Aon Benfield, the world’s premier reinsurance intermediary and capital advisor, today releases its annual Insurance Risk Study, which quantifies underwriting volatility and correlation by line and country. This year’s Study documents increases in many risk measures and provides a greatly expanded scope. The 2009 Study covers core business lines across 26 countries which together account for 85 percent of global premium.
The report, Modeling the Global Market, reveals that many measures of insurance risk increased during 2009. Five of the eight major U.S. lines (private passenger auto, workers compensation, commercial multi-peril, medical malpractice and other liability occurrence and claims made) showed increases in measured risk and none showed a decrease. In Europe, motor and liability risk increased in the UK but remained constant or decreased in Germany and France. Meanwhile, Fidelity & Surety is the most volatile major line of business in nearly every country where figures are reported, with up to 93 percent volatility in European countries, and up to 136 percent in the Americas.
Risk in the Americas is higher than in Europe or Japan for comparable lines. Liability volatility in Europe ranges from 16 to 26 percent compared to 36 percent to 84 percent in the Americas. Motor volatility in Europe ranges from 7 to 12 percent compared to 16 percent in the U.S. despite being a lower limits coverage. As in previous editions of the Study, commercial lines are more risky than personal lines.
The Study identifies and quantifies correlation between lines within a country and between countries. It adds an estimate of correlations in reserve risk, demonstrating material correlation in development between different lines of business. Finally, its analysis of macroeconomic correlations reveals that changes in surplus are more highly correlated with stock returns, stock price volatility and credit spreads than they are with underwriting combined ratios or the number of insurance company insolvencies.
The Study highlights that, in wake of the global financial crisis, rating agencies, regulators and investors are demanding that insurers provide detailed assessments of their risk tolerance, and quantify the adequacy of their capital models.
Despite the recent global economic turmoil, levels of insurance volatility are historically still far greater than levels of volatility in the equity markets. Furthermore, the level of correlation between global equity markets adds a significant level of risk to international insurers’ equity portfolios.
Stephen Mildenhall, Executive Vice President and Chief Actuary of Aon Benfield Analytics, said: “Over the past two years, the global financial crisis has caused considerable volatility in equity prices. However, over the past three decades, insurance lines have generally experienced far greater volatility than the stock market; for instance, by the end of July this year, stock volatility was at approximately the same level as commercial motor volatility – which is historically one of the less volatile business lines for insurers worldwide.”
Andrew Appel, Chief Executive Officer of Aon Benfield, added: “The Insurance Risk Study highlights that managing volatility is an issue for insurers globally. Our latest research shows that there is a clear correlation between volatility and market valuations. Those insurers that successfully manage volatility can help to increase their relative market valuation – which is especially important in today’s lower valuation ranges. Aon Benfield’s in-depth research into this topic allows us to develop effective reinsurance solutions designed to address insurers’ individual challenges. These solutions are delivered through a worldwide network of more than 4,000 dedicated and experienced colleagues.”
