The costs associated with compliance and disclosure will continue to rise as insurance regulators and rating agencies increase their scrutiny of the industry. (Re)insurers that operate on a global scale, for example, may wrestle with the complexity of multiple capital requirements and the return targets of investors. Smaller companies, often with fewer resources, may be forced to allocate a higher percentage of senior management’s time to compliance. It will become increasingly more important for (re)insurers to avoid unnecessary and redundant activity when seeking regulatory approval.

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Rating Agency Developments: There is a great deal of overlap between the goals of government regulators and credit rating agencies. The difference, however, is in the output, with regulators providing a license to trade, or not, and the rating agencies offering a graduated scale of relative strength. Regulatory solvency approval can be viewed as a “qualifier” or minimum standard required to be considered by a customer. A credit rating, on the other hand, can act as a “winner” or differentiating factor that results in a successful sale.

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Guy Carpenter Reports Stable Capital at January 1, 2016 Renewals: Guy Carpenter & Company reports that overall capital levels dedicated to reinsurance have stabilized, showing no growth for the first time in several years.  In a highly competitive environment, companies assessed broader opportunities and the rate of incoming capital slowed. However, moderate loss experience kept capacity at abundant levels for the January 1, 2016 renewals. The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015. 

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Chart: Global Property Catastrophe ROL Index 1990 to 2016: The Guy Carpenter Global Property Catastrophe Rate on Line (ROL) index is presented for 1990 through 2016.

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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.

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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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And, You May Have Missed…

Escalating Medical Costs: The impact of rising healthcare expenses has been and will continue to be felt around the world, in developed and undeveloped nations alike. Rising healthcare costs are putting a strain on governments worldwide. Nowhere in the world, however, are expenses as high as they are in the United States, where the impact extends into the medical component of workers compensation costs. Although the rate of growth has seen some stability, it still outpaces the US growth rate of inflation. The figure illustrates that per capita spending in the United States in 2010 was over USD 8,000. A key driver for higher US costs is that it spends more on hospital care and medical specialists.

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In realizing the goal of profitable growth, (re)insurers require a trusted partner to help them manage a rapidly evolving regulatory and rating agency environment.

Catastrophe Modeling

The insurance industry relies to a large extent on catastrophe models to manage catastrophe risk. Regulators and rating agencies recognize this fact by asking companies to justify their modeling approach. The underlying objective of such rules is to encourage companies to have a robust and consistent process to use modeling tools responsibly.

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In realizing the goal of profitable growth, (re)insurers require a trusted partner to help them manage a rapidly evolving regulatory and rating agency environment.

Rating Agency Advisory

Ratings are a key indicator for many insurers and (re)insurance buyers. Amid evolving rating agency concerns and the complexity of enterprise risk management (ERM) requirements, Guy Carpenter Strategic Advisory provides clarity. We help clients take a proactive approach to enhance risk-adjusted capitalization, build up ERM, improve communications with rating agencies and optimize rating outcomes.

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In realizing the goal of profitable growth, (re)insurers require a trusted partner to help them manage a rapidly evolving regulatory and rating agency environment.

Regulatory Advisory

The regulatory issues facing insurers and reinsurers today often require highly specialized expertise that may not be readily accessible to clients - from taking credit for reinsurance on financial statements to complying with regulatory requirements in contract wordings to shepherding new products through the approval process. Guy Carpenter Strategic Advisory℠ has a team of professionals whose deep expertise and knowledge can help companies navigate the regulatory realm.

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Europe

In anticipation of the January 2016 rollout, the European insurance industry focused squarely on Solvency II. Rating agencies refrained from instituting any new criteria.

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Own Risk and Solvency Assessment (ORSA) Framework: (Re)insurers that are required to implement Own Risk and Solvency Assessment (ORSA), or a similar framework such as Internal Capital Adequacy Assessment Process, may benefit by adopting a strong ORSA/enterprise risk management framework. One such framework that could work on a global basis is illustrated.

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Marsh and McLennan Companies, in Collaboration With the World Economic Forum, Publish the 11th Annual Global Risks Report: Disruptive shifts in technology, geopolitics, societal expectations, and economic patterns are creating instabilities that are directly impacting events in the world today. The World Economic Forum’s eleventh Global Risks Report highlights the issues that will exacerbate volatility and uncertainty over the next decade - while also presenting opportunities for governments and businesses to build resilience and deliver sustainable growth.

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Guy Carpenter Reports Stable Capital at January 1, 2016 Renewals: Guy Carpenter & Company reports that overall capital levels dedicated to reinsurance have stabilized, showing no growth for the first time in several years.  In a highly competitive environment, companies assessed broader opportunities and the rate of incoming capital slowed. However, moderate loss experience kept capacity at abundant levels for the January 1, 2016 renewals. The continued scarcity of costly catastrophe losses and more than adequate capacity led to reinsurance pricing reductions, although there are signs the rate of descent is slowing as compared to 2015. 

Read the article>>

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.

Read the article>>

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.

Read the article>>

And, You May Have Missed…

Longevity Risk: The impacts to society from changes in longevity and life expectancy will be wide-ranging and incredibly difficult issues to grapple with. A 2012 International Monetary Fund (IMF) study revealed that if individuals lived three years longer than expected the cost of aging could increase by 50 percent. This translates to 50 percent of 2010 gross domestic product (GDP) in advanced economies and 25 percent of 2010 GDP in emerging economies. Globally that amounts to tens of trillions of US dollars. The United Nations expects the aggregate expenses of the elderly will double over the period between 2010 and 2050. The figure below shows the projected trend of rising life expectancy to continue in all regions of the globe regardless of economic advancement.

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There is a great deal of overlap between the requirements of government regulators and credit rating agencies. The difference, however, is in the objectives of those requirements, with regulators focused on solvency and ability to trade, or not, and the rating agencies taking it a step further to opine on relative financial strength. Regulatory solvency approval can be viewed as a “qualifier” or minimum standard required to be considered by a customer. A credit rating, on the other hand, can act as a “differentiator” to distribution channels and insurance buyers ultimately leading to greater potential sales opportunities.

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Current capital requirements in the United States are set at a legal-entity level. Yet there are currently no global requirements for companies that operate in more than one country, and calculation formulas for capital requirements typically vary in each jurisdiction. Solvency II is the closest to mandating a group standard. Solvency II uses the concept of “equivalence” to deal with differing capital regimes between the European Union and the rest of the world including the United States, instead of forcing Solvency II standards on a third country.

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In accordance with the objectives of the National Association of Insurance Commissioners (NAIC) and European Insurance and Occupational Pension Authority (EIOPA), Own Risk and Solvency Assessment (ORSA) is “people and risk-centric,” primarily employing a principles-based approach, as opposed to a rules-based approach. This means that decisions on matters related to risks are largely based on the judgment of individuals relying on underlying facts, as opposed to decisions being made mostly by following intricate sets of rules. This is similar to the principles-based approach taken by International Financial Reporting Standards (IFRS). Although the calculation of the Solvency Capital Requirements (SCR) under Solvency II is rules based, like Insurance Capital Standard (ICS), Solvency II can be a “one size fits all” rules-based approach to capital, especially if the standard formula is used. (Re)insurers will need to find a way to incorporate ICS into their ORSA processes and the vehicle to accomplish this may be through the internal model.

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