The god clause and the reinsurance industry

September 04, 2011

This is a fascinating article about how the reinsurance agencies model risk, how those models are modified to take into account heretofore unknowns (e.g., 9/11, climate change, etc.) and the relationships between the "original insured," insurers and reinsurers.

Consumers don't tend to know what reinsurance is because it never touches them directly. Reinsurers, massively capitalized and often named after the places where they were founded, make their living thinking about the things that almost never happen and are devastating when they do. But even reinsurers can be surprised. And the insurers who make up their market put them on the hook for everything, for all the risks that stretch the limits of imagination. This is what the industry casually refers to as the "God clause": Reinsurers are ultimately responsible for every new thing that God can come up with. As losses grew this decade, year by year, reinsurers have been working to figure out what they can do to make the God clause smaller, to reduce their exposure. They have billions of dollars at stake. They are very good at thinking about the world to come.

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