Chris McKeown, CEO of Global Analytical and Specialty Practices
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Those who invest in and prioritize research and development — and introduce new tools and ideas — benefit from more than just the prestige of being first. Early movers define the standard to which others will have to adapt later. They shape the development of innovation, and thus its evolution, as it moves from a radically new idea to an accepted marketplace practice. In possessing this control, they hold the upper hand over their competitors, which become weighted with the burdens of the catch-up clamor.

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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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Donald Mango, Chief Actuary
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Even in the early stages of ERM and economic capital modeling, progress continues. Investments are being made in better risk identification methods and more resilient ERM structures. Capital modeling technology is advancing as well, including better coverage of asset-side risks. With property-catastrophe modeling fairly well established, attention is now turning to casualty catastrophes — a far tougher modeling challenge, as the dimensions of correlation are broader and more complex. Economic bubbles expand and burst with greater frequency and severity. Government intervention policies and practices could be reducing the relevance of the past for forecasting the future. Global interdependency, trading relationships and economic shifts are colliding with property catastrophes, which may be showing the effects of climate change.

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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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Frank Achtert, Managing Director, and Eddy Vanbeneden, Managing Director
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Lately, discussion about the use of capital models in Europe has been driven by Solvency II. A major regulation is on the horizon and is progressively introducing considerable change in the how the insurance industry will manage risk. Important investment has already begun and will continue, as companies have to integrate this new regulatory regime in their management approaches. With Solvency II compliance driving the adoption of economic capital models, though, many (re)insurers could miss an opportunity to secure a competitive advantage. Instead of using compliance as the impetus for capital modeling, strategy should come first.

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Donald Mango, Chief Actuary
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Going forward, the insurance industry will have to change its thinking. The crutch of excess capital has been kicked from beneath the industry’s arm. Despite some recent successes in capital-raising, the largesse of 2007 and 2008 is unlikely to return in the near future. The insurance industry began 2009 with sufficient capital to bear risk and operate without fear of insolvency, but the coffers were lighter than the year before. The industry is bruised, and may not be able to absorb a reprise of the realized risks of 2008. A new approach to managing and measuring risk is necessary, one that addresses the full spectrum of threats that carriers face.

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Susan Witcraft, Managing Director, Financial Intelligence Team
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The financial catastrophe may be almost a year behind us, but we’re still dealing with the effects. Capital remains constrained, and it will be a while before balance sheets return to early 2008 levels. (Re)insurers have had to learn to do more with less — deploying limited capital in a way that maximizes earnings and reaches challenging return on equity (ROE) targets. With MetaRisk®, Guy Carpenter’s economic capital model, you can delve into the scenarios that could mean the difference between capital productivity and missed opportunity.

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The European Parliament approved the proposed Solvency II directive on Wednesday. The EU’s Economic and Financial Affairs Council is expected to adopt the framework by May 5, 2009, with the measure likely taking effect in 2012.

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Participation in Quantitative Impact Study 4 (QIS4) exceeded European Commission expectations for small, medium, and large companies. The results, published by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) in November, suggest that 98.8 percent of the carriers participating will meet the Minimum Capital Requirement (MCR) and 89 percent satisfied the Solvency Capital Requirement (SCR), though the ongoing financial catastrophe could cause some changes to this result. Quantitative Impact Study 5 (QIS5), originally planned for early this year, has been deferred because of the potential impact of the financial crisis.

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Financial and Capital Advisory
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Many approaches exist for use in assessing catastrophe risks. Under Quantitative Impact Study 4 (QIS4), the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) provided a list of those that can be used for Solvency II compliance and, in the interim, managing risk and capital effectively. The full stochastic modeling of catastrophe risk using an internal model, such as Guy Carpenter’s G-Cat® tools and MetaRisk®, provides the most information.

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