Insurance for Insurers
September 2, 2011 7:28 AM   Subscribe

"Reinsurance" is what you do when you want to invest several billion dollars all at once. The top 25 reinsurers in the US together wrote about $27 billion in premium in 2010. Reinsurers are constantly looking for ways to manage their exposure to risk, particularly after Sept. 11, 2001 and Hurricane Katrina.

Reinsurance companies, which most people never even know exist, control an almost unimaginable amount of wealth.
Munich Re? €236.36 billion.
Swiss Re? $228.40 billion.
National Indemnity? $112 billion.
But even "small" reinsurers like Everest Re are still sitting on upwards of $18 billion.

Overview of the reinsurance market. Glossary of reinsurance terms.

Reinsurers also buy reinsurance, a practice called retrocession. If reinsurers and market regulators aren't careful, this can set up a nasty spiral, as a reinsurer may find that it is actually acting as a retrocessionaire for risk that it is also the retrocedent. This happened both after 9/11 and to a lesser extent after the market crash of 2008.

It has not been a good year for reinsurers, but Hurricane Irene is not expected to be a major reinsurance event.
posted by valkyryn (60 comments total) 13 users marked this as a favorite

 
And how many U.S. reinsurers are located offshore for tax purposes?
posted by jsavimbi at 7:38 AM on September 2, 2011


My initial reaction is to note the incredible complexity of this and assume it's evil. But then I recall the words "A dog barks at what he doesn't understand."

Woof.
posted by Bathtub Bobsled at 7:40 AM on September 2, 2011 [12 favorites]


Mr. Buffett's interest in reinsurers is longstanding.

posted by three blind mice at 7:42 AM on September 2, 2011 [1 favorite]


And how many U.S. reinsurers are located offshore for tax purposes?


all of them
posted by JPD at 7:42 AM on September 2, 2011 [2 favorites]


Swiss Re underwrites my malpractice insurance
posted by Ironmouth at 7:43 AM on September 2, 2011


It seems that when the reinsurers lose a lot of money because of something they did not foresee - like 9/11 - their response is to specifically exempt that sort of event from future coverage. This forces the insurance companies to stop covering damage from that kind of event, which is why insurance policies do not now cover damage resulting from terrorism.
posted by Kirth Gerson at 7:46 AM on September 2, 2011


But wait, there's more: Reinsurance Sidecars, complete with upbeat description from 2007:
Sidecars are financial entities created to allow investors to take the risk and return of a small and limited category of insurance policies

...

Put simply, sidecar investors are seeking high-yield and unencumbered short-tailed investments that are driven by event based risk and that allow for easy entrance and exit. It is the relative ease of entry and exit associated with sidecars that captures investors’ attention and dissuades them from investing in either well-established reinsurance companies or start-ups.
posted by kithrater at 7:46 AM on September 2, 2011


After Hurricane Irene, WNYC had a long segment with person from the Insurance Information Institute. (III) Whose motto is; Improving public understanding of insurance—what it does and how it works!

People would call in with relatively simple questions like.... "My basement flooded because my sump pump failed during the hurricane, but they refuse..."

To which the response was, well it depends.... "Do you have a sump pump failure clause?
"
posted by R. Mutt at 7:47 AM on September 2, 2011


control an almost unimaginable amount of wealth.

"I don't know, I can imagine quite a bit" --Han Solo
posted by chavenet at 7:48 AM on September 2, 2011 [10 favorites]


If this seems like a good investment I've got some collateralized debt obligations I'd like to sell you.
posted by twoleftfeet at 7:49 AM on September 2, 2011


And how many U.S. reinsurers are located offshore for tax purposes?

all of them


Actually... by definition, none of them. The insurance industry recognizes three kids of insurance companies. "Domestic" companies are located in your own state. "Foreign" companies are located in the US, but in a different state. "Alien" companies are located in a different country. So, by definition, a US reinsurer might be "foreign," but it can't be "alien."

Don't get me wrong: there are plenty of reinsurance companies located outside the US, and many of them are in that notorious tax haven Bermuda. As far as I can tell, it's mostly the "smaller" reinsurance companies that incorporate in tax havens. There's a lot of them, but I don't think they represent a majority of the market in terms of written premium or assets under management. But there are also plenty of reinsurers incorporated in the US and located here for tax purposes. New York is a pretty big hub.

