Chris McKeown, CEO of Global Analytical and Specialty Practices
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Innovation requires a dedication to research, creativity, resources and foresight. Above all, however, it takes courage to accept the risks — to strive for success rather than cowering in fear of failure. In fact, the best companies learn from occasional mistakes. Learning from failure during the development stages of innovation strengthens a company’s capabilities. It creates an understanding of the issue at hand farther reaching and more in depth than that of the competitors which attach to the idea after it has been accepted as a standard. This understanding fosters a more effective use of that innovation as well as a platform from which to generate new ideas with the practical experience of what works and what does not.

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Chris McKeown, CEO of Global Analytical and Specialty Practices
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Those who invest in and prioritize research and development — and introduce new tools and ideas — benefit from more than just the prestige of being first. Early movers define the standard to which others will have to adapt later. They shape the development of innovation, and thus its evolution, as it moves from a radically new idea to an accepted marketplace practice. In possessing this control, they hold the upper hand over their competitors, which become weighted with the burdens of the catch-up clamor.

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Chris McKeown, CEO of Global Analytical and Specialty Practices
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Innovation can be a source of competitive advantage. A (re)insurer — or service provider (e.g., a reinsurance intermediary) — devises a solution to a particular challenge that the industry faces. It results in improved risk or capital management, for example, leading to enhanced margins, the optimization of capital deployment or expense management. Since the innovator — or early adopter of a service provider’s new idea — has access first, it realizes the benefit ahead of competitors that wait for the trend to crystallize.

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Chris McKeown, CEO of Global Analytical and Specialty Practices                                                                                    Contact      

The threats to which (re)insurers’ capital is exposed seem to multiply with alarming regularity. Today, the industry is contending with risks that were barely imaginable (at best) 20 years ago. In an age when carriers must respond to casualty catastrophes, the possible effects of climate change and financial market calamity - perhaps all on the same earnings call - it’s natural to wonder if the right tools and techniques for the job are available. Risk and capital management have only grown in complexity, a trajectory that is quite likely to continue - and probably accelerate.

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With 2009 coming to a close, this week we’re taking a look at the most popular stories of the year.

Update: Risk Profile, Appetite, and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness: In April 2009, Guy Carpenter’s Financial Intelligence Team published a briefing entitled Risk Profile, Appetite and Tolerance: Fundamental Concepts in Risk Management and Reinsurance Effectiveness. That briefing included definitions of Risk Profile, Appetite and Tolerance and how these concepts fit into an Enterprise Risk Management (ERM) framework. It also presented the results of our initial Risk Tolerance Benchmarking study, which summarized the information publicly disclosed in this area.

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(Based on the earlier briefing published April 30, 2009)

Risk Modeling Part IV: ERM: A misunderstanding of models and exposure data is not the primary cause of most modeling failures. Indeed, many companies that have suffered in recent catastrophes, both physical and financial, had substantial and sophisticated resources invested in risk analysis. What is often missing is the connection between analysis and management decisions, and this is the link that the rapidly evolving practice of enterprise risk management (ERM) is meant to create.

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Don Mango, Chief Actuary and John Tedeschi, Chief of Catastrophe Modeling
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To cut through the claims of innovation in the market, you need to know what you’re looking for. There are plenty of capital models, catastrophe models and Enterprise Risk Management (ERM) practices in the (re)insurance industry, but which are the most valuable innovations? The right choices can protect your capital, help you deploy it optimally and ultimately bolster shareholder value … but faux innovation can slow your growth — or leave you exposed to unexpected risk or still leave you exposed when you thought the gap had been filled.

As you evaluate the solutions available in the (re)insurance industry, here are five ways to make sure you’re choices are on the leading edge:

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Don Mango, Chief Actuary
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For Solvency II, regulators have not yet announced plans to approve specific software platforms. Instead, they will focus on the model’s capabilities, embeddedness, implementation and use. For example, Guy Carpenter’s proprietary economic capital model MetaRisk® can be used as the basis for an internal model for Solvency II. MetaRisk is among the fastest, most robust and easiest solutions to use in the (re)insurance industry, making it possible to model countless combinations of risk and capital, identifying the optimal levels and enabling companies to make the allocation decisions that will yield the most favorable results for a given risk tolerance profile.

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Don Mango, Chief Actuary
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Beneath the surface, systemic risks, hidden accumulations and correlated threats also must be explored. These are the risks that cannot be diversified away. Others may result from a chain reaction, such as a casualty catastrophe caused by a class action lawsuit, affecting vast numbers of policyholders. In the extreme, (re)insurers should be ready for simultaneous major loss events that are accompanied by a plunge in asset values, inflation and a disproportionately high replacement cost of capital.

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Don Mango, Chief Actuary
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(Re)insurers face a labyrinth of capital management challenges. Financial markets have proved that they can change the industry’s view of risk swiftly — and with little warning. New risks are emerging, as well, some of which can be difficult to identify, lurking in portfolios for years without detection. The need for Enterprise Risk Management (ERM) is palpable, and risk-bearers are beginning to appreciate that preserving their capital requires metrics-based management and a robust capital modeling discipline. With regulatory requirements such as Solvency II on the horizon, the stakes are even higher, as capital optimization must be accomplished within a compliance framework.

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Articles in this series:

Part I: Introduction >>

Part II: Illustration >>

Part III: Standard Deviation >>

Part IV: Covariance >>

Part V: Co-xTVaR >>

Part VI: Shared Asset >>

Part VII: Comparison >>

Part VIII: Conclusion >>

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