June 28th, 2011

GC Capital Ideas Top Stories: Second Quarter 2011

Posted at 1:00 AM ET

1. 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.

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2. 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 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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3. Wide Range of Outcomes Seen in June 1, 2011, Florida Reinsurance Renewals:   The June 1, 2011, renewals took place against the backdrop of record first-half catastrophe losses and uncertainty surrounding the release of version 11 of Risk Management Solutions’ (RMS) U.S. hurricane model. The heavy international natural catastrophe-related losses that occurred during the first quarter of 2011 - combined with the multi-billion dollar losses from tornadoes in the United States in April and May - have added to significant loss activity over the past 16 months, culminating in insured losses of close to USD100 billion.

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4. Summary of 2011 Hurricane Season Forecasts:  With the start of the Atlantic hurricane season just a few days away, Guy Carpenter has summarized the various forecasters’ predictions for the 2011 season. AccuWeather, the Colorado State University (CSU), the National Oceanic and Atmospheric Administration (NOAA) and Weather Services International (WSI) have released forecasts for the forthcoming season and there seems to be a general consensus that 2011 will see above-average activity with an increased risk of hurricane landfalls in the United States.

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5. Global Reinsurance Outlook: Points of Inflection, Positioning for Change in a Challenging Market:  Executive Summary: Early predictions that January 1, 2011 reinsurance renewal rates were likely to fall have been proven correct. The Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index lost 7.5 percent - the second consecutive annual decline. Contributing to this move has been a combination of factors, including moderate loss activity and abundant levels of industry surplus.

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6. Guy Carpenter Publishes Second Part of Re/Insurance Industry’s Guide to Succeeding Under Solvency IIGuy 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 first report, published earlier this month, focused on Pillar I requirements.

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7. Japan April 1 Reinsurance Renewals, Tohoku Earthquake:  The Japanese market buys considerable amounts of earthquake reinsurance - both pro rata and excess of loss. Companies were able to renew unchanged capacity for pro rata treaties at the April 1, 2011 renewal, despite the occurrence of the Tohoku earthquake at a time when the renewal process was only partially completed. Typical ceding commissions for this kind of business have ranged between the low and high teens over the past few years. In most but not every case, these commissions were reduced by up to 3 percent in order to achieve placement goals. Many reinsurers also looked for greater detail on primary underwriting practices.

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8. 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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9. A.M. Best Updates Its Comments on Catastrophe Models: During a recent webinar, a panel convened by A.M. Best reviewed catastrophe models and addressed questions that arose as a result of the new RMS and AIR model versions that have been released. The discussion was focused on how A.M. Best wants companies to demonstrate a solid understanding of their catastrophe risk exposure and where it fits within their risk tolerances. The panel outlined the need for rated companies to engage in ongoing discussions with their A.M Best analysts regarding the efficacy of model output, specifically, the companies’ confidence in the model output and the reasoning behind this view.

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10. GC Securities: Catastrophe Bond Market Surges to Record High for First Quarter Issuance: The catastrophe bond market posted its most active first quarter on record for new issuance in Q1 2011, according to a new report by GC Securities*. Four transactions came to market in the first quarter of 2011, securing USD1.02 billion of new and renewal risk transfer capacity. This represents a significant increase over the USD300 million issued during the same time period in 2010.

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