Recently, we have seen a change in the way reinsurance is viewed in some companies and groups: The chief financial officer increasingly recognizes reinsurance as an instrument to achieve risk and capital management, rather than using capital measures like equity and sub-debt issuances.
Archive for December, 2015
The Own Risk and Solvency Assessment (ORSA) requirements are the key element of the Pillar 2 qualitative risk management requirements. The purpose of an “own risk assessment” by each company is to prove the appropriateness of the standard formula or internal model results if the company has applied for a certified internal model. While the Pillar 1 solvency capital requirement is calculated on a one-year basis to show that a company has enough capital to avoid insolvency through the end of the year in a 1-in-200 year event, the focus in Pillar 2 ORSA is the forward-looking assessment of solvency capital adequacy. Companies need to provide a projection of the risk and capital position for the entire planning period (at least three years), which has to be consistent with the business case balance sheet and profit and loss projection. The aim of ORSA is to demonstrate that there is an adequate level of capital available to support the business plan for a longer period. Based on this planning projection of the risk and capital position, (re)insurers need to define meaningful stress tests and scenarios to show they would be adequately capitalized in adverse scenarios as well. If a company would face solvency issues in certain stress scenarios, it needs to show it has countermeasures in place in order to reach the strategic targets of the corporate and risk strategy again.
A complex frontal system has rendered significant impacts to the Southern, Southwestern, and Midwestern States, with an ongoing threat from the Midwest to the Saint Lawrence Valley to the Northeast. The system brought severe thunderstorms to the Northern Gulf states, with a confirmed EF-4 tornado affecting the Dallas area, causing several fatalities and extensive structural damage. Excessive rainfall has produced significant and historic flooding in the Central Mississippi Valley. Significant winter weather including heavy snow and ice continues to threaten areas from the Midwest to the Northeast, after nearly 40 inches of snowfall in New Mexico and over half an inch of ice reported from Texas to Illinois. Significant power outages have been reported for some areas. Transportation disruption has been especially severe for both land and air.
After a long period of discussion and many delays, the new European insurance regulatory regime, Solvency II, will commence in January 2016. The rules will be compulsory for all insurance and reinsurance companies and groups in the European Economic Area (EEA). The three pillar approach of Solvency II for (i) quantitative capital requirements, (ii) qualitative risk management standards and (iii) reporting specifications, was derived from the international banking sector regulation (Basel II and Basel III). The Solvency II rules were developed over a period of more than 15 years, and there are many reasons for the long delay. Two notable reasons are differing business models from country to country and pressure on long-term guarantee products. With the goal of creating a common regulatory system in Europe there was much political will to find compromises that allowed different insurance business models in the individual countries to fit into Solvency II, without necessitating many product changes. And the ongoing low interest rate environment continues to create enormous pressure on long-term guarantee products in the private pension system of some European countries.
Financial market regulation has been under review for a number of years but the global financial crisis in 2008 made it a key priority in many countries. While the previous insurance regulatory framework did remarkably well in the protection of insurance consumers and companies during the financial crisis, the insurance industry has not been immune from these factors. Today, new and upcoming regulations are having a profound impact on companies’ balance sheets and risk management practices. Although primarily aimed at larger, global (re)insurers, the changes will impact medium and small (re)insurers as well.
Integrating & Synthesizing New Emerging Risks - Within the ERM Framework: One purpose of enterprise risk management (ERM) is to help (re)insurers determine how much capital is needed to support the risks they assume (subject to risk tolerance). Instead of segmenting portfolios and handling each peril on a standalone basis, a robust ERM methodology would use a holistic approach to risk and capital management where threats are identified and monitored, all action plans are developed and risks are measured.
Update on China Counterparty Risk Charges for Offshore Reinsurers: China’s developing insurance market is a potential bright spot for growth in an otherwise challenging landscape for global reinsurers. Driven by a maturing economy and expected increases in household penetration ratios, property/casualty insurance premium, totaling USD 121.6 billion in 2014, is projected to increase to roughly USD 300 billion by 2030.
Chart: Combined Ratio For Guy Carpenter Reinsurance Composite, Q3 2015: Chart presents combined ratio for the Guy Carpenter Global Reinsurance Composite, 2004 through third quarter 2015.
GC Securities* Report Shows Catastrophe Bond Market Continues to Hold Steady: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer and member FINRA/NFA/SIPC, released a briefing and analysis of catastrophe bond activity for the third quarter of 2015, which shows healthy activity across the market and marks the fourth highest third quarter catastrophe bond issuance on record.
Microinsurance Consortium and Venture Incubator Announces New Name: The Microinsurance Consortium, led by a group of leading companies in the insurance industry, announced a new name for their microinsurance venture incubator (MVI) - Blue Marble Microinsurance. The consortium consists of American International Group, Inc., Aspen Insurance Holdings Limited, Guy Carpenter & Company, LLC together with Marsh & McLennan Companies, Inc., Hamilton Insurance Group, Ltd., Old Mutual plc, Transatlantic Reinsurance Company, XL Catlin, and Zurich Insurance Group.
And, You May Have Missed…
Stochastic-based BCAR: Do You Understand Your “Capital-print”?: Technology and innovation continue to change the world around us, creating both opportunities and new challenges for the (re)insurance industry. Advances in risk quantification such as predictive analytics and capital modeling, to name a few, are changing the way we underwrite, price and manage risk. Similarly, technology is allowing A.M. Best (Best’s) to advance the analytics of risk supporting its assessment of balance sheet strength. Taking advantage of stochastic modeling technology, the evaluation of risk within Best’s capital model is undergoing a fairly substantial overhaul to broaden the lens used to analyze risk relative to capital.
*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/NFA/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. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. 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. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.
With the world rapidly changing and evolving, what was the case 10 years ago is not the case today and will not be 10 years from now. As discussed in detail in this report, A Clearer View of Emerging Risks, new technologies can impact people in their everyday lives through the products we use, how long we live, how much we spend to keep ourselves healthy and where our information is stored. All of these carry inherent risks that are new to the world and that may not be a part of the historical dataset upon which (re)insurers rely for pricing and/or establishing proper risk controls.
Eva Zheng and Graham Jones
It is anticipated that the China Insurance Regulatory Commission (CIRC) will recognize cash deposits (including premiums withheld), letters of credit (LOC) and certain other forms of collateral. LOCs must be issued by domestic banks with a capital adequacy ratio of no less than 11 percent or by overseas financial institutions with credit ratings equal to or higher than AA-. Cedents will be required to report and re-value their counterparty risk on a quarterly basis and adjust collateral positions accordingly.
Eva Zheng and Graham Jones
China’s developing insurance market is a potential bright spot for growth in an otherwise challenging landscape for global reinsurers. Driven by a maturing economy and expected increases in household penetration ratios, property/casualty insurance premium, totaling USD 121.6 billion in 2014 (1), is projected to increase to roughly USD 300 billion by 2030 (2).
One purpose of enterprise risk management (ERM) is to help (re)insurers determine how much capital is needed to support the risks they assume (subject to risk tolerance). Instead of segmenting portfolios and handling each peril on a standalone basis, a robust ERM methodology would use a holistic approach to risk and capital management where threats are identified and monitored, all action plans are developed and risks are measured.