November 3rd, 2011

Solvency II: How Guy Carpenter Can Help

Posted at 1:00 AM ET

Solvency II will profoundly impact the reinsurance market, though perhaps not exactly in the ways reinsurers or regulators have anticipated. This impact will not be limited to European reinsurance markets, but will be felt globally. Advances in disclosure and overall market strength will come with costs, including a more volatile pricing environment.

Guy Carpenter is uniquely positioned to help clients navigate a changing and increasingly volatile reinsurance market. We work closely with reinsurers to align capacity to an extensive suite of offerings that we have developed. We identify the issues that will impact our clients, and then develop and execute solutions geared to their individual needs. We encourage you to reach out to your Guy Carpenter contacts to review and discuss your Solvency II preparedness needs in more detail.

Among the specific services we offer our clients are:

Reinsurance Optimization Under a Solvency II Context

As discussed throughout this paper, the SCR is materially impacted by the structure of the reinsurance program. Our professionals are experienced in designing solutions that balance the elements of risk transfer, capital optimization and the achievement of financial goals.

Meta Risk® - Capital Model Implementation (Partial or Full)

MetaRisk is Guy Carpenter’s proprietary stochastic reinsurance and capital modeling platform. It is a uniquely powerful, flexible and transparent solution that enables us to model clients’ entire portfolios rapidly, accurately and reliably.

MetaRisk’s capabilities span all risk modules of the SCR. Thus, it can serve as a full or partial internal model for Solvency II.

MetaRisk provides a realistic way of modeling reserve risk, which reflects (re)insurers’ own reserving practices. This is particularly useful for Solvency II compliance, given the new regulations’ acute focus on loss reserves.

By building a parallel version of a client’s underwriting risk model (gross losses, ceded premium and ceded losses) in MetaRisk, we can undertake comprehensive validation and sensitivity testing as required under Solvency II. MetaRisk employs sophisticated algorithms that most closely replicate the treatment of secondary uncertainty in vendor models so that the platform’s estimation of extreme losses, for example, 1-in-200-year events, is nearly exactly the same as that produced by the actual vendor model.

MetaRisk’s simulation speed empowers carriers to compare any desired metric for multiple alternative selections for loss frequency and severity. Consequently, they can sensitivity-test their original assumptions around loss ratio, premium growth, underwriting cycle and inflation.

MetaRisk is also able to simulate clients’ underwriting risk (losses and reinsurance) with a sufficient number of simulations within a relatively short timeframe. This allows an assessment of the impact of potential simulation error within the main capital model on key extreme scenarios, such as the 1-in-200-year underwriting result.

Alternative Catastrophe Modeling

Guy Carpenter’s Model Development Team, established in 2004, has developed a number of industry-leading proprietary catastrophe models for peril-regions for which no other models exist by the established model vendors (such as RMS, AIR and EQECAT), or where market-wide modeling technology is still not as advanced as the Guy Carpenter proprietary alternatives.

Man-Made Catastrophe Modeling

In addition to the modeling of natural perils, GC Analytics has acquired an expertise in the modeling of man-made catastrophes. This is accomplished through both the use of commercial modeling platforms and the development of proprietary tools. The wide range of services offered covers the assessment of man-made events for conflagration and terror - including the uncertainty associated with the geocoding of risks - casualty events, pandemic, events that may hit a life portfolio and for marine cargo accumulations.

Actuarial Expertise

The GC Analytics team’s expertise and industry leading modeling proprietary software can help carriers:

  • Parameterize their portfolios
  • Supplemet their existing data with more from the industry
  • Enhance model performance through additional technical knowledge and capabilities

The GC Analytics team can propose a number of tailor-made solutions to assist (re)insurers with their implementation of Solvency II frameworks. These solutions are targeted and specific, as opposed to our offering them as a “general Solvency II advisory” service. This ensures that the solutions are achievable and deliver measurable value.

Experience and Exposure -Based Parameterization of Risk Losses

Guy Carpenter can use MetaRisk® FitTM, our advanced proprietary curve-fitting software, to fit clients’ historical loss histories to up to 33 different distributions, in order to serve as a second opinion to their own fittings. Furthermore, all MetaRisk Fit data includes calculation of the parameter uncertainty associated with fitting to limited sample sizes, which provides an element of sensitivity testing.

A Range of Customized Advisory Services

Guy Carpenter offers deep advisory expertise in areas that many clients will find useful in their Solvency II preparations, including ratings agency advisory, capital advisory, strategic advisory, reserve risk modeling, enterprise risk management and reinsurance counterparty risk exposure. Our Global Business Intelligence unit produces regular analyses of industry issues, as well as bespoke research at the request of individual clients.

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