The really big guys are located mostly in Europe, simply because that's where they were founded, e.g. Munich Re, Swiss Re, Hannover Re, etc. If anything, relocating to a tax haven would probably cost them more in taxes--reincorporation is a huge pain in the ass--than simply paying up where they are.
posted by valkyryn at 7:50 AM on September 2, 2011 [3 favorites]


Swiss Re underwrites my malpractice insurance

There are some insurers who have both insurance and reinsurance groups. But it's a pretty big no-no for the same company to reinsure its own risk.
posted by valkyryn at 7:50 AM on September 2, 2011 [1 favorite]


The 'Gherkin' building in London is actually the Swiss Re building.
posted by biffa at 7:51 AM on September 2, 2011


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In addition, I will insure that insurance for only $4 per year.
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In fact, I can do it right now, just PayPay me $2 and I'll ask the mods to delete your comment.
posted by blue_beetle at 7:55 AM on September 2, 2011 [1 favorite]


One of the neat ideas in Kim Stanley Robinson's Red Mars series was that the big reinsurance companies became part of the solution to the crisis of global / interplanetary capitalism, and supported the creation of a new model. It makes sense because they are in effect the residuary beneficiaries of everything. If shit goes to hell it can't help but come out of their bottom line. Like a government, they internalize the costs of public bads.

Robinson is miles to my left, politically, and I think a lot of his points on capitalism are silly, but this one struck me as pretty neat.
posted by grobstein at 7:56 AM on September 2, 2011 [5 favorites]


I'm not sure why its inherently evil for insurance companies to redistribute risk. If a single insurer had to take on all the risk for a given event it would be far more likely to be unable or unwilling to take on that risk. I know we automatically hate corporations here on MeFi, but I'm not sure how reinsurance is conceptually an inherent evil.

Insurance companies have had a history of improperly accounting for their reinsurance contracts, which has required restatements and losses to shareholder value, but that doesn't mean the concept is a bad one provided adequate controls are in place to protect the interface between complex products and unsophisticated consumers.
posted by The Bellman at 7:56 AM on September 2, 2011 [1 favorite]


This is why MeFi sucks at finance. Reinsurance is a fascinating topic in the insurance world. A post that delves into what it is and how it works would have been a great read.

Instead, this post is full of pitchforks.
posted by b1tr0t at 7:57 AM on September 2, 2011 [15 favorites]


Reinsurance need not be "evil" to make sense. It's about spreading "risk" (in the insurance meaning, risk being "exposure" to a loss). Say you insure homes. You have an agent selling house insurance in his own neighborhood. So suddenly, the company for whom he sells has a lot of exposure in one small area. That's not a good idea.

One small area could get hit by the same disaster, of whatever kind. So you reinsure, which means, you buy insurance coverage for the risk you've insured. (in residential insurance, this sort of reinsurance is almost always done by contract, and called "treaty" reinsurance. The same high exposure from an office tower would be reinsured using "facultative", meaning they think about it and strike an agreement). You don't want to expose your company to too large a loss because you insure too much property in too small a space.

This is not any sort of evil. From the consumer's perspective, you don't want your insurance company to go broke! They need to be solvent in order to play claims. You don't want to hear "We're sorry, you get 10 cents on the dollar, we're broke!" when your house gets blown away in a tornado. I believe some of this reinsurance business may even be required under the law governing the insurance business.

Of course and obviously, there's a lot of money flying around in this business, and that means someone is going to be trying to get some without earning it. And then there will be corruption at least some time and place, humans being human.

I worked (in IT) in the business, but the company I was with quit the reinsurance business to go in to health care insurance, since it was so profitable. (Just as Aetna Insurance dropped its traditional property/casualty lines for the health care insurance business).
posted by Goofyy at 7:59 AM on September 2, 2011 [7 favorites]


just PayPay me $2

For a dollar I'll sell you proofreading services. The "edit" button, though; that's priceless.
posted by chavenet at 8:00 AM on September 2, 2011


I believe some of this reinsurance business may even be required under the law governing the insurance business.

