Certainly the credit worthiness of reinsurers generally has been a subject of much comment and speculation recently. The basic issue is what insurance industry people call the "solvency margin" of the various counterparties. In other words, push come to shove, will the reinsurers be willing and able to pay their contractual obligations?
Generally the reinsurer picks up more, or most, of the liability for "unlikely", "black swan" events. One can see that the original insurer is trading exposure to credit risk for insurance risk.
The reinsurer then reinsures his insurance risk, and the reinsurer's reinsurer reinsures his insurance risk, and often the original insurer ends up selling reinsurance to reinsurers that contain insurance risk written by the original insurer. This stuff goes around in circles, like a tangle of spaghetti, ending up in very much as seen in the interlocking derivatives markets. As in CDOs, CDSs, CMBSs, etc. one has the risk of companies becoming "too big to fail" as in dominoes falling creating a market collapse. A single reinsurer failure could easily result in insurance risk returning to an undercapitalized issuer, causing this insurer to collapse, returning insurance risk to other insurers causing them to collapse, etc.
Could a sufficient "black swan" event cause a collapse of the entire insurance industry? The question answers itself. Of course it can. Asbestos exposure claims nearly did the job. Only government intervention stopped collapse of the insurance industry.
Warren Buffett's GenRe has become such a power because people think Buffet creditworthy compared to alternatives. Buffett bought General Re at a Buffett like price because General Re was engaged in various financial hanky panky; in fact, former General Re chief executive Robert Ferguson just got sentenced to two years hard time for his part in an AIG accounting scam along with Christian Milton, Elizabeth A. Monrad, Robert D. Graham and Christopher P. Garand, all former General Reinsurance Corp. executive officers. Hank Greenberg, the now ex-Gen Re dictator, is considered an unindicted co-conspirator. Just the tip of the iceberg, this.
An entertaining and educational reinsurance blog is:
http://www.sexyre.com/
Many reinsurers, reaching for the "gold ring", got involved in the recently collapsed "investment banking" craze. One of the oldest and most respected reinsurance firms, Swiss Re, has been much in the news of late and is scrambling for capital. Swiss Re says it is not seeking government funds.
Lots of uproar about the insurance, reinsurance and banking firm Fortis in the news. Essentially the Belgian government tried to sell the profitable part of Fortis to PNB Paribas to avoid having to make bank depositors whole but didn't figure on the Chinese insurance firm Ping An, the largest Fortis shareholder, out manuevering them. (you are going to see a LOT more of this sort of thing). The Belgian government is going to have to pony up a lot more taxpayer money to get out of it's obligations. Need I point out that the insurance side is heavy into reinsurance. In the end the public always pays, or, more accurately, the "little guy" always pays, because that is what "little guy" means. Whover gets stuck with the bill, is, by definition, the little guy.
Of course, their is AIG. The taxpayer is out about $200 Billion so far on this "too big to fail" reinsurer and $ Many Hundreds of Billions at risk in guarantees.
We have covered the travails of the reinsurance industry as has been reported in the mass media. To keep the insurance industry from going belly up has taken a lot of money so far.
About Bermuda.
Bermuda domiciles fourteen of the largest twenty five reinsurance firms in the world based on gross premiums written. This has come from zero in fifteen years. These are "class one" firms. There are five "classes" of Bermudan reinsurance companies, one through five, with five being the lowest. Most of the "five" rated firms are post-Katrina.
After a lot of digging I find the Bermudan reinsurance business fully opaque. The two year end statements I could find are useless. My judgment is that a lot of them function as SIVs, Special Investment Vehicles (remember Enron?) for various enterprises. I have no evidence that any of the torrent of money coming into the reinsurance business there is laundered. Need I say more?
It does appear that legitimate reinsurance can be purchased there however. Reinsurer's reserves were sufficient to weather Katrina. Somebody has deep pockets.
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