Europeans Seeking Reinsurance Solvency again!

Solvency II is the updated set of regulatory requirements for insurance firms that operate in the European Union.

Based on this new European regime, Aon Benfield  reports in a press release [November 4, 2010]  that the formulas for calculating natural catastrophe capital requirements under the proposed Solvency II Standard Formula are outdated and ignore 15 years of evolution in the field of risk modeling. In response they are offering a suite of services to help re/insurers [game the system] make the most of the catastrophe requirements.

The basic calculation methodology being used under Solvency II overlooks these key aspects of risk and data modeling says Aon:

  • Location granularity (CRESTA zone data is insufficient)
  • No differentiation by occupancy (residential, commercial or industrial) or construction, age and height
  • Single damage function so no differentiation between buildings, contents and business interruption cover
  • No application of limits and deductibles

Unrelated to any of the above, it was released today [November 10. 2010] that:

Andrew Appel, chief operating officer of global broker Aon, will leave the company at year-end.

One should always endeavor to make the innocuous seem conspiratorial.  Of course one might argue that in the someone opaque world of global reinsurance the conspiratorial is at least mundane if not exactly innocuous.

4 thoughts on “Europeans Seeking Reinsurance Solvency again!”

  1. European accounting valuation models have always been very very loose.

    That is why the Bush administration wanted to go “International” with the accounting standards.

    It is really hard to know where the European regulators are going with this one, but it is entertaining to see such a public shot across the bow.

  2. International Accounting Standards is principle based while US GAAP is rules based. The accounting profession is currently busy consolidating the standards as the days that FASB sets standards in the US are numbered with the SEC allowing foreign issues to submit their SEC finanical reports using IFRS (International Standards).

    The bright white lines of US rules based accounting are as easily abused as are the principles based IFRS. Under our lease accounting rules Boeing 767’s would disappear in transactions structured at places like AIG’s old aircraft leasing unit. Under our special purpose entity accounting Andrew Fastow and Jeff Skilling were able to shift liabilities off ENRON’s balance sheet.

    I think it should not be lost on anyone that the calc on how much capital to retain for right tail catastrophes impacts everyone insurance rates especially and including here on the gulf coast. The cost of that capital is very high according to the folks at Wharton which is why were are being price gouged. Simply put we’re buying insurance from the modern day equivalent of old fashioned loan sharks.

    Our long time readers no doubt recall Russell and the fact he is posting some with us. There are only a few Slabbed lifers though and Russell counts in that number. He and I go back to before the storm on Yahoo finance and frankly he is the smartest guy I know and financially savvy. He has agreed to help us with financial topics so I can devote time to covering matters in greater NOLA.

    sop

  3. Speaking of European Reinsurance:

    http://www.dnj.com/article/DN/20101027/BUSINESS01/10270353/1088/BUSINESS/German+insurer+buys+Brentwood+s+Windsor+Health+Group

    German insurer buys Brentwood’s Windsor Health
    Group

    A large German insurer agreed to buy managed-care
    company Windsor Health Group Inc. of Brentwood
    for $125 million in cash to expand its presence in
    the U.S. Medicare market.

    Munich Re, also the world’s biggest reinsurer, made
    its bid as size and efficiency become more important
    to Windsor and other providers of private Medicare
    plans amid cuts in government reimbursements.

    Last year, the two companies entered an agreement
    under which Munich Re provided backup capital to
    help Windsor meet regulatory requirements.

    “They’ve had a good working relationship, and
    Munich Re was able to get a good feel for the
    management team and the business plan,” said
    Michael Devlin, managing partner of Pharos Capital
    Group, Windsor’s largest outside shareholder.

    “It makes sense given Munich Re’s interest in the
    United States to bring this in their portfolio of U.S.
    investments.”

    The Windsor-Munich Re transaction is expected to
    close at the end of the year, pending regulatory
    approval. Afterward, Windsor will come under
    control of the German insurer’s Munich Health
    North America Inc. subsidiary.

    Windsor provides Medicare Advantage health,
    prescription drug plans and special needs plans to
    more than 75,000 members in Alabama, Arkansas,
    Mississippi, South Carolina and Tennessee. This
    year, the company expects earnings before interest,
    taxes, depreciation and amortization of $31 million
    and gross written premiums of about $420 million.

    Munich Re said it plans to finance the purchase
    price from its existing resources. U.S. investor
    Warren Buffett recently raised his stake in Munich Re
    to more than 10 percent, with plans to acquire
    more.

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