Abstract
As we all know, sharing is caring. From the moment we can physically hold an item, we are told, reminded, and sometimes scolded that we need to share with others. Even now, you might be reminded to ‘like and share’ content on social media, or feel judgment from a ‘sharing bag’ of M&Ms that you eat by yourself. As we’ve already seen, insurance started as a way to share risk: ship owners would huddle together in Lloyd’s coffee shop and, if there was a shipwreck, all would share in the financial loss. Nowadays, policyholders often wish to transfer the majority of the risk to the insurer rather than share it as equals, although most insurance policies require that policyholders retain a small bit of the risk through the use of policy excesses or deductibles. Insurers take on risk, but even they have a limit as to how much they want to take on. They may have inadvertently written too many policies, be very exposed to potential large losses, or perhaps they were unable to find enough similar risks to create a pool in the way they hoped. Is there someone who would insure the insurer?
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Notes
- 1.
Technically the ‘free capital’—the capital not earmarked for paying claims or other costs.
- 2.
Premiums net of reinsurance means the premiums that the insurer doesn’t give to the reinsurer.
- 3.
It is not certain of course, because reinsurers can default on their treaties, although the reputational damage of this means that it would only happen if absolutely necessary.
- 4.
The author does not guarantee that this will actually impress your friends…
- 5.
Some underwriters did manage to write spiral reinsurance profitably, although they are by far the exception, rather than the rule. They managed by following a strict underwriting plan of what they would and wouldn’t write, careful portfolio monitoring and more accurate pricing.
- 6.
A very similar circumstance and, tragically, a similar outcome to Hurricane Katrina exactly forty years later.
- 7.
At the end of 2020, Equitas’ annual report stated that it still had £4.6 billion of outstanding liabilities.
- 8.
In 2020 it declared a loss of £0.9bn, due to a mixture of COVID-19 and a bad hurricane season. It reported a £1.4bn profit for the first half of 2021—the full year results aren’t available at the time of writing.
- 9.
This rolls all the way back to 1993, to the creation of Equitas which assumed the liabilities for the 1992 and prior years in order to end the LMX spiral.
- 10.
Say ‘Fin-Ree’. It also comes under a broad umbrella of Alternative Risk Transfers, which is abbreviated as ART (say ‘art’). There’s a lot of acronyms in reinsurance—even reinsurance itself is commonly abbreviated to RI!
- 11.
When ex-tropical storms hit the west coast of the UK, they cause heavy rainfall and high winds—the flooding in 2000 was partly due to the bad hurricane season that year.
- 12.
This fee structure has the effect that when there are lots of flood claims, private insurers tend to make higher profits, as they receive a fee for handling each claim. For example, after Hurricane Sandy, private insurers made a profit of $400 million Business Of Disaster: Insurance Firms Profited $400 Million After Sandy: NPR.
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Townsend, C. (2022). Reinsurance. In: A Risky Business. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-11673-5_13
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DOI: https://doi.org/10.1007/978-3-031-11673-5_13
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