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Making a Market for Acts of GodThe Practice of Risk Trading in the Global Reinsurance Industry$

Paula Jarzabkowski, Rebecca Bednarek, and Paul Spee

Print publication date: 2015

Print ISBN-13: 9780199664764

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:oso/9780199664764.001.0001

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Reinsurance

Reinsurance

A Market for Acts of God

Chapter:
(p.1) 1 Reinsurance
Source:
Making a Market for Acts of God
Author(s):

Paula Jarzabkowski

Rebecca Bednarek

Paul Spee

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199664764.003.0001

Abstract and Keywords

Chapter 1 explains the structure of, and key players in, the reinsurance market; the insurers (cedents), reinsurers, and brokers. This book focuses on the reinsurers who, despite being competitors, collectively bear the risk of unpredictable disasters, which is transferred to them from insurance companies around the world. The chapter particularly examines the practice of reinsurance underwriters who evaluate, price and trade these risks from their hubs in Lloyd’s of London, Bermuda, Continental Europe, and Singapore. This chapter opens with an evocative account of the devastating Tohoku earthquake and tsunami, 2011, as an example of the unpredictable disasters that reinsurers underwrite. The chapter then explains the basic principles of the way that this market works and how risk is traded. The remainder of the chapter introduces our social practice theory approach and the novel framework of making markets through relationality, nested relationality and relational presence that is developed in this book.

Keywords:   financial markets, market coordination, market connectivity, relationality, social practice theory, Tohoku earthquake, disasters, risk transfer, global ethnography

It’s the unknown unknowns that we have to think about. By buying reinsurance we’re transferring the risk of what we don’t know, what we don’t understand. And if we don’t buy enough cover, then we could have some very nasty shocks.

(Interview with a senior executive in a large insurance company explaining the purpose of reinsurance)

Reinsurance-as-Practice 1A

Tōhoku Earthquake and Tsunami Shocks Japan . . . and its Reinsurers

On March 11, 2011 at 14:46 JST, the earth shook seventy kilometers (forty-three miles) off the Oshika Peninsula of Tōhoku in Japan.1 Even in a country historically well prepared for unstable ground, this magnitude nine earthquake was beyond anything anyone had predicted; it was the most powerful earthquake ever recorded to have hit Japan. The underwater shock generated powerful tsunami waves up to 40.5 meters high, and the devastation on land was horrific: 17,500 people died, 6,109 were injured, 2,848 went missing, and 340,000 people were displaced from the Tōhoku region. Beyond the human tragedy, this was also a physical disaster: 127,290 buildings collapsed, another 272,788 semi-collapsed, and a further 747,898 were partially damaged.2 In addition, critical infrastructure such as roads and railways was damaged, a dam collapsed and the nuclear power center at Fukushima went into meltdown, displacing thousands of employees and nearby residents, and creating an ongoing crisis with terrifying implications for the whole region.

(p.2) In all, the World Bank estimated that the economic cost of the disaster was US$210 billion.3 Even as the Japanese government and the Bank of Japan responded, aid and rescue teams flooded in from around the world to begin the massive task of recovery. Against this dramatic backdrop we focus on a market actor closely tied to such events: those reinsurance firms and their underwriters*4 who insure the insurance firms, supporting insurers in paying the claims for their insured losses that are so critical for rebuilding after such disasters.

On March 11 in London, Simon,5 a reinsurance underwriter in charge of the Japanese territory for his firm, was watching television before his tube ride into work when the breaking-news alert came in. His cup of coffee grew cold—forgotten as he watched in horror. As he rushed to the office, underwriting on the yearly reinsurance deals for Japan (which were currently being renewed) had ground to a halt. Simon spent the day following the live stream of news reports on his PC, and emailing his colleagues in Japan (brokers* and clients) with simple messages that they were in his thoughts. Around midday, he—almost symbolically—scrunched up the hard copy of a document on some “pricing” he had only just done for a Japanese deal, and tossed it in the bin. The careful calculations he had finalized so late last night in the office meant nothing now. Japan had changed overnight, and that included the work of underwriting Japanese insurance companies: providing reinsurance capital to help them bear the risk of major, often unpredictable, disasters, such as the earthquake that had just devastated Tōhoku. Simon winced as he considered that not only did he need to begin his pricing anew for any Japanese deal, he also needed to find out the losses his firm would have to pay from the Japanese deals they already covered. With all the uncertainty and chaos surrounding the event, it would be some time before he could get that kind of information. Today, therefore, he packed up relatively early. The late nights crunching the numbers and meetings with the executive team—in his own company as well his clients’ firms—would be happening soon enough over the next weeks. Meanwhile, he grabbed his jacket and headed to a nearby bar to discuss the event with his colleagues, declaring, “This is what we are here for; to pay claims when the big one hits.”

1.1. Introduction

This is a book about making a market for disasters such as the Tōhoku earthquake. Our approach is to analyze and explain this reinsurance market by (p.3) looking at the skilled professional practice* of reinsurance underwriters, like Simon, as they trade on risks, such as “Japanese Earthquake”. The reinsurance market “insures insurance companies” for the risk that a major disaster might occur, resulting in multiple simultaneous or high magnitude claims that could cause insurance firms to collapse. As these events* are often unpredictable, and the damage and extent of loss they might cause is uncertain—those unknown unknowns in our opening quotation—we refer to this as a market for Acts of God*. Our use of this term, while not strictly adhering to the legal definition, refers to the unpredictable and uncertain nature of such disasters, whether natural or man-made. For example, in recent years the reinsurance market has provided cover for natural disasters as diverse as hurricanes that devastated entire cities in the United States; earthquakes in Chile, New Zealand, and Japan; flooding in Australia and Thailand; and bushfires in California. At the same time it has paid out for man-made disasters, including terrorist attacks such as the World Trade Center in 2001; ongoing asbestos claims; piracy; environmental disasters, such as marine and oil rig spillage; and credit default. Trading in the probability of such disasters is fraught with unpredictability and uncertainty. In reinsurance there is never any way to predict what the next “big” one will be, when it will occur or how much it will cost. As one journalist puts it: “Reinsurers are ultimately responsible for every new thing that God can come up with.”6

1.2. What Is this Market?

Despite the highly visible “C.N.N. nature” of the large-scale events in which it trades, surprisingly little is known about the reinsurance market (Cummins and Trainar, 2009; Dupont-Courtade, 2013). We therefore briefly explain the parameters of this market.