Sort of. Reinsurance, as such, is not always required per se, but it is an absolutely essential part of any insurer's operations if they want to make anything approximating a reasonable use of their capital. Suffice it to say that it is functionally required, because while not technically mandatory, regulations about reserves are such that it's pretty much impossible to operate at a profit without it.
posted by valkyryn at 8:10 AM on September 2, 2011 [1 favorite]


For a dollar I'll sell you proofreading services. The "edit" button, though; that's priceless.

Would you consider a percentage of the backend for a permanent non-exclusive service contract?
posted by blue_beetle at 8:12 AM on September 2, 2011


Actually... by definition, none of them. The insurance industry recognizes three kids of insurance companies. "Domestic" companies are located in your own state. "Foreign" companies are located in the US, but in a different state. "Alien" companies are located in a different country. So, by definition, a US reinsurer might be "foreign," but it can't be "alien."

Don't get me wrong: there are plenty of reinsurance companies located outside the US, and many of them are in that notorious tax haven Bermuda. As far as I can tell, it's mostly the "smaller" reinsurance companies that incorporate in tax havens. There's a lot of them, but I don't think they represent a majority of the market in terms of written premium or assets under management. But there are also plenty of reinsurers incorporated in the US and located here for tax purposes. New York is a pretty big hub.



The answer isn't really that simple though. You can have your subsidiary in one state, but recognize the profits elsewhere. All of the reinsurers that's I've seen manage to take their profits in Bermuda so they don't pay taxes. Or at least have a very low tax rate.
posted by JPD at 8:14 AM on September 2, 2011


Reinsurance companies, which most people never even know exist, control an almost unimaginable amount of wealth.
Munich Re? €236.36 billion.
Swiss Re? $228.40 billion.
National Indemnity? $112 billion.
But even "small" reinsurers like Everest Re are still sitting on upwards of $18 billion.



well this is sort of weird way to look at the size of these businesses no? If you consider long-term its a cost of capital business the real sum of money controlled by these companies is actually much closer to their Equity. So for example Swiss Re has 240 mil in assets, but only 27 bil in equity.

I saw this article yesterday and thought it would be an interesting thing to post. Reinsurance usually only makes the news when there is a catastrophe. The NYT had an article a few years ago on Catastrophe Bonds - which is sort of an effort by the reinsurers to offload some of their risks onto the capital markets.
posted by JPD at 8:20 AM on September 2, 2011


When you say "control xxx wealth" or are "sitting on $yyy" -- what does that mean ? (please, talk like I'm a 3rd grader, because I don't get it). Is that cash-on-hand ? (ie like banks are required to have xx capital immediately available ?) Or is that the value of the things they have insured ? And is that money from investors (shares sold) or private folks that got together and pooled their money ?
posted by k5.user at 8:20 AM on September 2, 2011


The really big guys are located mostly in Europe, simply because that's where they were founded, e.g. Munich Re, Swiss Re, Hannover Re, etc. If anything, relocating to a tax haven would probably cost them more in taxes--reincorporation is a huge pain in the ass--than simply paying up where they are.


Well also the cash tax rate for the european reinsurers is in pretty low to begin with, so not much to be gained anyway.

I mean to pretend the reinsurance industry doesn't benefit from lots of favorable tax treatment is pretty silly. It even owes a lot of its existance to the fact that it gets favorable tax treatment compared to traditional insurers. This isn't a bad thing, as the low returns on capital despite the low tax rates just tells you the policyholders are being handed that tax benefit in the form of lower prices.
posted by JPD at 8:28 AM on September 2, 2011


I was once retained as a consultant by a contractor working for a law firm who represented reinsurers of insurers who covered manufacturers of a commercial product that is now known to cause cancer. Got that? The reinsurers were trying to mitigate their billions-of-dollars liability by ensuring that they only covered claims for cases in the period of insurance. A reasonable expectation, but since it took a manual review of a case to determine whether it did or didn't fall in the period, the costs of determining which cases were covered among the tens of thousands of claims were enormous and they wanted to keep those costs down. They had hired a contractor to fish through the claims one by one but they told the contractor they wouldn't pay to go through every one. That's where I came in. I constructed a model to trade the precision of the estimate of claims value against the number of cases that needed to be reviewed to get that precision. Now the precision was associated with a computable loss in dollars and the cost of reviewing a claim had a dollar cost, so I constructed the loss function and determined the optimal number of cases to review.

