January 3rd, 2012

GC Capital Ideas Top Stories: Fourth 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. 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 (FTI) to warn that damage to the industrial sector will be in the billions of dollars. It is interesting to note that none of the industrial plants in Thailand have been flooded in the past 40 years or so.

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3. Guy Carpenter Examines Multi-Model Approach in New Report on Managing Catastrophe Model Uncertainty: The report addresses the merits of adopting a multi-model approach to estimate risk and control uncertainty. Three strategies for using multiple models are examined: model blending, model morphing and model fusion. The study also provides extensive background on how catastrophe models are used and the potential sources of uncertainty in cat model results.

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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. 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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6. 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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7. 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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8. Impact of Solvency II on Primary Insurance Companies: Challenges and Opportunities, Part I: It is clear that Solvency II presents a host of challenges to (re)insurers. Below we explore in detail some of the key considerations, challenges and opportunities associated with Solvency II.

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9. 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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10. Terrorism: Global Terror Attacks and Hotspots: The increasingly diverse and dispersed threat has seen worldwide terrorist activity rise in recent years. The number of global terrorist attacks peaked at more than 14,400 in 2006. Although there has been a slight dip in the number of attacks over the last five years, they remain at historically high levels. Attacks increased dramatically in Afghanistan and Iraq following the deployment of coalition combat troops. Several other countries have also witnessed a big jump in terrorist activity recently, including Pakistan, Yemen and Somalia.

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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, Inc. 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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