Volatile Markets Require Diligent Risk Mitigation

Elaborating on its prognosis for insurers and reinsurers earlier this year, Guy Carpenter & Company LLC affirms they’ll have to keep close tabs on risk strategies as capital markets tumble.

The delicate market means any catastrophic event could seriously impact earnings and capital bases, the risk and reinsurance specialist reports in its latest briefing, entitled Bag Profits Early: Investment Gains Under Pressure.

“Carriers may want to consider protecting underwriting earnings booked year-to-date by seeking reinsurance to cover in the form of a ‘stop-loss’ or other instruments such as ILWs, enabling them to lock in underwriting profits against potential future catastrophic losses,” Chris Klein, Guy Carpenter’s global head of business intelligence, says in a news release this month.

“With net income declining steeply from the first half of 2007 to the first half of 2008, asset-driven losses have been on the rise,” he acknowledges. “Though there have not been any mega-catastrophes, disasters across several continents have impacted insurers’ and reinsurers’ profits. Taken together with the effects of the subprime mortgage market collapse, which has pushed equity values lower, earnings are increasingly at risk.”

He says in addition, a judicious selection of risks such as an enhanced “increased risk transfer” could help mitigate the effects of the market volatility.

In its January briefing, the firm reported property catastrophe reinsurance rates were down an average of nine percent across all markets.

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