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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Financial Intelligence Team
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Solvency II compliance should provide more opportunity than burden … if executed properly. The ability to use approved internal models results in a Solvency Capital Requirement (SCR) that’s tailored to the risks in your portfolio - which in itself is advantageous. This benefit translates into more effective capital management, as it reflects the risks you actually cover (rather than the output of a standard formula). Improved operations through the internal model approach may also free capital for deployment elsewhere — if the model-determined SCR is lower than that from the Solvency II standard formula. The newly available capital can be invested in any number of initiatives that can lead to a competitive advantage.

After the jump, you’ll find five ways to attain competitive compliance.

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Donald Mango, Chief Actuary
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The net impact of prudent capital modeling and management — in regards to both rating agency evaluation and regulatory compliance — is a competitive advantage. (Re)insurers that accept the outcomes of rating agency or standard regulatory calculations may wind up either with gaps in cover (where de facto approaches are insufficient to address a carrier’s risks) or unproductive capital (where the norm requires over-allocation). The use of an internal capital model, on the other hand, allows a carrier to optimize its analysis to its own situation, with more accurate results and more informed decision-making.

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Donald Mango, Chief Actuary
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To derive the greatest benefit from an ERM investment, risk management by metrics becomes essential. Every risk assumption, retention or transfer decision must be analyzed using the holistic model to determine whether it is shareholder value-accretive. A rigorous, disciplined capital modeling effort will help a carrier move confidently by supporting strategic decisions with an objective, quantitative foundation.

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Frank Achtert, Managing Director, and Eddy Vanbeneden, Managing Director
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Group support will not be permitted when Solvency II becomes effective in 2012. As a result, the flexibility to use capital held anywhere in the group in calculating the Solvency Capital Requirement (SCR) will not be available. Rather, each entity will have to calculate its SCR based on the capital it has, regardless of its group’s position as a whole. This last-minute change to eliminate group support could prompt some European insurance groups to change their structures - or at least rethink how much risk they will take in each entity.

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Guy Carpenter & Company, LLC hosted “Capital Creativity — the Road to Renewals,” the Baden-Baden Reinsurance Symposium held in Baden-Baden on October 25. The event focused on the effective management of capital in the (re)insurance industry.The symposium was moderated by Chris Klein, Global Head of Business Intelligence at Guy Carpenter. Henry Keeling, President and CEO of International Operations at Guy Carpenter, provided the opening remarks, followed by presentations from Luzi Hitz, CEO of PERILS; Clemens von Weichs, CEO of Allianz SE, Reinsurance Division; and Victor Peignet, CEO of SCOR Global P&C. Wolfgang Gerstner, Lord Mayor of the City of Baden-Baden, welcomed attendees to the city.

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Henry Keeling, President and CEO of Guy Carpenter’s International Operations
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The emerging consensus seems to be that Solvency II will cost a lot and make the (re)insurance business more complicated. If conventional approaches to regulatory compliance are applied, this is likely to be true. After all, compliance tends to be seen as just another expense. This does not have to be the case for Solvency II, however. Choosing the right approach could free capital for investment elsewhere, ultimately resulting in a competitive advantage. “Competitive compliance,” consequently, can create an upside where most would perceive only a cost to be managed.

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As Industry Rebounds from Financial Crisis, Disciplined Capital Management and Decision-Making Remain Paramount

Contents

• Press Release
• Audio Replays/Podcasts
• Photo Gallery

Guy Carpenter & Company, LLC hosted a press briefing at Rendez-Vous in Monte-Carlo on September 5, 2009, focusing on the return of capital to the reinsurance market.

Brian Duperreault, President and Chief Executive Officer of Marsh & McLennan Companies, Inc., opened the briefing. Peter Zaffino, President and CEO of Guy Carpenter, then led a panel of Guy Carpenter executives that included Vice Chairman Richard Booth, Henry Keeling, President and CEO of International Operations, Chris Klein, Global Head of Business Intelligence and David Priebe, Chairman of Global Client Development.

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