Insurability (noun; insurable adj.). An old Lloyd's veteran once said famously that "there's no such thing as the wrong risk, only the wrong price". But the rest of his story is less well known: the syndicate that bore his Names ceased trading in 1985, with a clutch of fiscally disadvantaged capital providers in anxious pursuit. The pithy bit of underwriting wisdom this box man espoused - much repeated to this day by students of the 'gut instinct' school of underwriting - fails to take into account the important concept of insurability.Anything can be insured, it's true, provided the underwriter is unconcerned by the prospect of bankruptcy. Yet in practice the pot of money which insurers have available to pay claims is never unlimited (even when the liability is). Further, in the case of certain perils, the buyers of risk transfer products are universally unwilling to pay a price sufficiently high to guarantee underwriters' perpetual solvency. Therefore some risks cannot be insured sensibly, because the clear worst-case scenario would result in the complete meltdown of the underwriters' capital. Lacking insurability, this sort of risk is said to be uninsurable.
Hostage to fortuneOne shouldn't assume that uninsurable risks cannot be insured profitably in near perpetuity; the opposite, of course, is true. One can write uninsurable risks year after year, hoping to come off just in time, playing a sort of risk-transfer Russian roulette. Yet since true insurance risk is, by definition, fortuitous, the ability to come off at the right time (another inexplicable skill formerly claimed by many legendary bankrupt underwriters) is clearly possible only through some sort of occult prescience. Mere mortals simply cannot know when to come off, so when the mother of all losses actually materialises and our unimpeachable underwriter faces a loss greater that his free capital and reserves, the clean claims record of the insured is of little relevance, even if it stretches back decades. Likewise the profits realised over the years by insuring the uninsurable provide little comfort when bailiffs occupy the office.
Binary issueInsurability is a binary issue. Something is either insurable or it is not. Unfortunately for hapless investors backing graduates of the gut-instinct school of underwriting, the insurability of certain risks tends to oscillate, driven by the all-too-visible hand of global capital supply. Uninsurable risks have a chameleon-like ability to become insurable when the reinsurance pricing cycle dips. When capital is plentiful and prices are falling as pipeline profits flow in, underwriters may be sorely tempted by the lure of near-perpetual profit to spin the chamber of the uninsurable risk pistol, and point it at their temple. The ongoing, laudable effort by European reinsurers to eliminate the uninsurable risk of unlimited motor third-party liability is just such an example. All may agree today that this risk cannot be stomached, but as sure as where there's blame there's a claim, someone will volunteer to write unlimited motor a few years hence, just as Zurich decided it was a great competitive prospect in the late 1970s (marking the beginning of the previous re-evaluation of the insurability of this tenacious risk). Asbestos is another great risk whose insurability has recently been called into question, highlighting the surprise geographical quality of insurability. It is widely known that after the first signs of the extent of the asbestos loss materialised in the early 1980s, the international insurance community decided that casualty policies covering liability for asbestos-related diseases could no longer be underwritten. The risk, insurers finally realised, is uninsurable. However, as Europe's goliath risk transfer sector began to apply asbestos exclusions to the policies it issued to its US clients, underwriters made the odd determination that they could continue to insure asbestos-related liabilities in the rest of the world. It was not until 2002 that the asbestos risk (which in many ways is identical everywhere, for the miracle fibre kills Europeans and Australians as relentlessly as it does Americans) lacks the essential characteristic of insurability, no matter where on the planet it is used to line brakes, stiffen concrete, or beautify ceilings.
Future aheadA few voices - Munich Re comes to mind - had been sounding the asbestos insurability alarm for many years, but the various subjective influences that govern the judgment of specific risks' insurability had, until recently, drowned out the warnings. As technical underwriting enjoys a new dawn, many more risks are likely to be deemed to exceed the limits of insurability. As the cycle swings inevitably towards its nadir, insurers would be wise to forget received wisdom, and recognise that some risks are uninsurable at any price.