September 30th, 2011

Week’s Top Stories: September 24 - 30, 2011

Posted at 11:13 AM ET

North Atlantic Hurricane Models: All the major catastrophe modeling companies have reset their view of U.S./North American hurricane risk in the past year. Revisions to storm characteristics have been the key component of change for AIR, EQECAT and RMS. Many users have been frustrated by the lack of regard for risk management implications as some vendors packaged several significant U.S. hurricane changes into their releases. In subsequent GC Capital Ideas posts we will provide an overview of the significant changes to U.S./North Atlantic models over the last 12 months and give our view on each update.

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Losses Exert Upward Pressure on Property Catastrophe Pricing: The high catastrophe losses sustained in the first half of 2011 have already had an impact on capital and pricing in the reinsurance market. Since the January 1, 2011 renewal, the decline in the capital positions of some reinsurers has exerted pricing pressure on catastrophe-exposed markets. Indeed, according to the Guy Carpenter Global Property Catastrophe ROL Index, rates were flat to up 10 percent year-on-year as of July 1, 2011 (see Figure 2). However, rates in non-catastrophe lines continue to experience downward pressure.

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Model Updates Cause Uncertainty: Over the past 12 months, the three main catastrophe modeling companies, AIR Worldwide (AIR), EQECAT and RMS have updated many of their products or launched models for additional countries. The changes relate to earthquake, wind and flood risks. Some of the updates have created uncertainty within the market, and their longer-term implications are not fully known at the time of writing.

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Oil Refinery Fire, Bukom Island, Singapore: A large fire broke out at Royal Dutch Shell’s massive Pulau Bukom refinery near Singapore on September 28, damaging parts of the plant and prompting the closure of some units at the facility. Reports said the fire at the 500,000 barrels-a-day refinery in Pulau Bukom, an island 5 kilometers (3 miles) off Singapore, started at about 13:15 local time (05:15 UTC) and has now been burning for more than a day. Eyewitnesses also reportedly heard three large explosions at the facility. Reports said the fire is the worst to affect the site in 23 years.

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European Windstorm Models: AIR’s European windstorm model underwent a major update in 2010. There were, therefore, only a few changes in the 2011release, with an expansion in modeled countries to include the Czech Republic, Estonia, Finland, Latvia, Lithuania and Poland. The historical storms of Janika (2001) and Xynthia (2010) were also added to the model’s catalog.

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Long Tail Liabilities and Reserve Volatility: Dynamic Reserve Model (DRMTM): The convergence of a variety of pressure points at this time is leading to a set of unique circumstances that present opportunities around business strategy and capital allocations for the insurance industry. Future inflation is one of the pressure points. Inflation and uncertainty about its extent and timing is a function of untested but powerful monetary and fiscal policy actions. In addition to inflation’s potential effect on insurer liability management there is also an impact on the volatility of assets backing the liabilities. A reignition of the kind of severe inflation last seen in the 1970s is most likely not factored into any current insurer management practices for establishing reserves or setting capital levels.

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