One thing was clear. Although I made a modest amount of money on the job, halfway into it I figured out that with the amount of money sloshing around, I could have charged ten times as much and they wouldn't have blinked. The whole atmosphere surrounding businesses where such astronomical sums are slung about makes the awarding of huge salaries seem so minor that I can easily understand how the whole overpaying CEO thing comes about and why those in that game are so tone deaf to the complaints.
posted by Mental Wimp at 8:28 AM on September 2, 2011 [8 favorites]


Very interesting story Mental Wimp, and how do I get to do your job?
posted by grobstein at 8:32 AM on September 2, 2011


I met with a company that does the sort of stuff Mental Whip did but for participants in the mortgage market =- modeling mortgage pools for the Rep &Warranty claims for the big banks and the people suing them. Its actually been a big legal issue surrounding the validity of using sampling vs manual examination of the entire pool to force a put-back to the banks.
posted by JPD at 8:37 AM on September 2, 2011


It would be pretty funny (but definitely a conflict of interest) if some of those in the 'alien' class of reinsurers actually turned out to be space aliens.
posted by newdaddy at 8:45 AM on September 2, 2011


"Reinsurance" is what you do when you want to invest several billion dollars all at once.

No, no it is not. And it's not what the link in that sentence says either. Reinsurance is how insurance companies distribute risk to that they don't all go out of business, which would mean you could not get insurance. I'm no fan of major insurance companies, but this post was DOA due to editorializing and axe grinding.
posted by yerfatma at 8:52 AM on September 2, 2011 [2 favorites]


well this is sort of weird way to look at the size of these businesses no?

Actually, that wasn't what I was trying to do, because...

When you say "control xxx wealth" or are "sitting on $yyy" -- what does that mean ?

This means that that is the total amount of money, in various forms and levels of liquidity, that the company has under its control. The vast majority of that is policyholder surplus, i.e. money that the company has set aside to pay for future losses. The more surplus a company has, the more business it can write.

A good chunk of the company's net worth will also consist of actuarial reserves, i.e. money the company has set aside, either in cash or something pretty damned close to it, to pay for known claims.

Thing is, all that money? The insurers get to invest that. Not any way they want, as the industry is pretty highly regulated, so they have to stick to pretty safe investments with a big chunk of their reserves. But they do, in fact, get to pick where it goes.
posted by valkyryn at 8:55 AM on September 2, 2011


"Reinsurance" is what you do when you want to invest several billion dollars all at once.

No, no it is not.


Umm... yes, actually, it is. If you find yourself in possession of a few billion dollars and want to invest it all in the same place, one of the only things you can do is to start a reinsurance company. It's one of the only industries on the planet that can handle that level of investment in a very short period of time. A process that is described in some of the links above. This is how Warren Buffett makes most of his money, as it turns out.

And editorializing? Axe grinding? The hell?
posted by valkyryn at 8:57 AM on September 2, 2011


What b1tr0t said. My father in law was a senior actuary for several small and medium-sized reinsurance firms, and I've heard a lot about the importance of the reinsurance industry and how it benefits society* as a whole, and the insurance industry in particular, and how without it no one would be willing to take the risks necessary to get Big Things Done. This is common fodder for after-dinner conversation at my in-laws house (pity me), so while I've never worked in reinsurance, I feel like I've been schooled pretty well in how the industry operates in general. This is an industry populated with statisticians and business analysts, and it has its own brand of geek culture. If you are a math geek the probability aspects of reinsurance as an industry are apparently pretty interesting (or so I've been told, as I am not a math geek). Don't assume that's it's evil just because it's banal, or because the numbers they work with are all followed by many zeroes; money doesn't automatically equal villainy.

I think it's possible to discuss reinsurance in ways that are more even handed than this post suggests.

*Society = First world, G8 countries.
posted by mosk at 9:02 AM on September 2, 2011 [2 favorites]


I think it's possible to discuss reinsurance in ways that are more even handed than this post suggests.

I don't get it. I work in insurance, and I was trying to be even-handed.

