George Carrington, Head of International Casualty Specialty Practice
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Inflation is always a major risk factor for the casualty industry. For the past seven years, monetary inflation has been low across most of Europe, and this has helped keep interest rates low. For casualty insurers, this can lead to a challenge, because the key cost-drivers of long-tail liability claims — salaries and wages, pensions and most notably medical care costs — have been growing much faster than monetary inflation.

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Scott Lohman, Managing Director, Financial Intelligence Team
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Standard & Poor’s (S&P) is now performing additional analysis on loss reserves using a product called “Rescue,” which is developed by an outside vendor. Rescue obtains triangles from the company being examined instead of using Schedule P data. This approach offers data for more years for long-tail lines of business.

The in-depth analysis that S&P conducts with Rescue takes longer than the traditional approach (i.e., using Schedule P data), so it won’t use this approach every year. Rather, S&P will adjust total adjusted capital (TAC) to account for any difference between carried reserves and the company estimate.

David Lewin, Managing Director
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Monetary Inflation

Monetary inflation may not be a concern now, but many worry about the medium-term prospects. In the short run, a worldwide recession and depressed growth levels have kept the risk of inflation contained. But, “quantitative easing” — the pumping of money by governments into the financial system — could set the stage for a spike in inflation a few years from now. These developments could be exacerbated by non-monetary “superimposed” inflationary factors, which could make it more challenging for long-tail (re)insurers to write profitable business.

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David Lewin, Managing Director
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Interest rates are low right now, so monetary inflation is not an issue in the short term for the (re)insurance market. Look into the future a bit, however, and you can see how monetary inflation could turn into a threat. In two to five years, the effects of such measures as “quantitative easing” (i.e., a government’s pumping money into a financial system to attain near-term stability) will be visited upon long-tail (re)insurers. Further, other inflationary factors will continue to increase the cost of writing this type of business. Legal inflation, medical inflation, social inflation and emerging risk inflation are poised to drive the cost of underwriting long-tail risks ahead of monetary inflation. Planning for these elevated costs now can make a profound impact on future profitability.

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A briefing published today by Guy Carpenter & Company, LLC looks ahead to the possible effects of inflation on long-tail reinsurance, as well as the impact of the credit crunch on reinsurers in the wake of the subprime mortgage crisis. The briefing, Casualty Specialty Update, examines the twin pressures that inflation and the global credit crunch are exerting on the global casualty reinsurance industry.

Click here to download the briefing >>

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Christopher Klein, Global Head of Business Intelligence
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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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Eddy Vanbeneden, Managing Direcor
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With casualty reserves, it can be difficult to determine how much is too much. Unlike property reserves, which are mostly for specific known events, casualty reserves have to be sufficient to cover events that may unfold well into the future. A lot can happen in 15 or 20 years, which only serves to compound the uncertainty that casualty carriers face. Further complicating matters, there has been a dearth of viable ways to mitigate the plethora of risks that could converge on a casualty portfolio, leaving risk-bearers to learn that reserves are lacking years after they have accepted a risk.

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The amount of the expected recovery from long-tail XL reinsurance treaties of course will vary in line with the differing provisions of these clauses.

To download this chart, right-click on the image, and select “Save Picture As”. If you have any trouble, please e-mail us.

The amount of the expected recovery from long-tail XL reinsurance treaties of course will vary in line with the differing provisions of these clauses.

To download this chart, right-click on the image, and select “Save Picture As”. If you have any trouble, please e-mail us.

David Lewin, Head of International Casualty
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The Indexation Clause – otherwise referred to as the Stability Clause, Inflation Clause, or Severe Inflation Clause (SIC) – is designed to maintain the real monetary value of the retention and (where applicable) the limit under a long-tail excess of loss (XL) reinsurance treaty over the duration of the claims payout pattern. The clause is only relevant to losses that are of a long-tail nature (i.e., that take a long time to become paid) and is commonly found in the terms and conditions of Motor Liability (MTPL), General Liability (GTPL), and Professional Liability TPL XL reinsurance contracts of European cedants.

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