The amount of premium* (revenue) received by reinsurers across the global market for the risk they take from insurance companies was $233.6 billion in 2012.7 This premium is received in return for reinsurance companies holding capital reserves to cover insured losses around the world that are growing in severity, frequency, and cost. For example, losses from catastrophic events have increased significantly from Hurricane Hugo in 1989, which, at $4 billion of insured losses was the first event to cost more than $1 billion;8 to (p.4) events such as the World Trade Center in 2001, which incurred insured losses of approximately $35.5 billion to Hurricane Katrina in 2005, which cost some $46 billion in insured losses.9

These loss figures, while often U.S.-dominated because of the concentration of insured properties in high-risk regions, are not exclusively North American. Rather, 2011, which incurred losses from Australia, New Zealand, Japan and Thailand, was the second most expensive year for catastrophic loss on record, with an estimated insured loss of $116 billion.10 Behind the magnitude of these ever increasing economic losses, there is enormous personal suffering and hardship as people attempt to rebuild properties, lives, and businesses. Reinsurance is thus a market that plays a critical social and economic role. It supports insurance companies to pay the claims that enable individuals, business, and society to get back on their feet after a disaster.

In Figure 1.1 we show the basic structure of the market, and its key players. As insurance companies take on the risk from a range of consumers—from domestic policyholders with home and car insurance, to businesses with everything from property to workers’ compensation to business interruption insurance—an insurance firm carriers a portfolio of risks (Arrow A).

While these insurance companies have capital reserves to pay some claims on any of these risks, a big event, such as the Tōhoku earthquake above, or frequent smaller events, would result in claims that could exceed their capital reserves and cause insurers to collapse. Hence, insurance companies are called cedents* because they buy a reinsurance deal* that cedes away a specified portion of their portfolio of risk to reinsurers (Arrow B). These reinsurers receive a premium from their cedents in return for assuming a portion of risk, specified in a reinsurance deal. The reinsurers will be responsible for paying for the losses that have been specified in the deal if there is a disaster; therefore they must hold capital in reserve.

As this is a global market, with cedents transferring risks from different parts of the world to reinsurers who are also located in different capital hubs around the world, the market has an important third player: brokers (Arrow C). These brokers help cedents to structure a deal for transferring their risk, and then help them to find reinsurers who want to supply capital to such deals. We explain this process in more detail in Buyer’s Perspective 1 in the text box.

ReinsuranceA Market for Acts of God

Fig. 1.1. An Overview of the Reinsurance Market

(p.5) Our book focuses on the reinsurers in this market, in particular examining the underwriters who trade risks on behalf of their firms. While these risks are severe and unpredictable and the stakes for losses are high, reinsurance underwriters trade on such risks routinely, individually evaluating hundreds of risks each year as part of their everyday work. We make visible the skilled professional practice through which underwriters evaluate the probability of a disaster and the magnitude of any resultant loss, in order to charge a price for the risk being transferred to reinsurance firms. Always present in these evaluations* is the reinsurer’s obligation to pay for any losses incurred on the deals they underwrite. In this book, we examine underwriting practice across risks as diverse as Indian Third Party Motor Liability, European Credit & Surety*, and Californian Earthquake, showing how this practice generates a global market for Acts of God.

1.3. What We Did

From 2009 to 2012, we were granted extensive and unusual access to conduct a “fly-on-the-wall” ethnographic study of the global reinsurance market. As we were interested in how the market is generated within the everyday practice of underwriters evaluating and trading risk, we followed (Czarniawska, 2007) underwriters at work in the three main markets that channel reinsurance capital: Lloyd’s of London, Bermuda, and Continental Europe. We also included the important Asia-Pacific market through fieldwork in Hong Kong, Japan, Singapore, and Australia. Across these markets, we shadowed (p.6) and interviewed everyone from Chief Executive Officers to analysts in reinsurance, broking and insurance firms, and attended conferences, client meetings, and social activities with them. There were many social activities as this is an industry that has traditionally seen personal relationships as integral to big-money deals. Hence, we sipped champagne on sun-drenched terraces in Monte Carlo, drank pints in watering holes on the square mile in London, downed shots on Christmas Eve in Bermuda, had leisurely lunches in Continental Europe, and danced at cabaret parties in Singapore. We also arrived early and sat late in offices, observing frustration, anger, exhilaration and stress, as underwriters conducted major financial transactions.

Reinsurance-as-Practice 1B gives a flavor of the rhythms of work in the reinsurance market, which we followed over three annual cycles. During this time, we experienced first-hand the market response to natural disasters, such as earthquakes in Chile, New Zealand and Japan, floods in Australia and Thailand, bushfires in Australia and California, and man-made disasters such as Deepwater Horizon, through the eyes of the people who underwrite such events and pay for their losses. In total, we spent time across sixty-one separate offices in seventeen countries, conducting 935 observations of underwriters and brokers at work and 382 interviews with stakeholders in all parts of the industry, as well as numerous other social and informal interactions (see Appendix A for further details). These rich data will be used to take the reader behind the scenes, showing how reinsurance underwriters trade in the complex, high-stakes deals that make a market for Acts of God.

Reinsurance-as-Practice 1B

The Reinsurance Year: From Sipping Champagne to Allocating Capital

The reinsurance year begins in September with a three-day conference in Monte Carlo where key players from all over the world meet in a cluster of the most prestigious hotels around the main square. This is an important opportunity to mix with competitors, clients and brokers and get a sense of market conditions and trends.

We shadowed participants in Monte Carlo in September 2009. During the day we saw them dressed in chinos and polo shirts, drinking overpriced coffee, as we rushed alongside them through a tight schedule of meetings with brokers and clients, changing tables every thirty minutes in the Café de Paris and the main hotel venues. The evenings were more formal, starting with sipping champagne at cocktail parties, followed by dinners (in private dining rooms or on yachts for the inner circles), then serious drinking into the wee hours. At 8:00 a.m. the meetings began again.

While the setting is glamorous, these social activities are all business. Reinsurers talk about their risk-appetite and signal their expectation that prices will rise, while brokers and insurance clients talk prices down. Throughout (p.7) these meetings people frequently check the hurricane tracker on their phones. September is the U.S. hurricane season and a bad storm could create huge losses that would reshape the market. There is no knowing when the next disaster might hit!

These conference activities are the beginning of a process that will culminate in the allocation of capital to specific reinsurance deals by particular renewal dates. Just as insurance policies renew annually, so do reinsurance deals, with the key renewal date being January 1. Hence, as the underwriters move from the September sun of Monte Carlo back to their desks in separate offices and firms around the world, the work becomes more analytic as the renewal date* approaches.

