Introduction
In its series of Consultation Papers on Level 2 implementation Measures for Solvency II, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) drafted, in Consultation Paper 71, a new proposal for the calibration of non-life underwriting risk. Additionally, CEIOPS published its final and third set of advice to the European Commission (EC) at the end of January 2010. It is noteworthy that non-life underwriting risk is not covered in this final advice. Thus, the calibration changes suggested in CP 71, which would lead to an average of a 35 percent increase in the SCR for non-life underwriting, are still valid. It should be noted that the proposals in the CP are subject to a consultation process resulting in final recommendations by the end of March 2010 and therefore may not be final. The purpose of this briefing is to outline the rationale provided by CEIOPS behind the proposed increase in the SCR in respect of non-life underwriting risk.

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Christopher Klein, Global Head of Business Intelligence
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Reinsurers have enjoyed a significant recovery in 2009. Effective and disciplined capital management in previous years and good-natured weather enabled them to sit out the financial storm and build up strong cash positions. Meanwhile, the broader financial services industry is still coping with the effects of the worldwide financial crisis. Stability has returned to the reinsurance market, though it remains delicate. But, by all measures, the savvy management of capital and underwriting has been successful.

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David Lewin, Managing Director
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Interest rates are low right now, so monetary inflation is not an issue in the short term for the (re)insurance market. Look into the future a bit, however, and you can see how monetary inflation could turn into a threat. In two to five years, the effects of such measures as “quantitative easing” (i.e., a government’s pumping money into a financial system to attain near-term stability) will be visited upon long-tail (re)insurers. Further, other inflationary factors will continue to increase the cost of writing this type of business. Legal inflation, medical inflation, social inflation and emerging risk inflation are poised to drive the cost of underwriting long-tail risks ahead of monetary inflation. Planning for these elevated costs now can make a profound impact on future profitability.

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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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Christopher Klein, Global Head of Business Intelligence
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A strong financial performance for the first half of 2009 sets the stage for the January 1, 2010 renewal. Investment assets produced gains for reinsurers relative to the first half of 2008, and underwriting earnings approached double-digit growth. A rebound in shareholders’ equity is evident as well, suggesting that last year’s capital woes have given way to recovery. Calmer financial markets have stripped away the primary factor in this year’s reinsurance rate increases, indicating a smooth renewal at the start of next year in the absence of shock losses.

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Donald Mango, Chief Actuary
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The profound financial damage that began last year has left the insurance industry looking for answers. Diligent underwriting and conservative investment strategies were not enough to prevent natural and financial catastrophes from bleeding balance sheets. Both firm leadership teams and key stakeholders have questioned the value of Enterprise Risk Management (ERM) frameworks, yet the conclusion that ERM failed may be hasty. After all, the insurance industry actually survived the events of 2008 reasonably well, with at least some of the credit going to their ERM efforts. Where risk management did fail, the underlying causes were deeper.

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Emil Metropoulos, Senior Vice President
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Some workers compensation risks seem too difficult to cover. Excess loss rates are unpredictable, on the rise and difficult to analyze with the conventional tools. And, reinsurance may not be available at some layers. A carrier that can find ways to write business for these groups, however, can identify a revenue opportunity ahead of its competitors. Together, reliable modeling and disciplined underwriting can open new markets in a mature industry in which peers tend to look for merely incremental advantages. Using Guy Carpenter’s Reveal® v1.1 excess loss model, now available through the i-aXs® platform, workers compensation carriers can identify the drivers of severity at the class code level, making it possible to develop a plan for protecting capital and profitability.

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Christopher Klein, Global Head of Business Intelligence
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Underwriting and investment gains contributed to a general increase in capital in the first half of 2009. Some reinsurers have even regained half or more of what they lost as a result of last year’s hurricanes and financial shocks. Financial market stability has opened several options unthinkable nine months ago, including share buybacks, dividends and even maintaining a bit of extra capital as a cushion — after all, it was the excess capital held at the beginning of last year that helped reinsurers withstand the effects of the financial crisis.

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Global Property Specialty and Business Intelligence Unit
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Property-catastrophe reinsurance rate increases were steady at the July 1, 2009 renewal. In the United States and Latin America, capacity was sufficient to meet demand. U.S. property-catastrophe reinsurance rates increased 15 percent year-over-year, in line with the trend from January to June. In Latin America, preliminary data varied by country, but upward pressure on pricing was offset by supply and local market competition to keep reinsurance rate increases contained. For the marine sector, rates were up 5 percent to 10 percent, based mostly on loss history and catastrophe exposure. With four major renewal periods covered this year, a sense of calm has emerged. The general reinsurance market is tepid, with a few hotspots based on region- or program-specific factors.

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Christopher Klein, Global Head of Business Intelligence
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The Guy Carpenter Bermuda Reinsurance Composite posted an aggregate net loss of USD325 million for the first quarter of 2009. This is down from a net gain of USD558 million (after unrealized gains and losses) for the first quarter of 2008. As with the global and European trends, realized investment losses were the primary reason.

[Chart after the jump]

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