Market self-organization and the invisible hand of politics in global risk-trading

Abstract

To absorb modernity’s perils, insurers and reinsurers developed sophisticated collective risk sharing markets. The logic of pooling mega risks—pandemics, nuclear catastrophes, natural disasters, etc.—seemed obvious. In recent decades, however, this enduring market structure has been disrupted by the introduction of insurance-linked securities (ILS) and financial derivatives. This article presents a political account of the convergence between once-separate reinsurance and capital markets. The force driving change is a struggle for risk and price information: the protection of information by incumbent reinsurers and the search for information by capital market entrants. Large reinsurers in a position to bridge reinsurance and capital markets have been able to exploit the institutional discontinuities created in this battle. Disturbingly, as global risks escalate, the analysis explains why ILS markets have emerged sub-optimally, not efficiently, and the hollowing out of traditional reinsurance markets. More broadly, the argument develops a political conceptualization of market self-organization and structure. In this view, markets never spontaneously form as neutral fields of efficient exchange. Markets are always geared and distorted from within—through bitter internal conflicts among contending market groups bargaining over market organization and technical design, struggles that are political even if states remain peripheral to them—to produce distinctive global economic outcomes.