We followed the process by sitting with the underwriters at their desks, taking notes on the statistical data they received, learning how they analyzed specific deals in preparation for the looming January 1 renewal (see Chapters 3 and 4). Yet throughout the complex process of mathematical modeling, the social cues and information exchanged in the preceding months, such as at Monte Carlo, were not forgotten. Corridor chat and weekly meetings inside firms and gossip in the bars and restaurants around the various trading hubs focused on news of the market. Underwriters are continuously searching for information on that vital extra element of evaluating risk and making a market; how others in the market view these same deals on which they are all quoting. They are all keenly aware that no one knows the actual price of a deal until they have all provided their separate quotes* to the cedent and the cedent has issued a consensus price* based on those quotes (see Chapter 2). At that point, underwriters will need to make decisions about what share of the deal to take at that consensus price (see Chapter 5). Because the stakes are so high, the risk on any specific deal is spread across multiple reinsurers who each take different shares in that deal at the same consensus price.

Thus, as the world winds down for Christmas and New Year, underwriters (and the researchers shadowing them) enter into a heady last two weeks of negotiations and further analysis to finalize their share on deals. So we sat with underwriters at breakfast meetings, and joined in their late night takeaway curry and pizza as they did calculations at their desks. We winced as they screamed down phones, slamming the receiver back with frustration when they lost a share of a desired deal. We shared the elation as grown men jumped up and danced around the office in an embrace as the share on a deal came through. And we also looked forward to a rest, as the market was “put to bed” on New Year’s Eve.

Typically, after a brief holiday in January, underwriters return to evaluating, pricing and placing capital on risk, focusing on the additional renewal dates of the first day of April, June and July. However, between the intensive analytic periods associated with these various renewal deadlines, reinsurers travel around the world seeing their clients, generating personal impressions about risks as they audit business practices, probe ownership and governance structures and look at the nuclear power plants, condominiums, residential homes and car yards that are being reinsured. They are consolidating existing relationships, forging new ones, and checking, over and over again, the exposure to perils and the potential for loss, in an effort to mitigate the unpredictability and uncertainty of the market in which they trade.

(p.8) 1.4. What Is Being Traded?

The way that the reinsurance market trades in risks has some unique characteristics. Here we outline three key elements.

ReinsuranceA Market for Acts of God

Fig. 1.2. A Reinsurance Deal

Unpredictability and uncertainty. There are many unpredictable and uncertain perils/hazards* that could hit an insurance company. Such perils need to be categorized as risks in order to be transferred to reinsurers. That is, cedents cannot simply transfer the probability of some unspecified peril occurring. Rather, as shown in Figure 1.2, particular types of perils, such as hurricanes, earthquakes, credit default, and so forth become categories of risk, according to the particular threat that they constitute to a cedent. For example, hurricanes and earthquakes constitute a risk to insured property, and are therefore classified as a particular type of risk, Property Catastrophe* risk. As particular perils are more likely in some regions than others—hurricane and earthquake are more likely in the United States; bushfire and flood in Australia—these risks might then be further classified by region as U.S. Property Catastrophe or Australian Property Catastrophe. Similarly the probability of credit default is classified as Credit & Surety risk, and the probability of marine cargo being lost due to hurricane, running aground, and so forth, will become Marine* risk. As cedents have multiple types of risks within their portfolio, they then buy separate reinsurance deals to cover them for each type of risk.

As shown in Figure 1.2, this deal will be structured in a particular way in order to be traded to the reinsurance market. When cedents buy a deal, they transfer the risk that they will have to pay for the losses occasioned by a specified type of event to the reinsurer. The reinsurer receives a premium, in return for which they have a legal obligation to pay for losses on such an event. Hence, the risk of a disaster is traded from the cedent to the reinsurer via a deal. Buyer’s Perspective 1 explains how cedents develop a deal and put it to the reinsurance market.

(p.9) “Over-the-counter” deals, designed by the buyers. As buyers tailor each deal to their specific demands, each deal is unique. That is, with reference to Buyer’s Perspective 1, while other cedents might also buy a U.S. Property Catastrophe deal, none will have the exact same portfolio of properties in it as GlobalInc, nor be structured in exactly the same way. Furthermore, as shown in Figure 1.2, the probable events and risks upon which deals are based are vastly different. While two U.S. Property Catastrophe deals for the risk of windstorm might be somewhat comparable, they will be very different to a Chilean Property Catastrophe deal for the risk of earthquake and all of these will be vastly different to an Indian Third Party Motor Liability deal. This enormous variation in risks and deals—and the Acts of God that underpin them—raises a puzzle about how they (p.10) (p.11) can all be traded across a panel of reinsurers within a global market. That is, how is it possible to have a global reinsurance market for these different deals that originate around the world, rather than a series of fragmented local markets for specific types of risk? In Chapters 3 and 4, we show the specific practice through which underwriters make these largely incomparable deals both comparable and tradable within a global market.

Collective risk bearing by competitors. While reinsurance is a competitive market, in which each firm is an independent profit-oriented company, no single firm takes all the risk on any deal. Rather, multiple reinsurers take shares of the same deal, so that if something catastrophic happens, no single firm pays all of the loss (Borch, 1962; Gugerli, 2013). This is because there are many deals in the market, often concentrated within a particular region, and some of these deals are very large. For example, Japanese company Zenkyoren’s $10 billion catastrophe cover in 2014 is, reportedly, the largest deal in the world.13 Hence, rather than a single reinsurer covering all the deals for Florida hurricanes, or covering the entire deal for a single cedent such as Zenkyoren, many different reinsurers each take shares of these various deals. Since it is impossible to know which deals will be hit, reinsurers have a better chance of survival if they all take a share in a deal, and all have to pay some, but not all, of any subsequent loss. Similarly, as shown in Buyer’s Perspective 1, cedents have a better chance of being paid if they are not dependent on a single reinsurer, who might collapse if required to bear the entire loss of a big deal. Collective risk-bearing* is, thus, a way of hedging for the unpredictability of events and uncertainty about the value of loss by spreading risk across the players in the market. In effect, the reinsurance market is underpinned by a collective risk-bearing principle of “united we stand, divided we fall”.

