Hey Reinsurers! How can you become a risk expert by running away from the risk?

In 2001 when Twin Towers collapsed in New York due to a terrorist attack, it resulted into a huge insurance claim. The reinsurer who covered the risk gave a statement ‘we are here to pay claims’. The question was, did they have an option? If you are a reinsurer who accepted risk on your books, claim payment is not optional.

However, you have an option not to accept the risk at the next opportunity. You can decide not to cover that specific risk, or exit that line of business, or exit the market altogether. Unfortunately, some Reinsurers chose that path during the Covid crisis in India. Reinsurers made huge losses due to significantly higher claims owing to Covid deaths. There was lot of uncertainty about the duration of pandemic and its impact on long term mortality. So, it was a business decision to stay away from the market. While I don’t dispute the business decision, I dispute it from technical point of view. More so because it was a decision specific to Indian market. I was told they continued the reinsurance support in international markets.

Almost all business written by reinsurers is protection business. Therefore, they are considered as experts in that area. If you are an expert, when is your expertise needed the most? At the time of crisis. Is staying away from business at the time of crisis the best way to demonstrate your expertise? You could have strengthened the underwriting, increased the premium rates, imposed some caps and limits or insisted on profit / loss sharing. There were many options. To my knowledge, one Reinsurer chose these options and stayed in business by accepting risk. I guess, it would have been an extremely tough decision to accept mortality risk during these pandemic days. It’s easy to preach theory during normal days. But, it requires courage, conviction and confidence to take this decision when billions of rupees of money is at stake and your competitors are running away from risk. This probably is the best case study on ‘Risk management during difficult times’.

Best example can be drawn from the same covid crisis from doctors and other medical personnel. It was a new virus and the treatment was not known. Did they stay away from their jobs? They risked their lives to save humanity. Many lost lives in that process. For Reinsurers, its not life, but profit that was at stake. Is uncertainty of profit, a bigger risk compared to uncertainty of life? Do you want to participate in profits when they are stable but stay away when they are uncertain?

Covid is a once-in-a-century crisis. It required a once-in-a-lifetime approach from all walks of life. All your risk management expertise, empathy, and responsibility should have come out to tackle the situation, unless you are saving them all for your lecture in next conference.