As optimistic as researchers may be, however, responsible decisions must be made regarding nanotechnology’s development and use. Growing evidence suggests that nanoparticles - the basic building blocks of nanotechnology and the tiniest materials ever engineered and produced - may pose environmental, health and safety risks. As such, it appears that the industry is currently caught between stages 2 and 3 of the insurance coverage cycle below:
Archive for the ‘Casualty’ Category
Many scientists view nanotechnology as the revolutionary technology of the 21st century. Just as plastics were a pervasive and revolutionary product of the 20th century, nanotechnology products are having widespread use and change our lives in a myriad of ways. This technology has quickly evolved into a global force that is transforming manufacturing, medicine and an ever increasing number of consumer/food goods. The field has become a worldwide market worth an estimated USD 1 trillion and is projected to grow at a rate of 16.5 percent through 2020 (1).
Here we review GC Capital Ideas posts on the challenge the peril of cyber risk poses for (re)insurers and rating agencies and how the management of this risk is evolving.
Here we review recent GC Capital Ideas posts on developing changes to Best’s Capital Adequacy Ratio (BCAR) and the potential impact of those changes on (re)insurers.
1. Potential Losses From the Kumamoto Earthquake: The catastrophe modeling firm RMS estimated the economic loss for property risks to be between USD2.5 billion and USD3.5 billion. This estimate includes only residential, commercial, and industrial property and contents. Catastrophe modeling firm AIR estimated the insured loss to be between USD1.7 billion and USD2.9 billion for property risks. Both catastrophe modeling firms’ estimates exclude infrastructure, business interruption and contingent business interruption.
2. Reserving and Capital Setting: Sizing the Problem: There are three main questions to be tackled in sequence:
- Which emerging risks potentially expose my company?
- What means do I have to quantify those risks?
- How are these risks likely to crystalize?
3. Chart: Regional Property Catastrophe ROL Index, 1990 to 2016: The chart shows the indexes for United States, United Kingdom, Asia Pacific and Europe.
4. 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.
5. China Risk Oriented Solvency System (C-ROSS): The China Insurance Regulatory Commission (CIRC) is instituting sweeping changes through its three-tiered China Risk Oriented Solvency System (C-ROSS) framework that will dramatically impact how (re)insurers conduct business. It will strengthen capital requirements, risk management and transparency disclosures - bringing China in line with, and in some cases overtaking, global standards. The C-ROSS framework is similar to Solvency II: three tiers focusing on quantitative, qualitative and disclosure requirements.
6. Chart: Source Of Earnings For Guy Carpenter Reinsurance Composite, Q1 2016: Chart presents source of earnings for the Guy Carpenter Global Reinsurance Composite for the first quarter, 2016 compared to the first quarter, 2015.
7. Guy Carpenter Appoints CEO of GC Stockholm: Guy Carpenter announced the appointment of Tobias Andersson as CEO of GC Stockholm, effective April 1, 2017. He will succeed Tomas Ljungqvist, who will become Chairman of the division.
8. Chart: Return On Equity For Guy Carpenter Reinsurance Composite, Q1 2016: Chart presents return on equity for the Guy Carpenter Global Reinsurance Composite, 2005 through first quarter 2016.
9. Guy Carpenter Forms Strategic Alliance to Develop Cyber Aggregation Model: Guy Carpenter & Company announced the formation of a strategic alliance with Symantec Corporation, a global leader in cyber security, to create a cyber aggregation model. The model will include a comprehensive catalogue of cyber scenarios from which insurers can derive frequency and severity distributions to measure the potential financial impact of loss from both affirmative cyber coverages and “silent” all-risk policies where cyber is the peril, but no cyber exclusions exist.
10. 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.
The obvious response to the issues emerging risks provide is to make sure reserves and capital position are more than robust enough for any eventuality - however remote - and then release them when the risks fail to materialize. But, there are many arguments against this as a practical strategy:
The chart below attempts to illustrate the solvency calculation issue. Suppose the best estimate is 20 and the assessment from modeling is that the 1-in-200-year ultimate loss is 100. If all else stays the same and with the simplifying assumption that the yield curve stays flat, one can say that the sum of the 1-year solvency capital requirements (SCRs) approximated the difference between 100 and 20 (i.e. 80). Yet, because of the discounting, when in time the change in own funds is recognized, is important. The black line represents a linear recognition pattern so the 1-year SCRs are all equal with increments of 10. The blue line represents a Binary Fast recognition so the first year SCR is 80 and the remaining years’ SCR are zero. This means that the deterioration is recognized quickly. The red line again shows binary recognition but with a slow pattern as the movement is only occurring toward the end of the liabilities’ life. The two curves in light blue and light red represent less severe versions of the binary forms.
As discussed in the Executive Summary of this report, the term “crystalization of risk” refers to the timescale over which we realize that the risk is manifesting itself and how this view changes until ultimate understanding of quantum is reached and all liabilities are discharged. The “Reserving Risks” section in last year’s report, Ahead of the Curve: Understanding Emerging Risks looked at how information emerges in the presence of reserving cycles. The profit or loss in any particular financial year is made up of not only the profit or loss from the same accident year but also any recognized changes in the reserves on prior years.
Reserving and Capital Setting: Sizing the Problem, Part III: Quantifying Emerging Risks; Expert Judgement
Data quality and availability should also be examined in depth. Because the risks are new, the data may not be captured correctly to power the model, which will lead to further uncertainty and may even preclude the use of a model altogether.
Once the risks have been identified and ranked, the next step is how to quantify the likely impact on the financial results of the firm. The first and most obvious question is what available quantification techniques are available for each risk on the list. This will depend on the availability of relevant data and commercially produced models.