October 21st, 2011

Week’s Top Stories: October 15 - 21, 2011

Posted at 11:00 AM ET

Floods in Thailand: Thailand has experienced its worst flooding in decades over the last couple of months, leaving more than 300 people dead and causing severe damage across the country. Hundreds of thousands of homes have been destroyed or damaged and the floodwaters have severely disrupted manufacturing operations in central regions of the country. Reports said the flooding has affected 61 of Thailand’s 77 provinces, from Chiang Mai in the north to parts of the capital city of Bangkok.

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Timeline: Transitioning to Solvency II: As is often the case with pan-European legislation, the implementation timeframe for Solvency II has generated a great deal of debate and discussion - and what had been a firm January 2013 go-live date now looks increasingly unlikely. It appears at this point that the new regulations will be phased in, and enforcement is likely to be postponed by a year. Such a delay would buy some welcome time for companies that are behind in their Solvency II preparations - but is being opposed by others who say it will add more costs to an already expensive preparation process.

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Solvency II: Assessing Counterparty Default Risk: Counterparty default risk is one of the core components of the SCR. This module has undergone substantial change over the several quantitative impact studies, as the supervisors attempted to find an appropriate measure of the risk. In the QIS 5 final report, EIOPA noted that this module received the most criticism for the “overly complex approach” relative to the materiality of counterparty default risk within the overall risk-based capital requirement. We expect to see additional changes that will simplify the calculation of risk.

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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 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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Solvency II: Counterparty Default Risk Management: Whatever the final method for assessing counterparty default risk under Solvency II, this is an opportune time for companies to revisit credit risk management to ensure not only compliance with regulations, but also to limit this non-core risk. Insurers transact with numerous counterparties, including policyholders and agents, corporate bond issuers and asset managers, reinsurers and, of course, reinsurance intermediaries.

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And, you may have missed…

The Adverse Development Super-Catastrophe: Property catastrophes make the news. Tangible and visual, the carnage can be conveyed with ease, and all can grasp the direct implications immediately. Yet for (re)insurers, there’s another type of catastrophe that could be far more destructive to balance sheets. This threat, which can remain hidden in a portfolio for decades, can arise with little warning and have profound consequences.

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