Making a Market for Acts of God: The Practice of Risk Trading in the Global Reinsurance Industry

by Paula Jarzabkowski, Rebecca Bednarek, Paul Spee

Reinsurance is a financial market that trades in the risk of unpredictable and devastating disasters - such as Hurricane Katrina, the Tohoku earthquake and tsunami, and the terrorist attacks on the World Trade Centre. Such disasters are increasing in both frequency and severity, with the cost of their losses mounting rapidly. Reinsurance insures insurance companies, enabling them to pay claims arising from these losses. It is thus a market mechanism that is a critical part of the social and economic safety net, helping to pick up the pieces after disasters. Yet, how is the risk of such disasters calculated and traded in a global market?

This book brings to life the reinsurance market through vivid real-life tales that draw from an ethnographic, "fly-on-the-wall" study of the global reinsurance industry over three annual cycles. The authors shadowed underwriters around the world as they traded risks through multiple disasters. For instance, this book takes readers into the desperate hours of pricing Japanese risks during March 2011, while the devastating aftermath of the Tohoku earthquake is unfolding. To show how the market works, the book offers authentic tales gathered from observations of reinsurers in Bermuda, Lloyd's of London, Continental Europe and SE Asia as they evaluate, price and compete for different risks as part of their everyday practice.

Understanding how this market for disasters works has never been more critical given the impact of climate change and increased global connectivity, where a flood in one country can trigger losses to supply chains around the world. The authors develop a novel concept of how global markets work, which advances scholarship and challenges current thinking about how financial markets trade in intangible assets such as risk.

This book will be useful to readers interested in markets for disasters, insurance, reinsurance and financial markets, and academics interested in the practice of financial markets specifically or the practice of strategy and organizations generally.

254 pages, Hardcover

First published March 19, 2015

Reviews

[Grahamshircore]

A great piece of research put into book format. A bit repetitive but veru informative. Tough to rate as a book.

[John · Rating 3 out of 5]

This is a helpful book about a fast-changing industry. The authors did ethnographic work with a wide array of people working in reinsurance. They write in dialogue with work in science and technology studies and economic sociology, which is often impenetrable to the uninitiated, replete with opaque jargon and esoteric phrasing. This book gets around those difficulties with some really helpful techniques: concrete illustrative accounts of how reinsurers do their work, highlighted text linked to a glossary, and thoughtful explanatory writing. This makes for a readable text with clear messages and a strong contribution to understanding markets and reinsurance more broadly.

Some concerns: I am not always convinced by the authors' accounts; they give strong rationales for their claims but often do not bother with addressing plausible alternative explanations. Also, the efforts to clarify and hammer home arguments that help readability do often slide into repetitiveness.

Still, overall, it's a revealing book, and I hope others in this field adopt some of the research and writing practices that went into it.

[Dej · Rating 5 out of 5]

Fascinating insights, academically written. This is a compelling deep dive into how risk has been priced and how the market is changing.

[Linda · Rating 4 out of 5]

This book addresses a critical issue that I believe most people are not much aware of - the global reinsurance market. This is the insurance market for insurance companies, and it provides an essential source of insurance/capital for recovery from large losses, such as major earthquakes, windstorms, and other events, like the World Trade Center destruction in 2001. The authors do an admirable job of explaining how this industry works, and the changes currently taking place, and why those changes may threaten the reliability of this critical resource for recovery from disasters. On the downside, the language could be excessively academic, and sometimes overly repetitious. But the book nevertheless accomplished its goal of explaining the reinsurance industry and how and why it's worked (at least in the past.) I found it very interesting (but must acknowledge that I work in the insurance industry.)

[Mark · Rating 2 out of 5]

Brokers technicalize and contextualize to evaluate deals.

As a career-long financial and strategic advisor to the (re)insurance sector, I had high hopes for this study. Unfortunately, it fell flat on several fronts. Overly academic yet oddly superficial, the researchers, with their heavy reliance on anecdotes, miss the big picture in describing the roles of the various players in reinsurance. Their 'discovery' of the common practice of risk syndication is treated like a mystical phenomenon, while tranching and other sound and simple risk management practices are either ignored entirely or glossed over as uncommon and out-of-scope.

Two stars for sharing market gossip around the 2011 losses, for which I had a front seat in Tokyo but missed out on much of the renewal discussion as I was busy keeping several APAC reinsurers alive.