Bundling risk exposes reinsurers to surprise shocks
An increasing trend for bundling risk across multiple territories is reducing transparency and increasing reinsurers’ exposure to surprise financial shocks, according to a report by the Insurance Intellectual Capital Initiative.
The report, Beyond Borders: Charting the Changing Global Reinsurance Landscape, also raises concerns about the growing over reliance on models by underwriters.
Paula Jarzabkowski, professor at Aston Business School and Marie Curie Fellow, who authored the report, believes that reinsurers are risk carriers, not risk traders, and should not allow their deep knowledge and judgement to be challenged by an over reliance on models.
“Most reinsurance underwriters have established rituals for judging the physical properties of the financial risks they take but these judgement rituals are under threat, as complex portfolio modelling generates bundled multi-territory products that are remote from the primary risk,” she says.
“As the industry goes through such profound change as cedents consolidate and look to bundle risk together, it is absolutely imperative that reinsurers adopt extreme caution in how they embrace the increasing complexity and global connectivity of the reinsurance market.”
Bronek Masojada, chief executive officer of Hiscox, a joint sponsor of the report, said that the banking sector has demonstrated what happens when traders become too detached from the risk they take on.
“This report sends out a clear message to the reinsurance sector that we cannot allow the increasing bundling of risk and dependence on models to cloud the picture when it comes to evaluating the real risk being underwritten,” he says.