Perhaps most curiously, while reinsurers all provide different independent quotes for these deals, they ultimately all take shares on any particular deal at the same price (see Reinsurance-as-Practice 1B). This is known as a consensus price, a point we explain further in Chapter 2. The question is: how is such consensus achieved in a competitive market where firms are separately accountable to their own shareholders, have separate security ratings* (from agencies such as Standard & Poor’s and Moody’s), and are independently accountable to regulators? We address the relationship between individual competitive actions and collective risk-bearing in Chapters 2 and 5.

1.5. Where Is Risk Traded? Hubs for Global Capital Allocation

Reinsurance risk originates and is traded from cedents around the world. Indeed, during our research we saw deals that originated from such vastly (p.12) different places as Pakistan, New Zealand, Romania, Germany, and the United States, and we will take you “around the world” to show how such deals are underwritten in this book. However, reinsurers located in three main reinsurance hubs supply the majority of the capital for these deals: London, Bermuda, and Continental Europe. These hubs developed for different purposes, which we briefly introduce here in order to provide some historical background to the reinsurance market (for a thorough historical treatment of the market; see Borscheid et al., 2013).

Lloyd’s of London originated as an insurance market some 300 years ago in Edward Lloyd’s coffee house, where mariners, ship owners and merchants gathered to strike deals to underwrite ships embarking on uncertain voyages (Herschaft, 2005; John, 1958). Lloyd’s firms began writing reinsurance in the 1880s with a fire reinsurance policy on a book of North American risks (Kopf, 1929). Lloyd’s members are underpinned by a central capital fund and share a common Lloyd’s rating. While any specific reinsurance syndicate in Lloyd’s may be relatively small in terms of global capital allocation, together they have impact, with Lloyd’s comprising 6.6 per cent of the global reinsurance market by premium ceded in 2012.14 The Lloyd’s market is unique in being fully brokered, meaning that all business in Lloyd’s must be traded via a Lloyd’s accredited broker. Members of Lloyd’s assemble daily to trade in the iconic Lloyd’s building in London’s Square Mile. As the only reinsurance market where brokers physically bring the deals to the reinsurers, the building sees a steady tread of feet to and from surrounding offices, all located at most a fifteen-minute walk from the underwriting floor. Hence, social interactions between brokers and reinsurers are more critical in this market than in any other (Smets et al., 2014). Yet this connectivity only characterizes one slice of the global reinsurance market. The other hubs operate on a very different model.

The largest and oldest dedicated reinsurers in the world originated in Continental Europe. They include the two biggest players, Munich Re and Swiss Re, who between them hold 33 per cent15 of the global market by premium ceded. They were each founded in the mid-nineteenth century to service a domestic insurance customer base, within specific geographic Continental European locations that were not physically connected to each other (Kopf, 1929). Historically, and in contrast to Lloyd’s, these dedicated reinsurers typically traded directly with their domestic cedents without a broker as intermediary.

As stand-alone large entities, continental reinsurers became particularly self-reliant in managing the premium they received from cedents to generate investment income and build capital reserves in case of a loss; in contrast (p.13) with Lloyd’s with its common capital base. They also developed considerable individual expertise in risk evaluation, particularly by generating historical databases from their long-term relationships with cedents, which they developed into substantial analytical capabilities. As these reinsurers became the largest players in the world, they expanded globally from their original homes in places such as Zurich, Munich, and Hannover, setting up subsidiaries to access cedents and risks in other territories. Traditional Continental European reinsurers have very strong direct connections with their cedents, so enjoy deeper information exchanges than most brokered reinsurers. However, they are less able to access information about competitors than those in Lloyd’s or Bermuda where close geographic proximity enables social relationships and gossip to flourish.

Bermuda is a small island off the east coast of the United States, with a regulatory structure that enables the rapid setup of business to capitalize on opportunities in the global market. The Bermudian reinsurance market has grown in waves, specifically in response to disaster events in the U.S. insurance market that generated increasing demand for reinsurance capital; and hence higher reinsurance premiums. The most recent waves followed the 2001 attack on the World Trade Center and the devastating 2005 hurricane season of Katrina, Rita and Wilma. As Bermuda is a market originating in response to a shortage in U.S. cover, Bermudian reinsurers have been focused on providing capital to U.S. risk, particularly Property Catastrophe, as opposed to other types of risk, such as Casualty* or Credit & Surety risk.

Bermuda’s isolation, combined with the rapid development of new companies, has made Bermudian reinsurers very dependent on broking. They require brokers to act as a sales force to the insurance world, letting them know that Bermudian companies are a source of sound and viable capital, and to bring deals and cedents to the island. While each company operates separately (in comparison to Lloyd’s), the relative isolation and small size of the island generates a degree of “physical” connection in the marketplace. All of the relevant companies are located on some ten streets within the Port of Hamilton, within walking distance of each other. Friday afternoons see the popular Harry’s Bar on the waterfront full of reinsurers from rival firms having drinks and pumping each other for information. The island thus has a dense network of social interactions that facilitates peer-to-peer information sharing.

Summary: The global dispersion of reinsurance traders and risk. As we have shown, reinsurance is a socially and economically important financial market that trades in an unusual product—the risk of unpredictable disasters that originate around the globe. Because it is never possible to know when and where the next big event will hit or how big the loss will be, reinsurers dispersed globally have developed a practice of collective risk-bearing, taking shares in the various, vastly diverse deals that comprise the global market. (p.14) How they do this was the puzzle we set out to explore. Unlike other financial markets, they have no strong technological regime, such as a ticker or electronic exchange that provides a consistent point of contact for transactions anywhere in the world (e.g. Knorr Cetina and Bruegger, 2002a; 2002b; Preda, 2006). They have no singular model or algorithm with which to calculate risk in a common way (e.g. MacKenzie, 2006; Millo and MacKenzie, 2009). There is neither a strong regulatory regime enforcing the same practice (Fligstein and Mara-Drita, 1996), nor a normative regime arising from close proximity and everyday contact with each other (Baker, 1984; Zaloom, 2006). And yet these reinsurance underwriters, each in their different firms, in their different geographic hubs, working on very different types of deals, consistently, as part of their everyday practice, evaluate hundreds of reinsurance deals, generate a consensus price for each deal, and collectively share the risk of that deal with some of their competitors in the market. This book explains how this collective practice of the market emerges within the individual practice of the traders who underwrite reinsurance risk.

