Guy Carp Publishes Analysis of ‘Systemic Risks;’ Inadequate Reserves

November 1, 2007

Guy Carpenter & Company, Marsh & McLennan’s global risk and reinsurance unit, has released a new report: “Guy Carpenter Casualty Reserve Index: Managing the Unknown.” The study presents a “briefing that examines the challenges that insurers face from hard-to-manage ‘systemic’ risks and inadequate reserves,” said the announcement. “The paper also outlines a number of new hedging tools that Guy Carpenter is developing to help them more effectively address potential reserve inadequacy.”

Michelle Harnick, Managing Director at Guy Carpenter, described “under-reserving” as often resulting from what is broadly referred to as ‘systemic’ risks.” He indicated that these “include new areas of toxic torts as well as unforeseeable events, legislative and regulatory changes, aggregation risk, changes in the macroeconomic environment and adverse decisions on insurance cover. All of these have the potential to hurt profitability, even threaten a cedant’s solvency.”

Harnick added that Guy Carpenter had “identified a need for a new class of products, which would allow its clients to hedge the systemic risk associated with long-tail lines, keeping in mind risk bearers’ desire for new and diversified product portfolios. The hedge index we are developing will pave the way for transparent means of protecting against unpredictable adverse loss reserve development.”

The index is currently being tested in private passenger auto liability, commercial auto liability, workers compensation, commercial multi-peril, medical malpractice and other liability lines. It is based on industry loss development indices.

“In addition to providing clients with a verifiable, statistically credible hedge product that requires little underwriting, it also will allow cedants to access alternative capital for more effective risk management,” said the bulletin. “Leveraging the index, Guy Carpenter can assist clients in minimizing basis risk by helping them select a reference portfolio for the index and optimize both the selection of index attachment points and the amount of coverage for each accident year.”

A copy of the briefing, “Guy Carpenter Casualty Reserve Index: Managing the Unknown,” is available for download at: Printed copies can be obtained by contacting Guy Carpenter at:

Source: Guy Carpenter

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