Susan Witcraft, Managing Director, Financial Intelligence Team, Instrat
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Co-xTVaR has almost the opposite advantages and disadvantages of standard deviation. It is calculated as the amount by which each risk is worse than its expectation in those situations in which the totality of risks being modeled exceeds its expectation. Co-xTVaR can be viewed as the amount by which a segment is “over budget” in those scenarios in which the company as a whole is “over budget.” In other words, co-xTVaR looks at the average amount by which each segment exceeds its mean in the scenarios in which the company result exceeds some threshold.

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Financial Intelligence Team
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Reinsurance Regulatory Modernization Framework

At the National Association of Insurance Commissioners (NAIC) summer meeting, discussions continued regarding the Reinsurance Regulatory Modernization Framework, which would change the reinsurance collateral requirements. There appear to be a number of issues that would delay implementation of this framework including both constitutional and non-constitutional issues.

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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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Gary Venter, Managing Director, Instrat®
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The determination of a target capitalization must occur within the context of risk measurement and analysis. Enterprise Risk Management (ERM) practices seek to bring discipline to the risk and capital management process, with every decision made based on a single risk’s marginal implications to the firm as a whole. This approach will not indicate necessary capital levels, but it does equip insurers and reinsurers to optimize their deployment of cash.

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Guy Carpenter Business Intelligence Unit
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Governments around the world have moved swiftly and radically to respond to the turmoil in global financial markets. Many are concerned that efforts to create a level playing field through the harmonization of accounting rules, Solvency II, and other international agreements, will be swept away by governments anxious to be seen as prioritizing economic stability in their own countries.

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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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Eddy Vanbeneden, Managing Director
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Compliance may be an expense, but it can still generate a return. The increased cost of operating a European carrier has become a major aspect of Solvency II preparations, preventing many from seeing this regulation as a business opportunity. An enhanced understanding of the specific risks in a portfolio can lead to improved capital management, robust margins, and benefits to shareholders. Instead of pursuing compliance, (re)insurers should look for the competitive advantage that the regulation affords.

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Frank Achtert, Managing Director
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The objective of Solvency II—expected to take effect in 2012—is simple. The regulation seeks to protect policyholders and the global insurance system through adequate, risk-based capital (RBC) requirements. Carriers will have to demonstrate a 99.5 percent likelihood of solvency for the coming 12 months, based on the risks they hold in their portfolios. There are several ways for European (re)insurers to comply, and the latest Quantitative Impact Study Draft 4 (QIS Draft 4) explains the alternatives for demonstrating compliance. For some, Solvency II signals yet another cost of doing business, but beneath the surface, carriers may find opportunities to turn compliance into market risk management advantage.

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