What to Watch in 2012, Part I: 2012 will undoubtedly be a challenging year, but Guy Carpenter believes that growth opportunities exist - or can be created - for companies that have the fortitude to see and develop them. Below we examine 10 major themes that the (re)insurance sector will face in 2012.
Alternative Risk Transfer: Part I, Adverse Development Cover, Aggregate Stop Loss: Alternative risk solutions are used to address the following client motivations: rating agency issues, adverse development, earnings stability, reserve and premium leverage issues, reinsurance recoverables, terrorism risk, capital optimization constraints, mergers and acquisitions, discontinued lines of business, provide coverage for gaps in traditional placements and optimizing costs. The structured risk team designs customized solutions to achieve a particular client’s goals. An optimal reinsurance structure is determined by capacity needs, risk tolerances, capital management, cost of risk and degree of confidence in results. A cedent will need to balance the cost of transferring sources of risk with not only its own capital management strategies but also capital requirements imposed by rating agencies.
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.
Catastrophe Bonds: 2011 Review - Activity, Risk Capital Outstanding: 2011 was a year of significant activity for catastrophe risk investors and sponsors. As of December 9, 2011, the total 144A property catastrophe bond issuance for the year stood at USD3.86 billion, which is 84 percent of the USD4.6 billion issued during the 2010 calendar year. By the end of 2011, total issuance is expected to exceed USD4.0 billion, and a deep pipeline of transactions exists for the first half of 2012 and beyond.
Terrorism: Unstable Territories, Implications of Middle East and North Africa Unrest and Future Risks: It is interesting to note that Maplecroft’s TRI has Somalia and Yemen showing an increasing trend of terrorist activity, as both countries are deeply unstable and some ungoverned regions have become havens for militant groups. As noted above, AQAP in Yemen is now considered to be one of the most significant risks to the Western world. The rising terrorist threat emanating from Somalia, meanwhile, means the country now tops Maplecroft’s TRI.
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Industry Issues and Trends: Domiciles: Reinsurers Look to Europe: Since 2005, a notable shift in reinsurers’ domiciles has taken place. Europe’s transition towards risk-based capital requirements has prompted global regulators to call for some level of equivalence in key markets. This has, in turn, prompted carriers to reassess corporate structures, with a particular eye to the location of group balance sheets.