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The God Clause and The Reinsurance Industry

At 9:03 a.m. on September 11, 2001, Britt Newhouse stood in the lobby on the 52nd floor of the south tower of the World Trade Center. After United Airlines Flight 175 banked above the harbor behind him, it was pointed at the 50th floor. If not trimmed correctly, an airplane will rise as it accelerates, and the man who had killed and replaced the airplane’s pilot added power until he hit the south tower 24 floors above Newhouse. He doesn’t remember the sound of the impact.

At the time, Newhouse ran Guy Carpenter’s Americas operation. Guy Carpenter brokers reinsurance treaties, which protect insurers when a catastrophe—a hurricane or an earthquake—causes losses on a large number of policies. Reinsurance, in essence, is insurance for insurers.

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Consumers don’t tend to know what reinsurance is because it never touches them directly. Reinsurers, massively capitalized and often named after the places where they were founded—Cologne Re, Hannover Re, Munich Re, Swiss Re—make their living thinking about the things that almost never happen and are devastating when they do. But even reinsurers can be surprised. And the insurers who make up their market put them on the hook for everything, for all the risks that stretch the limits of imagination. This is what the industry casually refers to as the “God clause”: Reinsurers are ultimately responsible for every new thing that God can come up with. As losses grew this decade, year by year, reinsurers have been working to figure out what they can do to make the God clause smaller, to reduce their exposure. They have billions of dollars at stake. They are very good at thinking about the world to come.

Lloyd’s, the London-based company that invented the modern profession of insurance, publishes a yearly list of what it calls “Realistic Disaster Scenarios.” The list imagines such events as two consecutive Atlantic seaboard windstorms or an earthquake at the New Madrid fault in the Mississippi Valley, either of which could strain or break an insurer’s balance sheet. By 2001, Lloyd’s had already envisioned two airliners colliding over a city, launching claims on hull insurance for the planes, property insurance and workman’s comp on the ground, and life insurance everywhere. But even Lloyd’s lacked the imagination to anticipate September 11. “People find it hard to believe in a risk unless they can see it in their mind,” says Trevor Maynard, head of exposure management for Lloyd’s. “When you try and describe a risk like this—some terrorists are going to teach themselves how to fly a plane, they will fly into property, the buildings will be weakened—by the time you get to your third point, peoples’ eyes are glazing over.”


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