What'd I miss?
posted by valkyryn at 9:08 AM on September 2, 2011 [1 favorite]


This is how Warren Buffett makes most of his money, as it turns out.


It sort of isn't. He's in the reinsurance business for the float. He just wants the businesses themselves to break even. He's basically betting he can invest the float at a much higher rate of return than his competitors can. He's not actually betting on being better at writing insurance. Reinsurance is a terrible business on average.

This means that that is the total amount of money, in various forms and levels of liquidity, that the company has under its control. The vast majority of that is policyholder surplus, i.e. money that the company has set aside to pay for future losses. The more surplus a company has, the more business it can write.

A good chunk of the company's net worth will also consist of actuarial reserves, i.e. money the company has set aside, either in cash or something pretty damned close to it, to pay for known claims.

Thing is, all that money? The insurers get to invest that. Not any way they want, as the industry is pretty highly regulated, so they have to stick to pretty safe investments with a big chunk of their reserves. But they do, in fact, get to pick where it goes.

You are conflating insurance terms with finance terms. Net Worth is bascially the same thing as Equity. (although actuarial reserves are usually classified as liabilties and excluded from Equity) - I still don't see how looking that the gross asset number for a reinsurer is some comment on the amount of capital it controls, since nearly all of the capital is borrowed from someone - either a policyholder or a the bondholders, its hard to say thats "their" money, since at some point someone is going to want it back.
posted by JPD at 9:17 AM on September 2, 2011


As far as I can tell, this post is totally getting slammed inappropriately. It's kind of interesting. I don't see any editorializing or value judgements whatsoever in the post itself, yet multiple people are claiming that the post is does these things.

It's really the commenters that have been reading things into it. Pointing out the size of companies or that it is one are where someone could quickly invest large sums of money don't seem to be value judgements to me. The bias here is commenters assuming that big financial sector companies with little public profile are up to no good. I don't see that implied in the post.

(Probably they are up to no good, but valkyryn didn't say it or imply in his post, and there's no reason to believe that he even thinks it.)
posted by snofoam at 9:24 AM on September 2, 2011 [1 favorite]


Reinsurers also buy reinsurance, a practice called retrocession

There has to be an Inception joke in here somewhere.
posted by desjardins at 9:38 AM on September 2, 2011


Reinsurance companies, which most people never even know exist

I learned about them from a Pinky & The Brain episode. IIRC, Brain was planning on suing one for a workplace injury involving non-dairy creamer and a microwave.
posted by nomisxid at 9:57 AM on September 2, 2011


If you find yourself in possession of a few billion dollars and want to invest it all in the same place, one of the only things you can do is to start a reinsurance company.

That doesn't make it what reinsurance is.
posted by yerfatma at 9:59 AM on September 2, 2011


Reinsurers also buy reinsurance, a practice called retrocession

There has to be an Inception joke in here somewhere.


Google "retrocession spiral"
posted by JPD at 10:01 AM on September 2, 2011


Reinsurance companies themselves also purchase reinsurance, a practice known as a retrocession. They purchase this reinsurance from other reinsurance companies. A reinsurance company that sells reinsurance is a "retrocessionaire". A reinsurance company that buys reinsurance is a "retrocedent".

So, turtles all the way down, then.
posted by dirigibleman at 10:01 AM on September 2, 2011


I used to work in life insurance in the back end for years. In fact, my father was a high-up at Canada's largest insurance company, which unfortunately crumbled to the ground due to some ridiculously risky real estate investments, IIRC. Anyway, he bought a brokerage/MGA and I worked for him for many years, processing life & health applications. I even had my insurance licenses for awhile, but I didn't want to go into sales (not really my thing). Anyway, I have a pretty positive view of insurance; for some reason, a lot of people don't seem to understand it or think it's a big scam or something, but I used to process death, disability, and critical illness claims, and trust me, the insureds or their beneficiaries are very relieved to have their insurance policy when bad stuff happens. The insurance advisor is the one person who brings a cheque to the spouse of the deceased or the ill instead of bringing them yet another bill.