1.6. Theorizing the Market: Advancing a Concept of Nested Relationality

A stream of work on the social studies of finance has begun to examine the complex social activities of market-making. Drawing from economic sociology as well as science and technology studies (Pinch and Swedberg, 2008), these studies start from the point that “prices are not abstract, given or spontaneously generating themselves, without any interference from human actors” (Preda, 2007: 519). They suggest that we examine how markets are made between participants as they interact “in specific settings under specific conditions.” These specific settings and conditions, including rules, norms, spatial arrangements, technologies, and bodily orientations (Abolafia, 1996; Beunza and Stark, 2004; Knorr Cetina and Bruegger, 2002a; Preda, 2006; Zaloom, 2006) are the practices within which market-making activities such as pricing are possible. Our study of making a market for Acts of God is located within this view; that in their everyday work of participating in financial markets people engage in the practices that constitute the collective practice of the market.

The reinsurance market is particularly relevant to study as a global market because, as already outlined, risks that originate around the world are borne, collectively, across reinsurers in different firms in different geographic locations that comprise different national, cultural, historical and regulatory structures. We define a global market as one in which “patterns of relatedness and coordination . . . are global in scope” and in which “processes have global (p.15) breadth,” so comprising a “globally extended domain” within which market interactions and activities, such as those between buyers and suppliers, take place (Knorr Cetina and Bruegger, 2002a: 905).16

1.6.1. A Conceptual Framework: Relationality, Nested Relationality, and Relational Presence

Our book, thus, approaches markets through a social theory of practice.17 Specifically, we draw upon the work of Theodore Schatzki (2001; 2002; 2006) to unpack the collective practices that make up a global market and ensure its coordination and functioning (see Table 1 for an overview of Schatzki’s concepts adopted in this book). We will develop a layered conceptual framework of relationality*, nested relationality*, and relational presence* to explain how the collective practice of a market is accomplished in the practice of its participants.

First, we draw on the notion of relationality. A relational approach privileges the study of “relations and practices over the individual or organization” (Chia and Holt, 2006: 638; Cooper, 2005; Nicolini, 2013; Schatzki, 2002). That is, collective market practice can be studied in the relations among various market-making practices, such as the way that underwriters relate to each other (or an assumed collective “other”) during the quoting on specific deals, described in Reinsurance-as-Practice 1B, in order to generate the collective practice of a consensus price. Empirically, therefore, we need to look beyond the separation of individual and market practice to how the two are entangled within and “actively constitute each other” (Cooper, 2005: 1,699). In this book we will tease out the relationality of work practice in global markets. We will show that people make the market function, from their various different financial hubs around the world, by relating the work that they are doing as they evaluate particular deals (such as that of GlobalInc in Buyer’s Perspective 1), to the work that they assume others are doing on that same deal and other deals. For example, as we will show in Chapter 2, individual (p.16) underwriters all around the market, working on vastly different risk-types*, engage in a very consistent practice of quoting. In doing so they participate in and perpetuate the collective market practices through which deals are quoted and consensus price emerges.

Second, we will show that this relationality involves multiple interconnected work practices that we term nested relationality. A global market is complex and so different aspects of the work of market-making are nested within each other. For example, we cannot just look at people’s quoting practice (see Chapter 2) or their calculative practice with statistical models (see Chapter 3). Each of these types of practice is critical but also partial in the collective practice of making a global market. Hence, we must understand each of these individual work practices, such as quoting or modeling, as they sit at the nexus of multiple other, interconnected work practices involved with evaluating different types of risk (Chapter 4), or enacting the risk-appetite* of the different firms competing for a share of the various deals (see Chapter 5). That is, the work practices that comprise the market are nested within each other.

Third, we will develop a theory of relational presence to explain the interaction between participants in a global market. In some markets, flickers on a trading ticker enable actors to respond electronically to the signals they receive from each other. Such response presence (e.g. Knorr Cetina and Bruegger, 2002a; Preda, 2006; 2009a) is not seen in reinsurance, where actors are not connected through such technology. Neither are they connected through a common space, such as the open outcry market to which Zaloom (2006: viii) refers, so viscerally, as a “flesh and bone” market, in which actors have an embodied presence with each other, literally, through their flailing arms, raised voices, and whole body gestures as they place bids (see also Baker, 1984; Goffman, 1967/2005). Rather, our actors are relationally present with each other through the common practices that underwriters enact, which constitute particular facets of market-making activity. For example, an underwriter on the GlobalInc deal will be relationally present with other underwriters that comprise the reinsurance panel for that same deal, even if not connected in real time, because they will use common quoting practices for that deal. At the same time, these underwriters will be relationally present with underwriters on other U.S. Property Catastrophe deals because they will use similar calculative practices to evaluate such deals. And these underwriters will be relationally present with underwriters on different risk-types, such as Credit & Surety risk (see Figure 1.2) through the risk-appetites of their firms. Hence, any one underwriter will be relationally present with other underwriters as each one performs their individual practice, at a nexus of the multiple nested relationalities that comprise the market. This notion of relational presence therefore contrasts with the concepts of embodied and response presence in existing explanations of coordination in financial markets (Knorr Cetina and Bruegger, 2002a). In summary, throughout this book (p.17) we will develop the empirical basis for our conceptual framework of relationality, nested relationality, and relational presence within which a global market is able to function.

1.6.2. Sites of Market-Making Activity

In each chapter we zoom in on a specific site* of market-making activity (Schatzki, 2002; 2005), using rich ethnographic stories to explain its particular work practices. We then zoom out to show how those individually enacted work practices relationally construct collective market practice (Nicolini, 2009).

In common parlance “site” means a specific place, such as Bermuda or London, or even a particular firm. However, reinsurance deals are not written by a single firm, or in a single geographic region, but rather through the collective practice by which competitors take shares in deals at a consensus price. Hence, we take the practice concept of site, which goes beyond location, space, or time. Instead it incorporates the way that these elements come together as people interact over any specific activity of market making, such as the activity of quoting deals to establish a consensus price. We therefore conceptualize the reinsurance market as composed of multiple sites of market-making activity, in which “things exist and events happen” (Schatzki, 2002: 63). Further, these sites are themselves practices (such as evaluation) within which activities (such as modeling) happen (Schatzki, 2005: 468). Specifically, we examine the practice of making the market within the following sites.

The process of evaluating and quoting deals. A market does not exist per se, except in so much as the actors within it trade something. In reinsurance, underwriters trade deals that transfer risk from cedents to reinsurers (see Section 1.2 and Figure 1.2). This trading involves specific activity in evaluating and quoting these deals in order to establish a consensus price at which they may be traded. Different reinsurers then take a share of these deals, based on their evaluation. This activity takes place within the individual work practices of actors across the global market. We therefore conceptualize the activities of evaluating and quoting deals as two particular sites of collective market-making activity, which we explain in Chapters 2 and 3.

