Footing the Bill for Acts of God - how the reinsurance market is under threat

A new book, based on research carried out at Cass Business School, warns of the dangers the reinsurance market may face as a result of changes to the way losses created by natural disasters are assessed.

A new book, based on research carried out at Cass Business School, warns that the reinsurance market could face severe threats as a result of changes to the way losses created by natural disasters are assessed.

Reinsurance is a financial market that trades in the risk of unpredictable and devastating disasters. A move towards bundling the underwriting of natural disasters and changing the way in which potential losses are assessed could see investors in insurance bonds and financial products picking up the bill. As a result the pace at which societies and infrastructure are rebuilt following a disaster could be impeded. With both natural and man-made disasters increasing in frequency and severity, these changes could have profound implications both locally and globally.

The authors of Making a Market for Acts of God - Professor Paula Jarzabkowski, Dr. Rebecca Bednarek and Dr. Paul Spee - describe it as a "call to arms" to the industry. Professor Paula Jarzabkowski commented "After a disaster, we can’t wait afford to wait years and wade through costly court cases before receiving the pay-out that lets us rebuild. Natural and man-made disasters are just so horrific – it’s going to be better not to find out in retrospect whether these new reinsurance methods are substantial enough to cope.”

The book looks closely at catastrophes such as the Tōhoku (Japanese) Earthquake in 2011, which was estimated to have cost the reinsurance industry $37.5 billion. It also studies the consequences of the Thai floods the same year. Indeed 2011 was the most expensive year on record for natural disasters, placing the costs of recovery on the insurance and reinsurance industries. Professor Paula Jarzabkowski explains “We studied the industry for three years, and one of these years was 2011. We saw that the drivers of risk are increasing, and the range of disasters across the World during that year demonstrate the systematic and linked nature of that risk."

“We show how a flood in Thailand can disrupt global supply-chains, impacting the operations of businesses as far away as the American chain, Walmart. We don’t know if new insurance linked securities are the right way or not – but we do know they don’t operate on the same principles as the traditional reinsurance that has paid for major losses in the past.”

Making a Market for Acts of God, now available from Oxford University Press, will find an audience among people working in the industry, as well as academics and those with an interest in global affairs, reinsurance and financial markets, and unpredictable world events. It's an in-depth and compelling study of an industry that affects everyone.

Praise for Making a Market for Acts of God

Darwin travelled to the Galapagos to see how species evolved. Paula and her team travelled to more congenial places - Bermuda, Lloyd’s of London, European capitals, Asian capitals and Monte Carlo – to see the reinsurance tribes at work. The result is a ground-breaking book explaining what the different tribes actually do. It is an insightful and vivid account that explains how our market works, how it identifies, prices and manages risk. It also provides important warnings regarding the implications of recent changes to industry structure. It is a must read for anyone interested in (re)insurance, including those working in this industry. Bronek Masojada, CEO Hiscox Group

This ethnographic study of the insurance industry performs an important and urgent task: it exposes the everyday practices by which global financial markets work. The authors bring wonderful clarity to difficult themes, from the structuring of financial deals to developing a macro-level theory of social practice that will be insightful for scholars adopting strategy-as-practice or practice approaches more broadly. This book will be a stimulating read for financial professionals, social scientists, regulators and policy makers alike. Richard Whittington, Professor of Strategy, University of Oxford

Professor Paula Jarzabkowski speaks to Bloomberg about catastrophe bonds and insurance (video).