Without reinsurance companies (most companies dealt with Swiss Re, IIRC), practically anybody who was in poor enough health to get a rating (a higher premium based on their poor health, like 300% of normal premium rates because of diabetes or something) would not be able to be insured if it weren't for the reinsurance industry. Companies just can't afford to take on that kind of a risk, without increasing everyone's premiums to a ridiculously high amount.

Hopefully I'm making sense. I've been sick as a dog for days :(
posted by 1000monkeys at 10:25 AM on September 2, 2011


Reinsurance is actually pretty neat, and in general we're probably better with it than without it. That's not to say that it's not possible to get into a nasty and incestuous spiral of retrocession, but that's probably due to sloppy bookkeeping (really, profit-chasing) rather than a fundamental problem with the reinsurance model.

One particular way that reinsurance benefits insureds is that it allows small and highly-specialized insurance companies to write policies on otherwise difficult-to-insure risks, and then once they have quantified those risks and written them into a policy that the bigger and less specialized insurance companies can understand, they can buy reinsurance to mitigate their own risk to a reasonable level. The net result is more insurance, and better insurance, in the sense of being more specialized and representing a better quantification of the underlying risk, than if the big companies just had to take a stab at it (and would probably err or the side of taking more premium).

But more generally...

The US insurance industry is something I'm peripherally familiar with, and have been watching (from a distance, not as a direct participant) for a couple of decades. One perhaps controversial point which is beyond dispute in my mind is that the industry was severely damaged during the 90s tech/market boom by asshole MBA-types who crept in via mergers and consolidations, and performed a Gordon Gecko-like evisceration of traditionally stolid and conservative companies in the name of higher profits. They almost universally achieved this by increasing those companies' market exposure (via various types of financial trickery), and in some cases by eliminating specialized technical risk-management staff in favor of rote formulas. These short-timers achieved lots of quarter-over-quarter dividends and paper profits, but did so (in some cases) by mining decades of cash reserves, and threw away uncountable amounts of institutional knowledge via layoffs and accelerated retirements ... putting the companies in untenable positions when the next decade brought the 1-2 punch of 9/11 and the recession.

I can think of at least one century-old company that was utterly ruined by this sort of stuff. What killed them wasn't 9/11 or the recession, both of which they could have easily weathered if they had happened a decade earlier; their undoing was the teams of bright young things who crawled in during the Long Boom, driven by an attitude that they were in a summer that would never end.

It's sort of an untold story, or at least I don't think it's well-known outside the industry, and to me it represents a rapid and dramatic playing-out of the same process that has hollowed the American economy generally.
posted by Kadin2048 at 10:33 AM on September 2, 2011 [6 favorites]


Eh - I think you are right, but to say its a US only phenomenon would be quite wrong. The European insurance companies actually ended up with even more equity exposure post-tech bubble then the US guys did, and the market for structured equity products (the like of which almost ended a few US life insurers) is actually much much bigger in Europe. Take a look at the French banks balance sheets for example. Chock full of stuff like that.
posted by JPD at 10:45 AM on September 2, 2011 [1 favorite]


The Retrocessionaire was a terrible comic and deserved to be canceled long before the "vs. the Robert Reich" issue that finally did it in.
posted by adamdschneider at 11:01 AM on September 2, 2011


How is it that the third tier gets the best name? Insurer - meh. Reinsurer - double meh. Retrocessionaire -- swashbuckling elegance!
posted by brain_drain at 11:17 AM on September 2, 2011 [5 favorites]


Very interesting story Mental Wimp, and how do I get to do your job?
posted by grobstein at 8:32 AM on September 2 [+] [!]


Stay in school. Study hard.
posted by Mental Wimp at 11:55 AM on September 2, 2011


Stay in school. Study hard.

Well shit.
posted by grobstein at 11:58 AM on September 2, 2011 [1 favorite]


My father ran a pretty large reinsurance corporation for many years. They have been gobbled up, sold, and resold many times in the years since then. It's an odd business. Back in the day, it wasn't what I would call "evil". Times have changed, but reinsurance is just good business when you are the primary insurer of really, really expensive stuff.
posted by Windopaene at 12:10 PM on September 2, 2011


And editorializing? Axe grinding? The hell?

