State of the Reinsurance Market, Part II: Inflation/Deflation Expectations, Investment Returns: Expansionary monetary policy has fueled concerns that inflation could increase in the medium term, but the picture is less clear in the near term. While consumer price indices in Brazil, Russia, India and China (BRIC), the United States and the rest of the G7 currently exhibit positive trends, consensus forecasts show borderline disinflationary trends in the nearer term in the United States and many developed markets.
Capital Management: Reinsurance Valuations at a Long-Term Low: The challenging macroeconomic environment of subdued growth and low interest rates meant the reinsurance sector ended 2011 trading near 20-year lows. As Figure 1 illustrates, the average price to book ratio for the sector of 0.893 is just greater than one and a half standard deviations down from the 20-year average of 1.32. The sovereign debt crisis, threat of a double-dip recession, heavy non-peak zone catastrophe losses during 2011 and concerns about reserve adequacy are among the factors contributing to volatility and low valuations. Additionally, despite the heavy losses incurred during 2011, many reinsurers are still perceived to have excess capital relative to projected earnings and top-line growth.
Property & Casualty Mergers & Acquisitions: 2011 Review: Property & casualty (P&C) merger and acquisition (M&A) activity in the United States and Bermuda in 2011, as measured by the number of transactions, was at a level below the previous year’s after being stifled by volatility in the financial markets and a difficult operating environment. In dollar terms, M&A activity for P&C risk-bearing entities in 2011 was at a higher level than that seen in the past two years. The last six weeks of 2011 saw two of the largest deals, totaling more than USD6.3 billion combined, or almost 50 percent of the full year’s deal activity.
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.
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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Terrorism Solutions: Models: To support the process of managing and underwriting the terrorism peril, (re)insurers are increasingly using data management and modeling tools to analyze the risk. The dynamic nature of terrorism and the uncertainty in identifying the targets and frequency of attacks requires a different approach to manage the risk.