September 24th, 2012

Navigating the Risks: Executive Summary

Posted at 1:00 AM ET

Guy Carpenter is pleased to present our mid-year report on the global insurance and reinsurance sector, Overcoming Key Risks on the Road to Profitable Growth. In this report we outline three key risks to the sector: economic uncertainty and emerging interest rate sensitivity, the shifting nature of catastrophe losses and reserving risk. Guy Carpenter has dedicated extensive resources to understanding these risks and it is our objective to assist clients in overcoming the current challenges by deploying best-in-class risk management tools, reinsurance placement and strategic advisory services.

Economic Uncertainty

Prospects for an economic recovery remain uncertain, particularly in Europe where some countries are paying a high premium to finance deficits and carriers exposed to these regions are under rating agency pressure. The unresolved debt crisis has compelled (re)insurers into a “risk-off” investment mode, which reduces credit risk but also results in lower investment returns and renders balance sheets more sensitive to interest rate movements. The global economic slowdown also continues to constrain top-lines, particularly in developed markets.

Cold Spot Losses

As (re)insurers expand into developing markets, losses in non-peak zones will have a significant impact on property catastrophe lines, particularly in unmodeled or inadequately modeled territories. The powerful Chile and New Zealand earthquakes, as well as the devastating floods in Thailand, highlighted the increasing cost of natural catastrophes in non-peak zones and the difficulty of pricing business and monitoring exposure growth without appropriate risk modeling tools.

Reserving Risk

There are indications that (re)insurers will not be able to rely on reserve releases to mitigate losses for much longer. Our unique analysis of the reserving cycle, which studies booked ultimate losses by accident year, shows reserve releases slowing in the near term. Looking further ahead, we believe the sector may start to see deteriorating reserves in 2014 financials or beyond, with significant implications for carriers’ growth and profitability. 

These three risks help explain persistent low valuations and underline the key challenges (re)insurers currently face as they seek profitable growth. These obstacles can be overcome by gaining access to the right tools and expertise. At this time of economic uncertainty, Guy Carpenter is working closely with clients to identify underwriting opportunities and mitigate the effects of increased counter-party credit risk. We are also helping clients prepare for potential future reserve deficiencies through loss portfolio transfers and adverse development covers. In addition, we stand ready to assist clients in penetrating new and emerging markets by advising on market entry strategies and enterprise risk management (ERM) practices and developing industry leading proprietary catastrophe models for perils/regions where no other modeling solution exists.

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