Here we bring together recent GC Capital Ideas’ posts that have focused on the BRIC (Brazil, Russia, India and China) countries. 

Increased Flood Loss Potential:  Making use of all available tools and practicing comprehensive exposure management will both strengthen (re)insurers’ ERM practices and allow them to make informed risk management and reinsurance decisions as they enter new markets. Certainly, flood risk is prevalent and increasing in almost every developing economy.

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Lloyd’s: What Will Success Look Like?  If Lloyd’s is successful in achieving the growth and diversification outlined in its near-term and long-term strategic plans, it can expect to capitalize on business opportunities in emerging market economies such as the BRIC countries (Brazil, Russia, India and China). Growth, however, will not necessarily be limited to these markets. Other countries in Southeast Asia, Eastern Europe and Latin America are experiencing strong growth and increasing insurance penetration, and these territories also present attractive opportunities for Lloyd’s.

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Growth Potential in Developing Markets:  Positive premium growth trends in developing markets are expected to be sustained over the next decade. During this time, emerging markets are expected to drive global economic growth, and foreign direct investment in these emerging regions is likely to increase. In Brazil alone, investment in infrastructure is expected to amount to USD550 billion over the next few years as the country prepares to host the soccer World Cup in 2014 and the summer Olympics in 2016. China and India too are expected to continue to see robust growth in the next ten years.

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State of the Reinsurance Market, Part II: Inflation/Deflation Expectations, Investment Returns:  Expansionary monetary policy has fueled concerns that inflation could increase in the medium term, but the picture is less clear in the near term. While consumer price indices in Brazil, Russia, India and China (BRIC), the United States and the rest of the G7 currently exhibit positive trends, consensus forecasts show borderline disinflationary trends in the nearer term in the United States and many developed markets.

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David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President

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Although (re)insurers’ investments in higher-grade fixed income securities have calmed nerves for now, it is only logical to expect an increase in interest rate sensitivity for portfolios with lower yields to maturity. This creates the potential for negative balance sheet impacts should interest rates rise suddenly. Continue reading…

M&A Drivers Going Forward

Guy Carpenter sees several potential merger and acquisitions (M&A) drivers in 2012 and beyond:

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Inflation/Deflation Expectations

Expansionary monetary policy has fueled concerns that inflation could increase in the medium term, but the picture is less clear in the near term. While consumer price indices in Brazil, Russia, India and China (BRIC), the United States and the rest of the G7 currently exhibit positive trends, consensus forecasts show borderline disinflationary trends in the nearer term in the United States and many developed markets.

Continue reading…

2012 Macroeconomic Themes

As we bid farewell to a tumultuous 2011 and enter 2012, it is becoming very clear that the (re)insurance sector will remain exposed to profound changes in the global economy. The coming year promises to be one of economic, monetary and political transition.

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In addition to the record breaking loss activity so far in 2011, the current macroeconomic environment continues to be challenging for the reinsurance industry. Subdued economic growth and low interest rates have seen investment returns remain at low levels through 2011. Coupled with poor underwriting results, the reinsurance sector’s non-technical income could be under pressure for some time to come if the current expansionary monetary polices in the United States and elsewhere remain in place.

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Loss reserves for WC are essentially forecasts of losses that will be paid over five, 10 and 15 or more years. As a result, they are one of the most challenging risks to quantify on balance sheets. Under standard reserving methods, an actuary examines historic data, measures existing patterns and makes forecasts based on the assumption that those patterns will repeat. Alternatively, an actuary can adjust the patterns for forecasted changes.

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Peripheral European sovereign securities are not the only potential cloud on the investment horizon. Besides the bonds of certain US municipalities, there is a risk that US Treasury securities themselves may come under more intense scrutiny by investors given the large US budget deficit and growing national debt. Figure 8 shows the exponential change in US government debt since the 1950s as well as the relatively moderate increase in GDP. The result is that the marginal increase in GDP per new dollar of US government debt is now only 17 cents in contrast to 70 cents in the early 1950s, begging the question: Is this risk-free return or return-free risk?

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Issues

Following the passage of the Courts Act 2003, which gave courts in England and Wales the power toimpose rest-of-life structured settlements, known as periodical payment orders (PPOs) to provide for the long-term care and loss of earnings of severely injured third parties, the actual incidence of such awards in the market has been relatively low. It is clear however that the trend towards PPOs has accelerated over the past year, partly driven by low interest rates. This trend presents real challenges to both insurers and reinsurers of casualty classes, particularly for motor.

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Peter Zaffino, President and CEO
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The global (re)insurance marketplace is confronted with challenges as the world continues to be challenged with the after-effects of the 2008 financial crisis. As risk-bearers sort through the aftermath and navigate the significant complexity and uncertainty that persists, we expect three broad macro trends to have a profound influence on global economic growth and on our industry: the volatility of economic growth, global tension between inflation and deflation and finding opportunities for (re)insurers to maximize returns during periods of volatility.

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