Christopher Klein, Global Head of Business Intelligence
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Instrat®, Guy Carpenter’s quantitative services unit, has developed a reinsurer credit model. It allows an analyst to input a mixture of reinsurers and measure the impact of the diversification effect. The model allows for the specification of correlation levels for reinsurer defaults. It also allows for the chance of partial recoveries.

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Christopher Klein, Global Head of Business Intelligence
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In many instances, a common and useful approach to risk management issues involves establishing metrics and monitoring actions in light of certain benchmarks. Risk metrics are generally easier to understand and capture important summary information as opposed to trying to deal with, for example, a comparison of entire probability distributions.

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Christopher Klein, Global Head of Business Intelligence
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Case 1: Base Case

A hypothetical ceding company contracts for the USD200 million casualty cover from a single Aaa rated reinsurer. The probability of a default is 1 percent, with a loss of USD200 million, while the probability of no default is 99 percent and would carry no loss.

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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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Susan Witcraft, Managing Director and Head of the Financial and Capital Advisory
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S&P has released a new framework for determining whether a carrier’s own ECM can receive partial credit in the S&P capital adequacy evaluation. Companies with a Strong or Excellent ERM capability rating, a sufficiently rigorous model, and a substantial reliance on the results in making major decisions will be most likely to receive partial credit. The use of third-party modeling solutions—such as Guy Carpenter’s MetaRisk® platform—may be helpful not only in the rating process but also in overall capital management diligence.

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MetaRisk®, the (re)insurance industry’s original decision support tool, has helped insurance companies make analytically informed decisions about their risk and capital management for nearly two decades. MetaRisk has been expanded to give you a full economic capital model with complete transparency. It can be used to data-mine the causes of risk and the financial consequences.  You can evaluate alternative risk and capital management opportunities and anticipate their impacts on your company’s balance sheet … before you have to make a commitment.

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Susan Witcraft, Managing Director
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The co-TVaR report in MetaRisk gives analysts easy access to valuable information to illuminate the Enterprise Risk Management (ERM) and capital implications of reinsurance. Using co-TVaR for risk decomposition, one can develop a fuller view of the factors that contribute to company risk, ultimately delivering a more compelling case for risk-related decision-making.

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Andrew Marcell, CEO of Americas
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The financial catastrophe that has taken hold of global financial markets has caused much consternation for (re)insurers. Balance sheets have been hit, impairing investment assets and depressing surpluses across the industry. Yet, carriers are faring better than most financial services firms (particularly those in the banking sector), largely because the industry is quite well-capitalized. Even in this capital-constrained economic climate, operating cash flows are strong, and surpluses remain deep.

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Joan Lamm-Tennant, Global Chief Economist and Risk Strategist
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Excess capital is only excessive until you need it. Throughout the year, carriers have struggled to find uses for capital that has not seemed necessary, given the benign loss years that followed the 2005 storm season. Rates are down, retentions are up, and repatriation has been continual. Market conditions have overshadowed analytics in determining carrier behavior. But, aggressive repatriation may have been hasty. Looking to the future, buyback and dividend decisions could benefit from Enterprise Risk Management (ERM).

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