Tuesday, September 6, 2011

The God Clause and the Reinsurance Industry - By Brendan Greeley

Found via Simoleon Sense.

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. 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.


Catastrophes do not surprise all societies equally. Greg Bankoff, an historian at the University of Hull in Britain, has defined for the Philippines a “culture of risk,” a set of adaptations built around the constant threat of natural disaster. Agricultural systems in the Philippines focus on minimizing loss rather than maximizing yield. The islands developed a kind of low, buttressed “earthquake baroque” style for stone buildings. Communities are quick to relocate out of danger.

In a paper this year on risk culture in Western Europe, historian Christian Pfister of the University of Bern in Switzerland details how towns pass on memories of disaster. A stone house in Wertheim, Germany, sits on the Tauber River, painted with the dates and levels of floods back to 1621. Storm tide markers dot the North Sea coast. In 1606 the farmers of Italy’s Aosta Valley built a chapel near the glacier that delivered regular floods and began a procession to it every July. And on Japan’s east coast, stone tablets mark the high-water marks of tsunamis. They all send the same message: When we are gone, remember this flood. And prepare for the next one.

From Newhouse’s office you can see, near the receptionist, a monument to the 29 Guy Carpenter employees who were killed on September 11. It stands about five feet high, in polished wood, inscribed with 29 names and topped with a crystal flame. Newhouse is now Guy Carpenter’s chairman. When I tell him that I was downtown on September 11, he reaches into a box below his desk and gives me a pin he’d had made for staff and clients: the towers of the World Trade Center, wrapped in a single black ribbon. I mention the tsunami stones, many of which had been ignored in the burst of economic activity in Japan that followed World War II. Commerce grows along dangerous places, on rivers and coastlines. Is it possible, I ask, that there’s a value to forgetting? He pauses. “If the stone is there the stone is there,” he says, “but 500 years of upside, with the absolute certainty that it’s going to be the generation after me, not me, that gets drowned—that’s human nature, isn’t it?”