At 9:03 a.m. on September 11, 2001, Britt Newhouse stood in the lobby on the 52nd floor of the south tower of the World Trade Center. After United Airlines Flight 175 banked above the harbor behind him, it was pointed at the 50th floor. If not trimmed correctly, an airplane will rise as it accelerates, and the man who had killed and replaced the airplane’s pilot added power until he hit the south tower 24 floors above Newhouse. He doesn’t remember the sound of the impact.
At the time, Newhouse ran Guy Carpenter’s Americas operation. Guy Carpenter brokers reinsurance treaties, which protect insurers when a catastrophe—a hurricane or an earthquake—causes losses on a large number of policies. Reinsurance, in essence, is insurance for insurers.
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—Cologne Re, Hannover Re, Munich Re, Swiss Re—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. i.e. Until they have excluded it, they are liable for it……
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 like to think that are very good at thinking about the world to come. Others differ.
Interesting article. Read the rest here.