October 26th, 2011

MetaRisk® Reserve™: How to Get Ahead of the Reserving Cycle

Posted at 1:00 AM ET

leong_jessica_gcciJessica Leong, Lead Casualty Specialty Actuary
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The impact of claims inflation on eroding returns is among the most vexing challenges that insurers face. Getting ahead of the reserving cycle would be a significant competitive advantage, but many carriers do not have the right tools at their disposal. As a result, the ability to hit target return on equity (ROE) levels is put at risk, and firm value hangs in the balance.

Few insurance companies have mastered claims inflation. Without the right tools, they have either set aside too much capital and constrained their abilities to generate growth, or they have reserved insufficiently, exposing themselves to losses that can have direct and significant implications for market capitalization. Interestingly, taking control of claims inflation is no longer as difficult as it used to be.

Managing claims inflation starts with understanding. Simply understanding the trends that have affected the portfolio can provide a clear view of the factors at work, indicating the exposures and the solutions available. Measuring claims inflation, and understanding its impact, can help clients gauge the effectiveness of different risk mitigation strategies. Through understanding and measurement a platform for remediation is attained.

Prudent reserving has implications all the way to market capitalization. Modeling claims inflation risk leads to a better understanding of reserve risk. You understand the likelihood of having greater than expected losses, not to mention the earnings declines that are magnified in firm value. And, you understand the risk of leaving too much capital on the sidelines, which can make it difficult to attain target ROE levels. An intuitive tool is the key to unleashing the latent power of capital.

With MetaRisk® ReserveTM insurers can take the steps necessary to protect their capital. Understanding claims history by measuring historical inflation provides a powerful starting point for trading risk for growth.

Guy Carpenter developed MetaRisk Reserve to address the challenges associated with claims inflation and reserving. This new solution makes it possible for insurers to measure their reserve risk and parameterize it for their capital models. MetaRisk Reserve streamlines the process of identifying the drivers and implications of claims inflation in the portfolio, allowing the optimization of reserving practices.

Once insurers have run MetaRisk Reserve to determine how claims inflation is impacting their portfolio, they can use the output in any capital model - including MetaRisk®, developed by Guy Carpenter - to evaluate alternatives and deploy capital in accordance with the firm’s risk profile, appetite and tolerance. Essentially, users will be able to better understand trends in claim payments, enabling the company to be ready for projected insured losses without setting aside capital that could otherwise be deployed to generate returns.

Understanding, measurement and analysis: this is what it takes to understand claims inflation history - and take decisive action. MetaRisk Reserve equips users to get ahead of the reserving cycle, attain ROE targets and grow shareholder value with tools that contribute to improved capital allocation and management.

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