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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Don Mango, Chief Actuary
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As expected, insurers have continued to accelerate their development of Enterprise Risk Management (ERM) practices following last year’s financial crisis. The impact to both sides of the balance sheet emphasized the importance of tracking every risk a carrier faces and protecting capital from a wide range of threats. As ERM practices evolve, clear definitions and terminology become critical. A common language and framework will facilitate process and technical innovation, improving the transfer of practices across companies and simplifying the disclosure process — all of which will lead to more accurate risk evaluation.

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The Financial Accounting Standards Board (FASB) continues to work on the Insurance Contracts project. The FASB has indicated that it will not support current exit value for reserving, but is favoring fulfillment value instead. Fulfillment value represents the amount that will actually be paid as claims become due (essentially the present value of expected losses plus a risk margin). Measurement of fulfillment value would use expected cash flows (i.e., a probability-weighted average of possible cash flow results) rather than a “best estimate.” In addition, a company should use all information available, including industry and market information and the company’s own historical data.

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Guy Carpenter’s Financial Intelligence Team (FIT) scours the insurance and reinsurance marketplace for information that affects how risk-bearers manage risk and capital. FIT uses information from financial markets, rating agencies, regulators and other sources to help carriers optimize the deployment of their capital.

There’s more to managing capital than expected loss, value at risk (VaR), and the other basic metrics on which insurers and reinsurers rely. Other factors to be considered include:

• Regulatory updates (including Solvency II)
• Rating agency developments
• Financial market shifts
• Tax law changes
• Accounting standard developments

None of these factors is static, making it crucial that carriers have access to a resource that continually monitors these areas and understands how they could impact risk-bearers. FIT works with Guy Carpenter’s broking teams and Specialty practices to ensure that our clients benefit from our investment in addressing the full set of issues that shape the business of risk and capital management.

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Gary Venter, Managing Director, Instrat®
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A strong capital position provides access to a plethora of strategic alternatives. It attracts prospective insureds, bolsters ratings, and enables the pursuit of new initiatives. What many insurers and reinsurers may not realize, however, is that the “strength in numbers” associated with a strong capital position is self-reinforcing. Healthy coffers attract insureds … with the implication being a stronger capital position, which attracts more insureds. Investments in growth opportunities (presuming success) follow the same dynamic. Successful initiatives increase a carrier’s capital, enabling greater growth. Thus, fine-tuning capital management practices can lead directly to returns.

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The ongoing credit crisis, described by former Federal Reserve Chairman Alan Greenspan as a “once in a lifetime tsunami,” is affecting markets and economies around the globe. NERA has created this area as a central repository of our current thinking on issues and developments relating to the crisis, including but not limited to litigation connected to all aspects of the crisis, bankruptcy and restructuring concerns, financial risk management issues, and the various regulatory and agency responses to the crisis. We invite you to check back often, as we will continue to update this section as events warrant.

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Mark Shumway, Vice President
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Rating activity was remarkably low in 2008, despite the forcible removal of several billion dollars of capital from the global reinsurance industry. The confluence of one of the costliest insured catastrophe loss years to date and the ongoing financial catastrophe have had a material impact on the earnings and capital position of nearly every major player. A few downgrades, including most of XL Capital’s subsidiaries, were counterbalanced by a small number of upgrades. Both Standard & Poor’s (S&P) and A.M. Best, for example, upgraded Hiscox operating companies, and A.M. Best moved its rating on CCR up to the highest category of A++.

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Rating activity was remarkably low in 2008, despite the forcible removal of several billion dollars of capital from the global reinsurance industry. A few downgrades, including most of XL Capital’s subsidiaries, were counterbalanced by a small number of upgrades.

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Outlook changes were more abundant than actual rating changes in 2008. A.M. Best raised the outlook for several companies, including Hannover Re, Max Bermuda, and Paris Re. S&P also raised a few outlooks, including ACE, Montpelier and Scor, and lowered those on several others, such as Everest Re and Mapfre Re. S&P also revised several positive outlooks back to stable, citing the economic downturn in most of these actions.

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The rating agencies appear to have proceeded cautiously this year, perhaps to avoid exacerbating the effects of the turmoil in financial markets. They are keenly aware of the house of cards created by debt covenants and reinsurance cancellation provisions based on ratings.

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