Managing unknown risks: the future of global reinsurance

It has been said that insurance is the last of the financial services to accept radical change (Denney [1995-1996]). Yet there has been a fundamental shift in the geographic location and in the organization of the reinsurance industry in the last six years (Chichilnisky [19966]). Global environmental risks are partly responsible for this change; increased weather volatility and catastrophic risks are difficult to diversify using traditional insurance practices. To provide a map to the future, we need a realistic appraisal of how we got where we are. This is the story of how humans have hedged risks. There are two basic and distinct approaches: statistical and economic. The former is typical of the insurance industry; the latter typifies the securities industry. Both are needed to manage today's catastrophic risks. Neither alone will do. We show how a combination of both leads to efficient outcomes, and is the way to the future (Chichilnisky [1996a, 1996b, 1996d]).