Learning lessons from the crisis
As the reinsurance industry becomes ever more complex and influenced by the capital markets both as a source of capacity and in the way risk is increasingly ‘packaged’ and sold to investors it also inches closer to being more like the investment banking sector.
As the chain between the original risk and the underwriters assessing and pricing it and those selling and those holding the risk is becoming ever more complex and convoluted, so the risks of mispricing, misselling and misunderstandings increase.
Given the boom and bust culture that inspired some spectacular failures in the investment banking sector, and the culture of excess that went hand in hand with that, we asked Geraint Anderson, one of the world’s most famous former investment bankers, for his insights into the risks the reinsurance industry must be at pains to avoid.
The wind of change is blowing through the reinsurance sector. What has often been viewed as a staid industry with an idiosyncratic structure, arcane rules and odd traditions is beginning to talk about ‘modernisation’, ‘incentivisation’ and, dare I say it, even ‘innovation’.
Most worrying of all is that insiders now tell me that its culture may well become more like that found at investment banks.
As someone who has spent 12 long years as a stockbroker let me assure you that this ain’t necessarily a good thing.
I worked at four investment banks between 1996 and 2008—a career that just happened to coincide exactly with what ex-prime minister Gordon Brown would later refer to as ‘the age of irresponsibility’… although I like to believe that my presence had little to do with that scathing conclusion.
I didn’t know it at the time but my City career took place during a truly extraordinary era, which was a product of the regulatory changes that had taken place over the previous 20 years and a precursor to the worst financial crisis in generations.
The problem with investment bankers is that they’re generally pretty smart. That wouldn’t necessarily be an issue but for the fact that, as a rule, you don’t enter banking to fulfil your artistic ambitions or make the world a better place.
No, you enter the heart of the beast to make a fast buck and when you’re a young, (probably) male hyper-competitive banker plying your trade in a hire-and-fire world you might just prioritise lining your pockets over worrying about the implications your actions may have on society.
Indeed, you’re generally only ever going to think about next year’s bonus and subsequently not get too concerned about tedious things like regulation, compliance or ‘long term shareholder value’.
What’s worse, the system in place actually encouraged such behaviour. About 12 minutes into my City career I came to realise that the bonus system was there to be aggressively milked and that the downside from screwing up was minimal; there was, to use the technical term, an ‘asymmetrical risk’.
Risky business
If I, or my trader or the hedge fund I was broking to, took a few massive gambles and they came good then within a year you might receive a bonus big enough to buy a couple of Maseratis.
If, however, those punts didn’t work out no money was actually removed from your wallet. Sure, you might possibly lose your job if you hoofed it badly but back then, when the City was booming, you’d easily be able to obfuscate the causes of your ‘resignation’ and find another job with some other dumb schmucks.
Of course, this wasn’t always the case. When broking firms were partnerships senior employees would potentially lose the shirt from their back if their firms made major losses. Partners would share in the pain as well as the gain, and that would give them pause before betting the house on some dubious derivatives they didn’t understood.