There's two possible reasons for this. One is that whenever you see a Metafilter post of the form 'huge corporation is huge' it's usually a frame for the news or suggestion that the huge corporation in question has done Something Bad. And your opening line, about reinsurance being the sort of thing you do if you need to invest billions in one go, makes it sound like money laundering.

The other reason is that your username bears a superficial similarity to that of another user who posts more regularly than you and has a taste for dramatic revelations of the sort described above. I have mixed you up with him/her on more than one occasion, before realizing that the substance and tone of your respective posts/comments tended to run in almost opposite directions.
posted by anigbrowl at 12:16 PM on September 2, 2011


It would be pretty funny (but definitely a conflict of interest) if some of those in the 'alien' class of reinsurers actually turned out to be space aliens.

Well you wouldn't want to only insure on one small planet. If there was a global catastrophe and all the insurers went broke or were destroyed in the cataclysm. Off planet life would see a huge hit to their bottom line unless they were reinsured by alien insurers.
posted by JackarypQQ at 12:59 PM on September 2, 2011


Can someone explain this to a really ignorant person?

How is insurance not "Gambling that you will lose?" Like, I would not want to buy fire insurance. I really don't want my house to burn down and I hope it never does. If I live the rest of my life without a house fire, but I have paid 1000s of dollars over that time, doesn't that make me a chump?

And if it does burn down I will maybe get some money, but from what I have seen (in the insurance restoration business) it is a painful battle trying to get compensated, and the insurer will try their best to hum and haw and not pay you. It sounds almost as stressful as just being broke and homeless.
posted by Meatbomb at 1:07 PM on September 2, 2011


If you can self-insure its always a better deal. I.e. never buy insurance for losses you can easily afford the cost of taking. This is why things like service plans or linsurance on very high probability events are nearly always bad deals. You are better off saving a bit of money

In another respect, sure its gambling that you will lose, but the size of the loss would be big enough that it would cause financial hardship out of scale relative to the premium's you've paid -partially because the actual risk of that event occurring is quite low. For an entire pool the expected payout is 100% of the premiums paid. LT the industry pretty much has done that, actually slightly worse than that (i.e. claims>premiums)

And yes, there are many many shitty insurance companies. Its just like dealing with any other financial services company.
posted by JPD at 2:05 PM on September 2, 2011


one last thought- part of why increasing your deductible reduces the premium by more than simple math would explain is because the likelihood of a low severity loss on your homeowners or auto policy is much much greater than a high severity loss. Its not proportionate.
posted by JPD at 2:08 PM on September 2, 2011


How is insurance not "Gambling that you will lose?"

It is. Alternatively, you can see it as a positive bet on the fact that Shit Happens.
posted by anigbrowl at 2:20 PM on September 2, 2011


How is insurance not "Gambling that you will lose?"

The main reason is that gambling is actually a speculative risk, in that there's a chance of loss and a chance of gain. But with insurance, there's really no chance of actual gain, because even if you receive benefits under a policy, they're only going to compensate you for a loss in another area--and probably not even completely. So if you're looking to get ahead, gambling is actually a better bet than insurance, because the only way to profit off insurance is fraud.*

If I live the rest of my life without a house fire, but I have paid 1000s of dollars over that time, doesn't that make me a chump?

No. What you're doing is paying someone to be ready to drop a few hundred grand on you at a moment's notice, i.e. you're essentially "renting" capital. Some agents describe this as "peace of mind," but that's really because either they don't really understand the concept or they don't think customers will. Potentially both, and the latter is actually true a lot of the time. but think about it: how long would it take you to set aside funds equivalent to your policy limits? Most people can't do this under any circumstances.**

So having insurance lets you do two things. First, it means you don't have to plan on being able to completely rebuild your house on your own dime, which means saving one hell of a lot more than you pay in premium. This means you can take on risks--like homeownership and driving a car--that you would otherwise never be able to afford responsibly. Second, it lets you sort of flatten out your costs by establishing a maximum that you'll ever have to pay for a particular kind of loss, that being your insurance premium. Take car insurance. Whether you have no accidents, a fender bender, or cause a sixty car pileup on the interstate, you will never pay more than your insurance premium to cover any liability you may rack up while driving. That's actually a pretty valuable service, when you think about it.

