Some Aspects of Currency and Exchange Rates in the London Market

This paper is intended for an audience that is not wholly familiar with the considerations in dealing with various currencies and addresses the problem from the viewpoint of the London Insurance and Reinsurance Market (London Market). It begins by giving a brief description of the London Market, stressing the importance to this market of international business. The importance of estimating currency liabilities and matching them with suitable assets is then explained. Some of the difficulties of estimating liabilities by currency are described. This includes a detailed description of the workings of a London Market Excess of Loss treaty to show how complicated certain insurance contracts can become if exposed to different currencies. The problems of analyzing loss development triangles if the underlying data are in currencies are discussed, as are methods of allocating IBNR to currency if derived from grouped data. Certain aspects of the assets side of the question are discussed, and in particular the question of whether the idea that interest rates tend to counteract currency fluctuations over the medium to long term is explored.