I ran across a piece in Bloomberg Businessweek that is very interesting. The God Clause and the Reinsurance Industry It is a fairly long story but the gist of it is that reinsurer’s, companies that essentially insure insurance companies, have some very sophisticated models for assessing risk but even they are not omniscient when it comes to natural events. The way these companies caegorize risk is interesting in the extreme. Lloyds of London has an entire section of their website devoted to analyzing risk and they annually put out a list of Realistic Disaster Scenarios. What I found most interesting were the examples in the story of the way in which reinsurance companies have affected the way people and even governments do business. The best example was this story from Sweden.
In 1888 the city of Sundsvall in Sweden, built of wood, burned to the ground. A group of reinsurers, Swiss Re among them, let Swedenâ€™s insurers know there was going to be a limit in the future on losses from wooden houses, and it was going to be low. Sweden began building with stone. Reinsurance is a product, but also a carrot in the negotiation between culture and reality; it lets societies know what habits are unsustainable.
The story is well worth reading, it provides some intriguing food for thought.