Specific risk-types. As shown in Figure 1.2, there are many types of very different reinsurance risks from U.S. Property Catastrophe, to Marine, to Credit & Surety. Each of these risk-types constitutes a very different site of market-making activity, involving particular calculative practices that are specific to that risk-type. Underwriters make their career in evaluating a particular risk-type, so becoming skilled professionals in the calculative practices that are germane to that risk-type. These underwriters are the ones that generate the collective market practice of the consensus price for deals within (p.18) that risk-type, and make the decisions about taking shares of those deals. We therefore consider specific risk-types as particular sites of market-making activity that we explain in Chapter 4.

The risk-appetite of the firm. While underwriters do the work of evaluating and quoting on deals, the firms in which they work are the actual risk-carriers that hold the capital to pay out on losses. These firms have different appetites for the various risk-types, such as Property Catastrophe, Casualty, Marine, and so forth; and different deals. This variable risk-appetite shapes which types of underwriters that firms employ, and how hard these underwriters compete for a share of different risk-types and deals. Hence, the risk-appetite of a firm is not a concrete “thing” but rather is enacted in a dynamic and fluid process (Power, 2009) by underwriters throughout the year, according to their success in competing for and gaining shares of those deals that are particularly attractive to their firm. The practice of enacting risk-appetite is absolutely critical in determining which specific firms comprise the collective market that is bearing risk on any particular deal. We explore how risk-appetite shapes competition between firms in Chapter 5.

While we focus our ethnographic eye on a different site in each chapter, none of these exists in isolation. Rather, they “can only be studied relationally, and they can only be understood as part of a nexus of connections” (Nicolini, 2013: 229). Therefore, in Chapter 6, we draw together the nested relationality within and between sites. We thereby show how the reinsurance market has been able to function collectively as a global market in providing for disaster after disaster, even as disasters continue to increase in frequency and severity year-on-year. Yet we sound a note of caution, pointing to the particular combinations (the nested relationality) that might be implicated in financial crises that spiral throughout a global system. We propose that an understanding of nested relationality is a first step in potential damage control for the alarming changes in practice we see emerging in this industry, which have parallels with crises in other financial industries (see also Chapter 7).

1.6.3. Building on Existing Theory

An aim of this book is make our theorizing accessible through our ethnographic tales of the field (Van Maanen, 2011). We therefore weave theoretical concepts into the narrative of each chapter, using many rich illustrations of Reinsurance-as-Practice to make our conceptual points and develop our framework of nested relationality and relational presence. In doing so, our book also draws upon and speaks to existing bodies of theory, to which it both owes a debt and also makes a contribution. We allude briefly to these here, as well as developing further theorizing points within each chapter.

(p.19) First, our study is located within the general practice turn in management and organization theory (Feldman and Orlikowski, 2011; Nicolini, 2013), which has gained considerable momentum over the last two decades in fields as diverse a strategy-as-practice (see Jarzabkowski, 2005; Jarzabkowski et al., 2007; Jarzabkowski and Spee, 2009; Johnson et al., 2003; Vaara and Whittington, 2012; Whittington, 2006); technology-in-practice (see Leonardi and Barley, 2010; Orlikowski, 2001; 2007; Orlikowski and Scott, 2008); and accounting-in-practice (see Hopwood and Miller, 1994; Ahrens and Chapman, 2007; Faure and Rouleau, 2011; Mikes, 2009; Whittington, 2011). In particular, our study is relevant to those scholars who increasingly posit a practice approach as a way to examine how work is accomplished within a bundle of practices (Chia and Holt, 2006; Pickering, 1995; Schatzki, 2002; 2006) in which technologies, spatial arrangements, materials, bodies, motivations, and emotions come together. We provide an empirically-substantiated framework for applying practice theory to the complex issues of markets and show how scholars may zoom in on the details of an individual underwriter’s work practice, even as that practice is revelatory of the collective practice of the market (Nicolini, 2013).

Second, our work is linked to a growing tradition of ethnographic work in social studies of finance that shows how financial markets actually work (e.g. Abolafia, 1996; Beunza et al., 2006; Beunza and Stark, 2012; Çalışkan, 2010; Knorr Cetina and Bruegger, 2002a; Mackenzie, 2006; Millo and Mackenzie, 2009; Preda, 2009b). We draw from these studies in three key aspects of market-making: the concept of value/evaluation; stabilizing the “work” of the market within collective practice; and making the market within a bundle of material, social, cultural and calculative practices.

The concept of value is at the heart of any market. It covers a broad spectrum of “goods” from the aesthetic to the financial to the domestic (e.g. Antal et al., 2015; Heuts and Mol, 2013; Pinch, 2015). Yet value is a somewhat problematic concept on at least two fronts. Firstly, there is the concept of value, which, in a market economy, is typically associated with economic value and the metrics associated with price (Aspers, 2009; Swedberg, 1994). Some authors have criticized this singular concept of value, drawing attention to the disputability and multiplicity of concepts of value, such as exchange value, use value, or semantic value among others (e.g. Helgesson and Muniesa, 2013; Lamont, 2012). There are thus calls to conceptualize value more broadly, particularly examining the intangible aspects of value which are not easily converted into a price, score, or ranking (Antal et al., 2015). Secondly, there is a distinction between value, which is the worth attributed to some “good” (e.g. a score or a price) and evaluation, that emphasizes the process through which any attribution of worth is constructed (Lamont, 2012; Stark, 2009; Vatin, 2013). For example, the scores given to a wine to express its value are abstract representations that provide (p.20) little insight into the professional practice of evaluating that wine by a recognized expert (Hennion, 2015). Hence we need to understand how concepts of value encode the professional practice of evaluation through which they are generated (Lamont, 2012). For the purposes of this book, we adopt these distinctions, considering the price attributed to reinsurance risk to contain a complex set of concepts about its value that do not reside simply in whether a deal has a lower or higher rate of return*; but, rather, capture and express the professional practice of evaluating risk that is the everyday work of reinsurance underwriters (see Chapters 3 and 4).

