October 10th, 2011

GC Capital Ideas Top Stories: Third Quarter 2011

Posted at 1:00 AM ET

1. 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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2. Market in Transition at July 1, 2011 Reinsurance Renewals, According to Guy Carpenter: In the first quarter of 2011, the reinsurance sector’s dedicated capital position fell by 4.4 percent to about USD165 billion. In the second quarter, reinsurance capital remained essentially flat and moderately down year-to-date. While the global catastrophe losses of 2011 and the version 11 release of Risk Management Solutions, Inc.’s catastrophe model (RMS v11) have impacted reinsurers’ view of risk, the longer-term implications remain to be seen. This will come into sharper focus when recent event losses are fully realized and the industry reaches consensus on the integration of the model changes.

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3. Guy Carpenter Publishes First Industry Risk Benchmarks Report: Guy Carpenter & Company, LLC announced publication of its first Industry Risk Benchmarks report, which provides risk benchmarks for loss ratios and reserves, by line of business, for coefficient of variation (standard deviation/mean), correlation and cycles. The risk benchmarks are based on proprietary analyses of an extensive database of industry information that includes the reported financial results of hundreds of insurance companies over a thirty-year period. Insurers can use the benchmarks to assess the risk parameters that they use in economic capital models.

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4. Terror Attacks at Historically High Levels, Still Pose Threat to (Re)Insurance Industry, According to Guy Carpenter Report: A new report on global terrorism and the terror reinsurance market, released by Guy Carpenter & Company, finds that while recorded incidents of terror around the world remain at historically high levels and terrorism remains a serious risk to the (re)insurance industry, the industry continues to meet the current demands for terrorism risk transfer.

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5. Uncertain Market Ahead for Reinsurance Industry, Finds Guy Carpenter’s 2011 World Catastrophe Report: A number of developments in 2011 have created an uncertain market for the reinsurance industry as it begins to focus on next year’s renewals, according to 2011 World Catastrophe Reinsurance Market Report, released by Guy Carpenter & Company. These developments range from elevated global catastrophe activity to catastrophe model changes that have altered risk perceptions and changed expected loss amounts.

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6. Guy Carpenter Addresses Insurer Strategies for Profitable Growth At Monte Carlo Rendez-Vous 2011: In its fourth annual press briefing held at the Reinsurance Rendez-Vous 2011 in Monte Carlo, Guy Carpenter & Company identified and explored insurers’ opportunities for growth in today’s uncertain (re)insurance market.

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7. Chart: Guy Carpenter Global Property Catastrophe Rate on Line Index: 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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8. Focus on Hurricane Season at July 1, 2011 Reinsurance Renewal, Introduction and Catastrophe Events: July 1 represents the last major renewal period of the year. As we wrap up the majority of placements for 2011, there are several occurrences that have played a key role in the positioning of the market. Chief among the critical 2011 events are the global catastrophe losses and the release of RMS v11, both of which had an impact on reinsurers’ capital positions and views of risk. The longer term impact of both of these factors remains somewhat unclear as losses from recent events are not fully developed and there is not a consensus position on the integration of RMS v11.

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9. RMS Hurricane Model Update: RMS issued a significant update to its U.S. hurricane model, RiskLink, bringing material increases in risk estimates to many insurers with exposure to hurricane states. Early indications are that the average hurricane probable maximum losses (PML) for the industry will increase dramatically - by 20 to 25 percent. Regionally, the increases could be significantly higher.

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10. Chart: Cat Bond* Risk Capital Issued and Outstanding 1997 - 2011 Q2: The second quarter of 2011 saw four catastrophe bonds came to market, totaling USD592 million of new bond issuance.

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* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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