Janis Berger, Managing Director and Spencer Gluck, Senior Vice President
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The convergence of a variety of pressure points at this time is leading to a set of unique circumstances that present opportunities around business strategy and capital allocations for the insurance industry. Future inflation is one of the pressure points. Inflation and uncertainty about its extent and timing is a function of untested but powerful monetary and fiscal policy actions. In addition to inflation’s potential effect on insurer liability management there is also an impact on the volatility of assets backing the liabilities. A reignition of the kind of severe inflation last seen in the 1970s is most likely not factored into any current insurer management practices for establishing reserves or setting capital levels.

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Don Mango, Chief Actuary
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According to the draft European Union Solvency IIc directives, companies will need to provide an “own risk and solvency assessment” (ORSA). The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has prepared an issues paper that provides guidance to assist (re)insurers in implementing the ORSA.

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David Flandro, Head of Global Business Intelligence and Julian Alovisi, Senior Vice President
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To support the process of managing and underwriting the terrorism peril, (re)insurers
are increasingly using tools to analyze the risk. The dynamic nature of terrorism, and
the uncertainty in identifying the targets and frequency of attacks, requires a different
approach to manage the risk.

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The Guy Carpenter Global Reinsurance Composite’s non-life underwriting result suffered a loss of USD1.5 billion. This loss contrasts with the corresponding quarter in 2009, which showed a non-life underwriting gain of USD1.1 billion. The first quarter of 2010 was dominated by natural catastrophe events including the Chile earthquake, U.S. winter storms, Windstorm Xynthia in Europe and hail in and around Melbourne, Australia. Catastrophe losses from events in excess of USD250 million totaled approximately USD17 billion in the first quarter of 2010 compared with USD7 billion in the first quarter of 2009.

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Chris Klein, Guy Carpenter’s Head of Business Intelligence, presents an illustration of the impact that higher investment returns can have on (re)insurer return on equity. A company with a 6 percent investment return is able to earn a 10 percent return on equity despite an unfavorable underwriting ratio. The situation is very different if the investment return drops by only 2 percentage points.

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Chris Klein, Guy Carpenter’s Head of Business Intelligence, discusses the pressure that the long term decline in yields of fixed-income securities is exerting on (re)insurers. The subsidy of poor underwriting that good investment returns have provided has disappeared.

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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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