April 15th, 2011

Week’s Top Stories: April 9 - 15, 2011

Posted at 10:00 AM ET

Guy Carpenter Publishes Second Part of Re/Insurance Industry’s Guide to Succeeding Under Solvency II:  Guy Carpenter & Company released a new briefing, Succeeding Under Solvency II - Corporate Governance (Pillar II) and Disclosure (Pillar III), the second report in a special series for re/insurers operating in or covering risks in Europe. The new report examines: the rigorous corporate governance programs that (re)insurers will need to implement under Solvency II, covering the core functions of risk management, actuarial, internal audit and internal controls; Expectations under the Pillar II requirement of every company conducting its “own risk and solvency assessment;” the internal model approval process as an alternative to using the standard formula to determine a company’s solvency capital requirement; the two levels of disclosure - regulator and public - required under Pillar III; Catastrophe modeling documentation requirements for Solvency II compliance.

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Reinsurance Market and Rate Direction Still in Transition at April 1, 2011 Renewals:   With substantial first quarter insured losses from catastrophes in Australia, Japan and New Zealand and the political unrest in the Middle East and North Africa, the direction of global reinsurance rates at April 1, 2011 renewals varies by region and line of business. Guy Carpenter & Company released its annual report on the state of the reinsurance market at the April 1 renewals period. As the quarter comes to a close, it is the most costly first quarter on record for the industry.

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Guy Carpenter’s Approach to Model Changes:  From time to time, a catastrophe model vendor makes material updates to its model, generating a stir among companies who use its results in risk financing decisions. At Guy Carpenter & Company, we help companies understand the model limitations, and the impacts of model changes on their portfolios in the context of the industry as a whole. By researching the latest version of the model in relation to other models, we develop a broad understanding of expert views, and share these insights to help our clients use the outputs in the proper perspective and prepare for future model developments. A new briefing provides key insights.

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Update: 9.0Mw Earthquake Strikes off Northeastern Japan:  A powerful earthquake struck off the coast of northeastern Japan at 05:46 UTC on March 11, causing severe shaking near the epicenter region and triggering a massive tsunami that devastated coastal communities. Estimates issued by AIR Worldwide, EQECAT and Risk Management Solutions (RMS) suggest insured losses could be between USD12 billion and USD34 billion. There are fears the death toll could now exceed 27,000 people and powerful aftershocks continue to shake the region. Tens of thousands of buildings were destroyed or damaged across northern Japan despite the country boasting the strictest building standards in the world. Officials say the situation at the quake-damaged nuclear facility in Fukushima has improved over the last couple of weeks, but remains serious. According to both the U.S. Geological Survey and the Japanese Meteorological Agency, the earthquake’s magnitude was measured at 9.0, making it the fourth most powerful earthquake in the world since 1900 and the largest in Japan since modern instrumental recordings began 130 years ago.

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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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A Survey of Capital Allocation Metrics: Co-xTVaR:  Co-xTVaR has almost the opposite advantages and disadvantages of standard deviation. It is calculated as the amount by which each risk is worse than its expectation in those situations in which the totality of risks being modeled exceeds its expectation. Co-xTVaR can be viewed as the amount by which a segment is “over budget” in those scenarios in which the company as a whole is “over budget.” In other words, co-xTVaR looks at the average amount by which each segment exceeds its mean in the scenarios in which the company result exceeds some threshold.

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