losses has made apparent the primary challenge in a downturn: Reducing and avoiding attritional losses. The surety sector continues to show significant growth potential, though reinsurers are concerned that the market has yet to experience the true extent of losses that will come out of the economic downturn.
Catastrophe Bond Update: Third Quarter 2010 - Activity (and Great Expectations) Persists, Part I: Issuance, Redemptions: From the standpoint of catastrophe bond issuance, the third quarter of 2010 was consistent with historical cat bond market precedent. Following a second quarter of eight transactions and USD2.05 billion of issuance, activity was light as two transactions closed (the same number of transactions as in the third quarter of 2009), generating USD232 million of risk capital. Both transactions were received positively and were in fact over-subscribed. Issuance, however, was outstripped by significant maturities of existing catastrophe bonds prompting risk capital outstanding to decline seven percent over the course of the third quarter. At quarter end risk capital outstanding stood at USD10.99 billion, roughly equal to mid-year 2006. Market sentiment remains positive as catastrophe bonds (and catastrophe risk generally) as an asset class is clearly on the rise.
Change and Consistency; Guy Carpenter Specialty Insurance Program Issuing Carrier Survey: Little has changed at the core of the Program Administrators and Managing General Agents (MGA/PA) market from last year, though there has been activity in targeted areas. In general, the MGA/PA space has shown progress in recovering from the 2008 financial crisis and subsequent recession, indicating resilience, consistency and strength. Yet, over the past five years, since Guy Carpenter & Company, LLC (”Guy Carpenter”) began tracking the MGA/PA market, there have been some significant shifts, showing that the market has matured.
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.
Turn Insurance Portfolio Modeling and Management into a Strategic Advantage: Companies that optimize the use of economic capital models to holistically manage portfolios may gain a powerful advantage in the marketplace. Improved risk decision-making and capital allocation can translate to profitable growth and an increase in shareholder value. But, it takes a commitment: ongoing integration and evaluation of the models in the operation may create ongoing benefits to results.
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Solvency II - Approval of Internal Models: The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) published many consultation papers in 2009 focusing on Level 2 implementation measures for Solvency II. Consultation Paper (CP) 37 addressed the procedures for approval of internal models. It was followed by a final paper entitled “CEIOPS Advice for Level 2 Implementing Measures on Solvency II ‘The procedure to be followed for the approval of an internal model’”, published in October, 2009. This series reviews the implementation measures described in the final papers.