January 2nd, 2013

Top GC Capital Ideas Stories of 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. Reinsurance Rates Rise at April 1, 2012 Renewals: Reinsurance rates rose as the market continues to work through the impact of the events of 2011, according to Guy Carpenter. In a briefing released today, Guy Carpenter reports that this year’s April 1 renewals are continuing the general trends observed at January 1, 2012.

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3. 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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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. Indexation Clauses in Liability Reinsurance Treaties: A Comparison Across Europe: The Indexation Clause - otherwise referred to as the Stability Clause, Inflation Clause or Severe Inflation Clause - is designed to maintain the real monetary value of the retention and (where applicable) the limit under a long-tail excess of loss reinsurance treaty over the duration of the claims payout pattern. The clause is only relevant to losses that are of a long-tail nature (i.e., that take a long time to become paid) and is commonly found in the terms and conditions of motor liability, general liability and professional liability third party liability excess of loss reinsurance contracts of European cedents.

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6. 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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7. January 1, 2012, Renewals Reveal Shift in Industry Behavior: The January 1, 2012, renewals saw a shift in industry behavior as both insurers and reinsurers implemented more sophisticated, customized approaches to risk assessment and mitigation, according to Guy Carpenter. In its 2012 global reinsurance outlook, Catastrophes, Cold Spots and Capital: Navigating for Success in a Transitioning Market, Guy Carpenter reported that reinsurers were in a position to undertake a major review of pricing and underwriting going into the renewal season. This led to significant market fragmentation and increased market volatility at January 1.

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8. Alternative Risk Transfer: 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.

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9. 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.

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10. Superstorm Sandy: Initial Impacts and Implications: Guy Carpenter published a new briefing. As documented by the National Hurricane Center, Superstorm Sandy made landfall as a post-tropical cyclone at 8PM EDT, Monday Oct 29, 2012, with maximum sustained winds of 80 miles per hour.

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