Casualty Catastrophes Threaten (Re)Insurers’ Balance Sheets: Guy Carpenter

By | December 10, 2014

The “casualty catastrophe” is perhaps the most daunting threat that casualty (re)insurers face today, according to GCCapitalIdeas.com, Guy Carpenter’s thought-leadership blog.

Casualty (or liability based) catastrophes have become increasingly frequent and severe over the past decade, exposing (re)insurers to much more risk than they may have reserved for, which can “bleed balance sheets and even imperil solvency,” said the blog entry entitled “Casualty Catastrophe Risk Modeling: Part I,” issued on December 3, 2014.

One root cause can trigger a chain reaction of liability through a web of tightly intertwined business relationships, which in many cases involves multiple lines of business, the blog continued.

“The proliferation of liability is replicated in casualty (re)insurance portfolios, leading to the possibility of unexpectedly high claims, a drain on capital, and, in the extreme, risk to a firm’s solvency. Multiple lines of business insureds and even multiple accident years can be swept up in a casualty catastrophe, and the carriers involved may have to pay claims that may at first seem unrelated to the event’s initial trigger.”

Until recently, casualty carriers had little choice but to accept this risk as losses emerged, said the blog. However, the outlook is changing with the maturation of enterprise risk management (ERM) and the development of niche, open-platform and casualty-specific catastrophe, GCCapitalIdeas.com continued.

The good news is that it is now becoming possible “to model the accumulation of an increasing number of casualty risks, whether technological, crystallizing or aggravating, both knowable and manageable,” the blog said.

As casualty catastrophes become more common and more models become accepted, insurers should be able to take informed action to protect and allocate their capital as they have on the property side, which has “utterly familiar” catastrophes that have been modeled for over 25 years, the Guy Carpenter blog added.

“The more complex the casualty risks and regulations carriers face, the more they are recognizing that improving their underwriting and ERM practices could in some cases even yield competitive advantage.”

Source: GCCapitalIdeas.com

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