The Financial Crisis – Risk Transfer, Insurance Layers, and (No?) Reinsurance Culture

Abstract

The financial crisis of 2007 has triggered various debates, ranging from the stability of the banking system to subtle technical issues regarding the Gaussian and other copulas. All these debates are important, and it might be good to start even a further one: Credit derivatives have much in common with treaty reinsurance, e.g. risk transfer via pooling and layering, scarce data, skewed distributions, and a limited number of specialized players in the market. All this leads to a very particular mixture of mathematical/statistical and behavioral challenges. Reinsurers have been struggling to cope with these, not always successfully, but they have learnt many lessons during their more-than-one century in business. This has led to certain rules adopted by the reinsurance market and to a certain mindset adopted by the individuals working in the industry. Some of the traditions established in the insurance and reinsurance world could possibly inspire markets like the credit derivatives market.