March 4th, 2011

Week’s Top Stories: February 26 - March 4, 2011

Posted at 10:00 AM ET

Update: Earthquake in New Zealand: The death toll from the earthquake that hit New Zealand’s South Island at 23:51 UTC on February 21 has now reached 75, according to the latest reports. The epicenter of the earthquake, of magnitude 6.3, was located only 3 miles (5 km) from the city of Christchurch on New Zealand’s South Island, at a shallow depth of 2.5 miles (4 km), according to the U.S. Geological Survey.

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Chart: Reinsurance Sector Price to Book Multiples and Forward ROE: Low valuation of the reinsurance sector may prove to be a catalyst for change by driving reinsurance sector consolidation. The chart below plots quoted reinsurance companies on price to book ratios and forward consensus returns on equity. The shaded area below 0.9x book value which now comprises the majority of the sector, is where mergers and acquisitions (M&A) have tended to take place in the recent past. Combined with significant share buybacks already taking place in the sector, additional M&A could slow the growth of dedicated reinsurance sector capital, thereby restricting the supply of reinsurance. This, in turn, could eventually drive rates higher.

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Chart: Property & Casualty Accident Year Reserve Development: Accident year loss experience is beginning to show signs of lower reserve margins. The chart below shows U.S. P&C industry reserve development by accident year since 2000. The reserving cycle is evident in the graph with adverse accident year loss development during the “soft market” years of 2000 and 2001 and favorable development between 2003 and 2007. The orange line in the graph shows the average initial loss ratio pick. The old reserving adage that “good years get better and bad years get worse” appears to be borne out here.

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Navigating the A.M. Best Supplemental Rating Questionnaire Changes: Recent changes related to the A.M. Best Supplemental Rating Questionnaire (SRQ) will have a sweeping impact on U.S. property and casualty insurers. Respondents are facing new questions regarding enterprise risk management (ERM), new considerations for workers compensation coverage, and the release of the new version 11 of the RMS RiskLink TM model, all of which will factor into a company’s A.M. Best rating.

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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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And, you may have missed…

Guy Carpenter Examines Annuities in Europe, Periodical Payment Orders, Intellectual Property Trends in Asia: A new briefing released today by Guy Carpenter examines emerging issues in the global casualty reinsurance marketplace. Key issues highlighted in the report include the changing role of annuities used in third-party bodily injury claims settlements in Europe, the growing trend of UK courts to award rest-of-life structured settlements and the emerging market for intellectual property (re)insurance in Asia.

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