Just Say No When Business Gets Too Risky

At the annual rendezvous of reinsurers in Monte Carlo earlier this month, risk assessment and, in particular, risk analysis were hot topics.  Reinsurers buy up risk assumed by other insurers, and they have met in Monte Carlo every fall since 1957.  Understandably this industry has been hard hit by the upheaval in the financial markets, especially the sub-prime mortgage crisis, and there was open discussion of a new kind of catastrophe, “financial catastrophe,”  occurring along with the more usual forms of catastrophe–like the string of hurricanes this autumn.
While some reinsurers were concerned about locating new sources of capital, at least one company stated quite firmly that that in a season of heavy loss scenarios, a perfectly viable option was to sit on the sidelines and not fund the transfer of risks that come with these scenarios.  The company, which like Palisade Corporation, produces Monte Carlo software and has done risk analysis for years, apparently takes the guidance produced by this method of operations risk assessment seriously.  At the Monte Carlo rendezvous the company issued a bulletin stating it would limit in the near future.  This strategy–although not the method of statistical analysis that supported it–was greeted by the insurance press as rather remarkable.   But it seemed reasonable enough to me.  They sized up the risks and found there are some situations in which the best way to make a profit is to not do business.

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