These concepts of value and evaluation are central to the marketization* of reinsurance risk, in which it is critical to attribute economic value to unpredictable risk in order to trade it as a financial object. As we shall show in Chapters 3 and 4, the process of evaluation is complex, incorporating many concepts that extend our understanding of the calculative practices through which financial objects are traded (Çalışkan and Callon, 2010; Callon and Muniesa, 2005) such as the localized knowledge of the underwriter and his/her skill in evoking the underlying risks to give meaning to the prices being constructed. It is therefore important to distinguish between the economic value that is constructed in some “objective” measure such as price, which may appear singular, and the multiplicity of values attributed within the evaluation process that leads to price (Helgesson and Muniesa, 2013).

Sociological studies of markets also draw attention to the critical role of social interactions and normative rules of market participation in stabilizing the work of the market. For example, some studies have examined how dense social networks that are characterized by repeat transactions make defectors who do not conform highly visible, so that they can be sanctioned (Granovetter, 1985; White, 2001). Others have examined how actors sustain the collective practice of the market within their own actions. Abolafia (1996) and Baker (1984) are seminal works in this field for social studies of finance, showing how individual opportunism and collective restraint are practiced on trading floors. They note how market actors enact a dense social web of normative obligations to trade, such as being prepared to offer prices on difficult deals, in order to keep the market liquid (see also Beckert, 2009; Zaloom, 2006). Of course, social interaction is not a control in itself, since it can also generate spirals and mania (Abolafia and Kilduff, 1988), or reproduce hubris and false confidence (Ho, 2009). It is imperative to study the social structure of markets as they both produce market stability (Abolafia, 1996), but can also produce the cultures and practices of unsustainable financial markets (Ho, 2009). We examine these issues of producing collective market practice particularly in Chapters 2 and 5, and focus on potentially destabilizing elements in Chapter 6.

Finally, social studies of finance open our eyes to the tools and technologies of trading, illuminating a rich vein of objects to examine in the practice (p.21) of market making (Muniesa et al., 2007). Studies have shown that the quantitative technologies for trading, the financial models, are not simply “black boxes” within which price is constructed, but are influential calculative devices that shape the market (Callon, 1998). For example, in the trading of financial derivatives, the Black-Scholes-Merton pricing model was not simply a tool at the service of traders: it actually shaped the practice of the market, as trading began to reflect the pricing patterns determined by the model (MacKenzie, 2006; Millo and MacKenzie, 2009).

These tools and technologies form part of the socio-material bundle involved in trading (Beunza et al., 2006). For example, Schatzki (2002) provides a detailed example of the rich bundle of practices involved in day trading, including scanning screens, looking up newspapers, talking to traders at other desks, talking to the screen, monitoring flickers of color on screen, watching a particular graphic, using different keyboard and mouse functions, and moving around the work station. These practices are not incidental but, as Preda (2006; 2009a; 2009b) shows, central to the work of calculation: they enable the trader to participate in and construct the market (see also Knorr Cetina and Bruegger, 2002a; 2002b). Indeed, these specific arrangements influence price-making, for example the specific spatial arrangements of trading floors, combined with the use of tools and technologies, shapes the way traders see opportunity and attribute value in arbitrage markets (Beunza and Stark, 2004). Such studies thus draw attention to trading tools and technologies and the way that they enact the market (Mackenzie and Millo, 2003; Millo and Mackenzie, 2009). We examine how such tools and technologies are used in the practice of evaluation in Chapters 3 and 4.

1.7. Book Structure

We now provide an overview of the structure of this book (see also Table 1.1). In each chapter, we build the components of our theory of nested relationality by “zooming in” (Nicolini, 2009) upon a specific set of relational practices that are enacted within the activity of that particular site. We then “zoom out” (Nicolini, 2009) to explain how these relational practices enable the coordination of activity that characterizes that particular aspect of the market.

Each of the empirical chapters (Chapters 2 to 5) is built around a set of core concepts within practice theory that involves the general understandings* that shape activity within that particular site and the practical understandings* through which they are enacted and the way that these are coordinated across a global market (Schatzki, 2002; see Table 1.1). Using Knorr (p.22) (p.23) Cetina’s (1999) metaphor of a kaleidoscope, we think of each chapter as a turn of the kaleidoscope that brings the particular practices within that site under reflection. In each chapter, we illustrate our points empirically with rich ethnographic tales that we label as Reinsurance-as-Practice in order to show how this aspect of the market works in practice. The aim is to bring the practice of the market to life and provide empirical weight for our concept of nested relationality. The structure follows the “sites” of practice we described in Section 1.6.2.

Table 1.1. The Kaleidoscope of the Reinsurance Market

Empirical dynamic of market functioning

Turning the kaleidoscope: Site

General understanding

Coordinating practices

Practical understanding

Definitions

n/a

Sites “are where things exist and events happen” (Schatzki, 2002, 63).

General understandings are “a sense of how to participate in a community gathering” (Schatzki, 2002, 86).

Dynamic social practices that are enacted in organizing the activities of interdependent actors (Jarzabkowski et al., 2012).

Practical understandings are “complexes of know-hows regarding the actions constituting the practice” (Schatzki, 2006, 1864).

Chapter 2

How reinsurers bear unpredictable and uncertain risk collectively at a consensus price.

2.2 Quoting on deals as a site for market-making.

2.3 Collective risk-bearing rests on consensus pricing of deals. Market cycles stabilize the flow of capital.

2.4 Quoting and trading around a specific renewal date coordinates the actions of market actors.

2.5-6 Renewing business and process for quoting enact the consensus and cyclical features of the market.

Chapter 3

How varied risks stemming from different perils can be traded as deals.

3.2 Evaluating deals as a site for market making.

3.3 Marketization of risk pertains to an understanding that supports that risks can be calculated.

3.4 Working with calculative devices in the form of vendor models connect individual underwriters in the calculation of varied deals.

3.5 Technicalizing and contextualizing render deals comparable as tradable objects in a financial market.

Chapter 4

How varied risk-types can be traded as deals when there is little information and no vendor models.

4.2 Evaluative practices enacted within different risk-types.

4.3 Marketization persists despite difficulties of calculation/quantification of the deals pertaining to certain risk-types.

4.4 Epistemic cultures inform how underwriters on particular risk-types are connected in the knowledgeable practices of evaluating deals of that risk-type.

4.5 Different ways of blending technicalizing and contextualizing within epistemic cultures depending on risk-types.

Chapter 5

How firms (variably) compete amidst consensus as they allocate capital to different risk-types and deals.

