July 3rd, 2013

GC Capital Ideas Top Stories: Second Quarter 2013

Posted at 1:00 AM ET

1. April 1 Renewals See Reinsurance Pricing Stabilize Amid Dynamic Capital Growth: Guy Carpenter reports that dynamic capital growth and ample reinsurance capacity resulted in a relatively stable renewal at April 1, 2013. In a briefing released today, Guy Carpenter comments that the convergence of traditional and alternative capital sources is changing the marketplace, with non-traditional capacity now making up an estimated 14 percent of global property catastrophe limit.

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2. Influx of Convergence Capital Triggers Downward Pressure on Pricing at June 1 Renewals: Guy Carpenter reports that the reinsurance sector has witnessed dynamic capital growth in 2012 and 2013, spurred by an influx of capital from alternative sources. In its June 2013 renewal briefing, Guy Carpenter finds that this surge in alternative or “convergence” capital has changed the nature of the sector’s capital structure, as investors grow increasingly comfortable with supplying capacity through a convergence of both traditional and alternative vehicles. This market dynamic has also begun to impact significantly reinsurance pricing for peak property catastrophe risks in the U.S., with surplus capacity and lower target returns driving downward pressure on pricing for June 1 renewals and likely through the remainder of 2013.

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3. GC Securities*: First Quarter Cat Bond Activity Signals Robust Issuance Ahead: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer and member FINRA/SIPC, today released an analysis of first quarter activity and trends within the catastrophe risk market for 2013. Two natural peril-exposed catastrophe bond transactions closed during the first quarter of 2013, for a total of USD520 million of issuance. This seemingly low level of primary issuance activity is deceiving, however, as activity in the capital markets and the influence of “non-traditional” capacity - a term that is rapidly approaching obsolescence - has never been higher.

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4. Chart: Five Most Expensive Earthquakes for Insurers: Over the last two years, several powerful earthquakes have caused widespread damage, leading to significant losses for (re)insurers. Four out of the five most costly earthquakes on record have occurred since the start of 2010, and all four of these events were located outside the United States.

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5. Chart: Alternative Capacity as a Percentage of Global Property Catastrophe Reinsurance Limit: The increasing influence of alternative capacity is demonstrated by the chart below, which shows the growth of convergence capacity as a percentage of global property catastrophe limit from 2008 to 2013 (projected).

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6. Reinsurance Pricing Trends: Here we review recent GC Capital Ideas posts that have focused on 2013 reinsurance pricing trends.

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7. January 1, 2013 Renewals Bring Stable Reinsurance Pricing: Guy Carpenter reports that the reinsurance sector enters 2013 equipped with ample dedicated capital and stable pricing. In its 2013 global renewal report, The Route to Profitable Growth, Guy Carpenter finds that the January 1, 2013 renewals took place against a stable backdrop, with only loss-affected lines and select regions experiencing price volatility. The market was supported by a combination of factors including lower than normal catastrophe losses during the first nine months of 2012, new reinsurance capacity and record-high levels of capital.

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8. Chart: Global Natural Catastrophe Losses: The extent of rising insured losses from global natural catastrophes over the last 40 years is illustrated below.

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9. Chart: Global Flood Risks and Flood Model Coverage by Three Main Modeling Vendors: Flood risk is poorly modeled at a global level, particularly in developing countries where flooding is a regular occurrence.

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10. 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 (ERM) 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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* 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, Inc. 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.

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