December 5th, 2011

GC Capital Ideas Top Stories: November 2011

Posted at 1:00 AM ET

1. Update: Floods in Thailand: Thailand has experienced its worst flooding in years over the last few months, leaving more than 420 people dead and causing severe damage across northern and central regions of the country. The floods have severely damaged and disrupted manufacturing operations in Thailand. Flooding has forced at least seven huge industrial estates in central regions to close, prompting the Federation of Thai Industries to warn that damage to the industrial sector will be in the billions of dollars.

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2. 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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3. Floods in Italy and France: Torrential rainfall across northern and central Italy and southeastern France has triggered widespread flooding, killing at least 11 people and causing damage to property and infrastructure. Reports said the heavy rainfall caused rivers to burst their banks and forced thousands of people to evacuate their homes. The Italian city of Genoa was badly hit on November 4 after more than 350 millimeters of rain fell in six hours. Authorities in Italy have issued fresh flood alerts and are warning thousands more people will be at risk if the flooding continues.

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4. Guy Carpenter Asia Pacific Catastrophe Report 2011; Executive Summary: In our 2010 Asia Pacific Catastrophe report, we described how the Asia Pacific region has significant exposure to a wide variety of catastrophe perils. The events of the past 18 months have demonstrated how real these exposures are: a series of significant catastrophe losses in our region during 2010 and 2011 has turned the world’s focus on the Asia Pacific area.

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5. Chart: Historical Capital Levels of Guy Carpenter Global Reinsurance Composite: The chart below shows historical capital levels for the Guy Carpenter Global Reinsurance Composite beginning in 1998. From a pricing perspective, rates tend to rise when capital levels in the sector tighten. Conversely, reinsurance rates on line often fall when capital levels are above trend. The decline in capital growth witnessed so far this year goes some way towards explaining the building pricing pressures seen in property catastrophe lines.

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6. Review of Top Reinsurance Renewals Stories in 2011: As 2011 winds down and we head into the January 2012 renewals, here we offer a retrospective of the top GC Capital Ideas stories of 2011 covering the year’s renewals.

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7. Third Quarter 2011: Update on Property/Casualty M&A Activity:  During the third quarter 2011, financial market volatility and a difficult operating environment continued to stifle, but not completely hinder, merger and acquisition (M&A) activity for property/casualty risk-bearing entities. During the quarter, the most significant activity was in the form of deals announced, as opposed to transactions closing.

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8. Solvency II Pillar Two: Corporate Governance: To support Solvency II compliance, (re)insurers need to implement rigorous corporate governance programs that address all areas of the company, from the tone and activities of company leadership through granular risk and capital management activities. Consistent with the principles of ERM, the corporate governance framework should define a clear and robust organizational structure - including an adequate operational structure, the clear allocation of tasks and responsibilities, organizational transparency and efficient information systems across all business activities. The structure should delineate a clear separation between the risk management function and the audit function. There should be a clearly apparent independence of the two functions from each other. Management’s responsibilities must be evident.

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9. Solvency II Pillar Three: Disclosure: Dubbed “the forgotten pillar,” as it tends to get attention fairly late in a company’s Solvency II preparation process, Pillar Three deals with reporting requirements - to regulators and the public.

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10. Reinsurance Capital, Analytics and Market Intelligence: Three Parts of a Successful Renewal: A year busy with global catastrophe activity will undoubtedly affect the January 1, 2012 reinsurance renewal. Whether high catastrophe losses around the world will counteract the effective management of capital remains to be seen and many factors will be brought forward on both sides of the negotiating table. Cedents are well-positioned to renew at favorable rates and conditions, as long as they bring the right information to bear. The savvy use of analytics and market intelligence can make a significant difference in the cost of cover. It pays to be prepared.

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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. Messrs. Ezbiansky and Hathaway are registered representatives of MMC Securities Corp.

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