5.2 Enacting the firm’s risk-appetite as a site for market-making.

5.3 Competing to shape the consensus price of deals and for a share of them.

5.4. Firm risk-appetite, filters which firms are connected in sharing risk on any particular deal.

5.5 Firm risk-appetite enacted through diversification, relationship longevity, and capital availability, all of which varies between firms on any particular deal.

Chapter 6

How the market functions within nested relationality, and how current changes are altering these relations with harmful consequences.

Drawing together the nested relationality within and between sites.

Nested relationality is relationality between the bundle of sites and practices outlined in previous chapters.

In Chapter 2, we turn the kaleidoscope to focus on how consensus price and market cycles* are enacted within the process of quoting and renewing deals. We illustrate this process through a rich example of Reinsurance-as-Practice which follows the catastrophic Thai floods in 2011 and their impact on the market cycle.

In Chapter 3 we explain the marketization of reinsurance risk, turning the threat of perils into tradable deals through the increasing pervasiveness of statistical models*. We illustrate the practices of technicalizing and contextualizing deals with a Reinsurance-as-Practice example of an underwriter, John, evaluating U.S. Property Catastrophe deals for risks such as hurricane damage within the Gulf of Mexico.

In Chapter 4 we turn the kaleidoscope to focus on variation in risk-types. We explain that large swathes of the risk covered by the reinsurance industry are considered “un-modelable” and come with very little statistical information. We show that such risks can be evaluated and traded by different groups of dedicated reinsurance experts with specific knowledge of the calculative practices for that risk-type. Their varied practices are illustrated with a series of Reinsurance-as-Practice examples of evaluating different risk-types, including Credit & Surety, Marine and Property Catastrophe risks, from different regions including Spain, India, and Pakistan.

Chapter 5 brings into focus variation in the way firms compete to shape the consensus price and to gain shares in particular deals according to their risk- appetite. We bring this theme of competition alive with a Reinsurance- as-Practice example of underwriters in four different firms around the world, each competing for the same deal on a different basis, according to the variation in their risk-appetite.

In Chapter 6 we explain how the market is enacted within a nested relationality between sites and practices. This chapter will show that nested relationality both enables the market to function, but is also fragile, in that the entire nest depends on the complex interweaving of a series of specific practices in particular sites. When some of these practices shift, for whatever reason, they shift the entire set of relationships within which the market is made. We will explain some rapidly escalating threats to the current nested relationality. In particular, we will suggest that these changes are shifting the (p.24) reinsurance market from a market for Acts of God to a market for financially tradable commodities, with potentially serious consequences for its viability.

We conclude, in Chapter 7, with summarizing reflections, where we draw some parallels to other financial markets and suggest some practical and theoretical lessons arising from our exploration of reinsurance as a market for Acts of God.

Notes:

(1) “Magnitude 9.03—Near the East Coast of Honshu, Japan.” 2011. United States Geological Survey (U.S.G.S.), April 5; http://www.webcitation.org/mainframe.php.

(2) National Police Agency of Japan. 2014. “Damage Situation and Police Countermeasures,” February 10. http://www.npa.go.jp/archive/keibi/biki/higaijokyo_e.pdf; “The Great East Japan Earthquake.” 2012. World Bank, May 9, Washington D.C.

(3) Wharton Risk Management and Decision Processes Center. 2008. “Managing Large-Scale Risks in a New Era of Catastrophes: Insuring, Mitigating and Financing Recovery from Natural Disasters in the United States.” Philadelphia, PA: The Wharton School, University of Pennsylvania; Swiss Re. 2012. “Natural catastrophes and man-made disasters in 2011: historic losses surface from record earthquakes and floods.” Sigma Report, February.

(4) In this book, bold fonts with an asterisk are used the first time we use a specific reinsurance or theoretical term in any chapter, to denote that the meaning of the term may be looked up in the glossary.

(5) Pseudonyms for both individuals and firms are used throughout the book to preserve anonymity.

(6) Greeley, B. 2011. “Sept. 11 Teaches Reinsurers about ‘The God Clause’.’’ Bloomberg, September 1. http://www.bloomberg.com/news/2011-09-01/sept-11-teaches-reinsurers-about-catastrophe-planning-the-god-clause-.html.

(7) “Global Reinsurance.” 2013. MarketLine Industry Profile, October.

(8) Unless otherwise noted, all figures in the book are reported in United States Dollars.

(9) Wharton Risk Management and Decision Processes Center, 2008. “Managing Large-Scale Risks in a New Era of Catastrophes: Insuring, Mitigating and Financing Recovery from Natural Disasters in the United States.” Philadelphia, PA: The Wharton School, University of Pennsylvania.

(10) “Natural Catastrophes and Man-Made Disasters in 2011: Historic Losses Surface from Record Earthquakes and Floods.” 2012. Swiss Re Sigma, February.

(11) Excess-of-loss deals that are structured into specified layers are the most common form of reinsurance deal for Property Catastrophe, particularly in developed markets or for larger cedents; Swiss Re, 2010. The Essential Guide to Reinsurance. Zurich: Swiss Re.

(12) While Jane has developed her deal with the help of a broker, some deals are developed on a “direct” basis with a particular reinsurer, particularly in the case of historic relationships with Continental European reinsurers (see Section 1.3). However, these deals are traded on the same basis to the wider market—they are developed by the cedent, in consultation with one reinsurance partner, and then distributed to a panel of reinsurers by a broker.

(13) “News Review.” 2014. Insurance Linked, March 24. http://insurancelinked.com/news- review-l-march-24-2014/.

(14) “Global Reinsurance.” 2013. MarketLine Industry Profile, October.

(15) “Global Reinsurance.” 2013. MarketLine Industry Profile, October.

(16) In this book we examine market-making from the perspective of the reinsurers who supply the capital to cover insurance risks. We do so advisedly because the relationship between these suppliers is critical in generating a consensus price at which multiple reinsurers are willing to transact. While many theories of markets examine how competition narrows the field, leading to a trading exchange between only a few parties, the collective risk-bearing nature of the reinsurance market examines how competition leads to an exchange, at a consensus price, between many suppliers; in our case a panel of reinsurers, with a single buyer, an insurer.

(17) While there are multiple practice theories, all with a largely consistent focus upon the way events and relatively stabilized social patterns unfold within the everyday practice of actors, in this book we draw primarily on Schatzki’s theory of practice. For a more comprehensive overview of practice theory and of different practice theorists, refer to Knorr Cetina et al. (2000); Reckwitz (2002); Nicolini (2013).