By David Priebe, Chairman of Global Client Development
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The climate change debate is likely to continue unabated well into the future. Even if it is not settled anytime soon, the debate itself has already begun to affect the (re)insurance industry. Risk-bearers deal in probability routinely, making climate change another likelihood to consider. In this manner, it has entered natural peril models, risk management assumptions, and risk transfer strategies. Consequently, climate change has become part of the (re)insurance lexicon, despite the fact that scientific, sociological, economic, and political authorities have not reached a universally accepted conclusion. The absence of a definitive answer does not preclude the use of climate change-related information in risk portfolio management.

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Christopher Klein, Global Head of Business Intelligence
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The time-honored principle of diversification used in many areas of financial management applies equally well to reinsurance placements. From the ancient days of river commerce in China, where merchants divided their cargo between barges to avoid total loss, diversification has been a key principle of insurance and later reinsurance markets. Given the current financial turmoil in reinsurance markets, there is a legitimate pressure from investors, top management, and the rating agencies for cedents to seek only the highest rated of reinsuring partners. But this worthy objective needs to be balanced with the diversification principle, so that cedents can reduce their probability of zero recovery, as demonstrated in the above analysis.  

This series is limited to consideration of diversification among a panel of reinsurers. Cedents also have options to diversify to other forms of risk transfer, notably risk securitization. In particular, catastrophe bonds as currently structured may reduce the credit risk practically to zero, because they mandate a full collateralization of the limit at risk.

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The i-aXs® data management platform has revolutionized risk portfolio management. Guy Carpenter’s award-winning platform gives risk-bearers the power to convert life, accident and health (LA&H) data quickly into clear, concise information that fuels faster, better-informed decision-making. The i-aXs platform contemplates the complex data needs and perils specific to this line of business while providing a combined assessment of property and casualty exposures.

i-aXs products such as Risk Profiler^iX, Accumulator^iX, and RealCat^iX, hep carriers manage their LA&H exposures with a simple way to dig deeper into their own data.

Learn more about i-aXs >>

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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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Book Value Update: Earnings Announcement Impact: the erosion of balance sheets continues, as the effects of a global financial catastrophe spread across financial markets.

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Get Credit for Your ECM with S&P: Standard & Poor’s (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.

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Financial Catastrophes: No Storm, Plenty of Damage: throughout 2008, every major city in the world felt the reverberations of a “financial catastrophe,” triggered by the collapse of the subprime mortgage market.

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Uncover and Mitigate Product Liability Risk: Avert a Casuaty Catastrophe: Casualty Cat, a new model developed jointly by Guy Carpenter and Arium, Ltd., seeks to identify the hidden product liability accumulations in a carrier’s portfolio and delivers the insights needed for informed action.

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Defining the Value of Risk Management: the fundamental activity of risk-bearers has not been measurable, leaving a cloud of ambiguity in the middle of every carrier’s operation.

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Alternatives to Alternative Capital: (re)insurers have come to expect that alternative sources of capital will always be available, but the well may be at risk of running dry.

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Andrew Marcell, CEO of Americas
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We live in a world at risk, but sometimes, the threats take new forms. Even as we are coming out of an above-average U.S. storm season, carriers are focused on a new type of disaster. Throughout 2008, every major city in the world felt the reverberations of a “financial catastrophe,” triggered by the collapse of the subprime mortgage market. This event has put severe pressure on both sides of the balance sheet and proved that an economic event can have the power to move the market.

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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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As measured by the S&P 500 Insurance Index, carriers have lost 15 percent in weighted average book value since the beginning of the year. This represents a significant change from the 9 percent level at which the index stood for the past several weeks. European carrier results are in line with the global trend. The weighted average book value of the Dow Jones Euro Stoxx Insurance Index is also off approximately 15 percent this year.

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John Major, Senior Vice President, Instrat
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How do you put a price on risk management? In the early days of finance theory (1950’s), the value of risk management was questioned—unless, of course, it was costless. The nuances of a more complex business environment have rendered this position untenable, but we still struggle to quantify the benefits of risk management, especially in the (re)insurance industry. Thus, the fundamental activity of risk-bearers has not been measurable, leaving a cloud of ambiguity in the middle of every carrier’s operation.

This changes now.

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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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