Compacts of god

Let’s hope they issued cat bonds

INSURANCE only works if reinsurance works, those in the business say. An insurer that would face crippling losses if, say, a hurricane struck an island where it had covered lots of property against extreme weather, would typically insure itself against such an event with a reinsurer. But the $425 billion industry is under threat as insurers increasingly offload risk directly to capital markets instead. This month Warren Buffett, who has investments in reinsurance, dismissed it as a “fashionable asset class” whose prospects have “turned for the worse”.

Two things have made life more difficult for reinsurers. First, as insurance companies merge into fewer, global players, the share of policies they seek to reinsure has declined rapidly over the past decade, says James McPherson of PwC, a consultancy. A Slovenian insurer that used to take out reinsurance against a big snowstorm, for example, no longer needs to do so if it is part of a global insurance firm that can offset the risk with unrelated policies in other parts of its portfolio. Technological advances and regulatory pressures have...

via The Economist: Finance and economics Business Feeds

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