March 6th, 2012

GC Capital Ideas Top Stories: February 2012

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. Calling All General Insurance Reserving Actuaries: Does the Bootstrap Model “Work”? Guy Carpenter’s extensive back-testing of reserve distributions created using the popular paid chain ladder bootstrap method has shown that these distributions materially under-estimate reserve risk. With the U.S. industry annual statement data and thousands of hours of research, Guy Carpenter in collaboration with Risk Lighthouse have bootstrapped thousands of loss triangles in an attempt to answer the question: Does the bootstrap model work?

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3. 2011 Catastrophe Losses and Reinsurance Capital: The reinsurance sector faced multiple headwinds in 2011. Significant losses in Australia, New Zealand, Japan, the United States and Thailand resulted in (re)insurers paying out more than USD100 billion in claims. (Re)insurers were hit by an exceptional accumulation of global natural catastrophes in 2011. Two of the most damaging earthquakes in recent times struck Japan and New Zealand early in the year, causing huge losses.

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4. Guy Carpenter’s January 2012, Reinsurance Renewal Report: Executive Summary: The (re)insurance sector experienced historic catastrophe losses in 2011, many in areas not previously considered ‘peak’ risks. Devastating earthquakes in Japan and New Zealand, floods in Thailand and Australia and a record-breaking tornado season in the United States contributed to insured losses in excess of USD100 billion. As carriers continue to penetrate new growth regions, ‘cold spot’ losses are expected to increase.

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5. 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. 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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6. Floods in Eastern Australia: Heavy rain has caused widespread flooding across parts of Queensland State and New South Wales State in eastern Australia, damaging hundreds of homes and businesses and forcing thousands of people to evacuate their properties. The floodwaters have reached record levels in some areas, isolating several communities.

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7. Periodic Payment Orders - Issues and Implications for Reinsurance: Following the passage of the Courts Act 2003, which gave courts in England and Wales the power to impose rest-of-life structured settlements, known as periodical payment orders (PPOs) to provide for the long-term care and loss of earnings of severely injured third parties, the actual incidence of such awards in the market has been relatively low. It is clear however that the trend towards PPOs has accelerated over the past year, partly driven by low interest rates. This trend presents real challenges to both insurers and reinsurers of casualty classes, particularly for motor.

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8. 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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9. GC Securities* Completes Japan Earthquake Catastrophe Bond: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer and member FINRA/SIPC, today announced the placement of the Series 2012-1 Class A Notes, with notional principal at $300 million, through a newly created catastrophe bond shelf program, Kibou Ltd. The bond will ultimately benefit ZENKYOREN, National Mutual Insurance Federation of Agricultural Cooperatives, which was accessed via Hannover as the transformer reinsurer. This is the first Japan earthquake-only transaction since the Tohoku Earthquake that occurred on March 11, 2011.

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10. 2011 Catastrophe Update: Historical Global Losses, Cluster of Costly International Losses: 2011 has been an unusually eventful year for the (re)insurance sector. In addition to the challenging economic environment and major catastrophe model updates, (re)insurers were hit by an exceptional accumulation of global natural catastrophes. Two of the most damaging earthquakes in recent times struck Japan and New Zealand early in the year, causing huge losses. Several other significant events, including devastating floods in Thailand and Australia, a record breaking tornado season in the United States and Hurricane Irene making landfall along the U.S. east coast, combined to cause insured losses of around USD108 billion in 2011.

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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. Cory Anger and Chi Hum are registered representatives of MMC Securities Corp.

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