*Or an underwriter really screwing the pooch. Which occasionally happens, but usually not in situations where the insured isn't up to something.

**And the ones that can tend to self-insure for exactly that reason.
posted by valkyryn at 2:39 PM on September 2, 2011 [4 favorites]


The differences among gambling, event-based derivatives, and insurance are similar, to my mind, to the differences among terrorists, partisans, and freedom fighters. The value judgments are embedded in the nomenclature.

Buffett blasts CDOs because of their impenetrability, but Berkshire makes a huge profit from managing the float of their General Re division, which essentially gambles every year that there won't be a bunch of world catastrophes. On the other hand, because Buffett understands this business - he wrote a college senior thesis at the age of 21 on how his ambition in life was to be the guy who manages GEICO's float - he is arguably well qualified to comment on the shades of difference between these different ways of speculating on probabilities. One of the ways that Berkshire differs from all the banks that went under due to speculating on CDOs is that Buffett makes Berkshire keep a huge cash pile sitting around - $20 billion or so - earmarked as "this is the money that sits here and only gets paid out if we have twenty Hurricane Katrina-scale disasters this year."

Interesting that for years Buffett has been singing the praises of one of his key employees, Ajit Jain. In Buffett's opinion, or so he says, the guy is better at pricing these large reinsurance deals than anyone else in the business. This makes him one of Berkshire's key employees - possibly more important than Buffett himself.
posted by Protocols of the Elders of Sockpuppetry at 4:40 PM on September 2, 2011 [1 favorite]


The differences among gambling, event-based derivatives, and insurance are similar, to my mind, to the differences among terrorists, partisans, and freedom fighters. The value judgments are embedded in the nomenclature.

Actually, it's less dependent on nomenclature and more dependent upon which side of the equation you're on. Customers of insurance companies pretty much uniformly benefit from having it, for the reasons described above, and there really is a category difference from gambling as such, because insurance is only profitable for the insured when there's fraud.

Insurance companies on the other hand, pretty explicitly are taking a flyer, hoping that their written premiums plus returns on float and investments are greater than their losses in a given year. It's a calculated risk, but it is still speculation.

But then again, so's any other business, when you think about it. This is just a little more explicit about that.
posted by valkyryn at 6:10 PM on September 2, 2011


twoleftfeet:If this seems like a good investment I've got some collateralized debt obligations I'd like to sell you.
That seems to be about the way it works. A number of prominent people took a serious financial hit playing this game back in the 90s.
Imagine the horror of the names who had been fleeced when they learned that Mr. Robert Hiscox, the deputy chairman of Lloyd's, had said when referring to Lloyd's names: If God had not meant them to be sheared he would not have made them sheep. In order that there shall be no misunderstanding, I will repeat that. The deputy chairman of Lloyd's said of his investors: If God had not meant them to be sheared he would not have made them sheep. That is backed up by another member of the Lloyd's regulatory body, whose identity I know, but I am not sure of the quote and therefore I shall not accredit it to him. He was heard to say, in effect, "If we find a mug, we use him." That is the way in which the Lloyd's regulatory authority refers to its investors. There is not much duty of care there.
posted by Coventry at 5:47 AM on September 3, 2011 [1 favorite]


I saw this post yesterday but was unable to post a response at the time. Found the direction of the thread very interesting and the thoughts contained within. I work as an Insurance Underwriter (previously in the London Market) and feel strongly that certainly where I am in the UK - the industry has a very poor profile. Not so much a tremendously negative one but the Insurance Industry has it's roots and raison d'etre in London and does not shout from the rooftops about the significant amount of good it does. As opposed to say the Credit Crisis and the nefarious activities of our Banking Cousins.

Insurance is by definition the spread of risk - and therefore the existence of this mechanism allows events to occur that would otherwise be untenable. There is a morality lurking within the industry though I accept it is not always there (I'm thinking US healthcare industry for example).

Anyhow probably too late to the party on this thread but Reinsurance is simply the Insurance of Insurance companies and as such anything you want to lay at the footsteps of the Reinsurance industry is the same as laying it at the Insurance industry itself.

If anyone has any specific queries they would like answered to better their understanding in this area I am happy to oblige.
posted by numberstation at 12:23 PM on September 3, 2011


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