The changes in today’s property and casualty (P&C) insurance marketplace present insurers with many challenges to capital management and risk transfer techniques. Insurers are compelled to leverage their capital positions to increase and diversify their market shares to an unprecedented degree. Preserving the status quo is not an option for long-term viability. Profitable growth is a key priority for companies seeking additional return. Companies need to enter new lines of business or geographies strategically with proper analysis. Guy Carpenter offers proprietary analytical tools, intellectual capital and expertise to help companies determine and evaluate their growth plans while maintaining an acceptable level of risk and profitability.
Posts Tagged ‘Casualty’
US Property/Casualty Insurers Facing Increasingly Complex Operating Environment: Guy Carpenter Report
A.M. Best’s More Transparent Ratings Criteria Provide Benefits to Insurers That Proactively “Own Their Ratings”
Eric Simpson, Managing Director
Maintaining or improving ratings is a priority for most insurers. This can be challenging amid increasing demands for companies to “own their risk” (Own Risk and Solvency Assessment “ORSA”) in an environment of evolving rating agency requirements, including A.M. Best’s (Best) proposed ratings methodology and Stochastic-based Best’s Capital Adequacy Ratio (BCAR) criteria.
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.
Loss reserves are arguably one of the most difficult risks to estimate and monitor. In fact, inadequate pricing and deficient loss reserves have been the leading cause of property/casualty company impairments. According to A.M. Best, from 1969 to 2009 they triggered approximately 40 percent of all impairments - four times more than those emanating from natural catastrophes (1). There are many uncertainties in managing long-tailed, heavily legislated lines of business that can be triggered from emerging risks. Unforeseen inflation and anticipated legislative changes over a 10 to 30 year period present many demands. In order to prepare for emerging risk scenarios, future trends and related uncertainties need to be explicitly identified, contemplated and estimated.
Casualty (re)insurers do not cover standalone emerging risks. A product defect (with recall) or a latent bodily injury resulting from new technological nano-products or Unmanned Aerial Systems risks, could lead to class action lawsuits and ultimately large liability claims including products liability as well as professional liability. This emergent reality, however, is difficult to address. A carrier would need to identify and model several possible epicenters of a liability chain reaction and follow their rapidly spreading implications throughout a portfolio. Without new powerful casualty modeling capabilities as well as highly granular data on the products and subcomponents that each of their insureds manufacture and sell globally, this process would be time-consuming, impossible to complete and likely to miss key threats and underlying exposures.
The careful evaluation of each new risk added to a portfolio moves the firm toward a metrics-based approach to risk and capital management, facilitating governance and enhancing the deployment of capital. The only problem for casualty writers, however, has been the availability of data and models to determine the true effects of a new risk to the carrier’s entire portfolio. Even if a casualty carrier wanted to make the most of an ERM framework, it would be limited by data, models and technology. Fortunately, this situation is changing.
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.
As greater understanding of the cyber peril is gained, a chief concern for (re)insurers is risk aggregation. Unlike traditional property insurance where aggregation is monitored by physical locations, insurers are exposed to the possibility of a single attack or a series of attacks either against multiple insureds or a single insured (such as a cloud provider) that could lead to substantial losses across multiple geographies. While a large systemic risk has not yet materialized, it does not mean the risk is not present. The challenging part is that there is limited history and lack of data for this emerging exposure, which makes it difficult for insurers to measure cyber risk and calculate capital needs.