Posts Tagged ‘CAPM’

December 4th, 2008

Reinsurance Pricing and the Changing Cost of Capital

Posted at 1:00 AM ET

Sean Mooney, Chief Economist

Despite the ambiguity pervading financial and reinsurance markets, it is clear that systemic risk has increased. Unprecedented chaos in financial markets left investors more risk-averse than they were at the end of the summer. They are demanding greater returns on the capital they put at risk. A closer look at the economic conditions underlying the marketplace, however, suggests that an increase of 1 percent to 3 percent is warranted for catastrophe covers, which should result in a minor impact at the January 1, 2009 renewal. Other factors, including the impact of the global recession on premiums and claims, the collapse in equity values, a rising distrust of modeled results arising out of Hurricane Ike, increased demand by cedents seeking to preserve their diminished capital, and diminished supply of reinsurance capacity, are likely to have a much greater impact on rates.

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November 17th, 2008

Reinsurer Diversification: Roots and Benefits

Posted at 1:01 AM ET

Christopher Klein, Global Head of Business Intelligence

Cedents are becoming increasingly concerned about the security of their reinsurers, particularly in light of the global financial catastrophe. Diversification, a time-honored approach to managing risk, may offer part of the solution. Cedents may benefit from diversifying reinsurance placements among many reinsurers. Thus, the approach applied to asset management can be applied to reinsurance placements, as well. The syndication process carried out within the broker market results in an important reduction of the “no recovery” potential that could arise from reinsurer defaults. Diversification may reduce the probability of no recovery, even if the likelihood of default among reinsurers is correlated.

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