Comments on: Why Berkshire’s cutting back on reinsurance A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: slingeek Thu, 23 Jul 2009 20:03:35 +0000 sorry, Chris, I’m not sure the document you linked us to quite does the trick.  /rating-berkshire/

By: Chris Cloke-Browne Tue, 14 Jul 2009 13:15:30 +0000 Reinsurer credit risk is accounted for to some extent in both regulatory and ratings models for insurer and reinsurer capital.

Some insurers have bought third party protection on their reinsurer risk. Aspen and Hanover Re are the best known examples. The Aspen deal is recognised as the clearest hedge of reinsurer credit risk and the most innovative.

I wrote some commentary on the issues around transferring credit risk on reinsurance recoverables from some quite extensive experience in the area. It is called “Run off with the recoverables” and it is available from

By: Dave Mon, 13 Jul 2009 19:47:08 +0000 Another funny characteristic of insurer financial strength is that policyholders’ claims are senior to credit claims (that’s why the insurer financial strength rating is always higher than the bond rating).

The problem is that when an insurer approaches insolvency, claims liabilities are up for negotiation but the bonds are not. Insurers don’t actually default, they go into ‘runoff’, which means that they stop accepting new business and negotiate down all of their liabilities.

Biggest example? Lloyd’s of London, which packed up its old asbestos liabilities into Equitas, then reinsured the whole thing with Berkshire. No credit event, but the policyholders still got screwed.

CDS doesn’t even come close to working for insurers. Reinsurance brokers have a run at this problem every few years, but the event definition shuts them down every time.

By: MrLomez Mon, 13 Jul 2009 17:48:12 +0000 It’s not even clear you could buy CDS protection on Berkshire’s operating (insurance) companies. Reinsurance receivables can’t be delivered or auctioned in a cds settlement proceeding. Operating companies rarely issue much debt. Protection referencing the holding companies would be a poor hedge. Indeed monoline bond insurers are the rare insurance operating companies where there exist a liquid market for credit derivatives.

Furthermore CDS protection captures very different credit characteristics than insurer financial strength, which is what a primary insurer looks for in a reinsurer. In particular catastrophe reinsurance pretty much has a 1-year, and often even shorter June to October “tail.” It’s hard to imagine that Berkshire’s 3-month to 1-year credit risk is really less than AAA.

Finally for catastrophe reinsurance primary insurers do not receive any accounting credit until an even occurs. If there was a Berkshire underwriting meltdown, it would be known before any accounting credit was granted to the primary insurers for their reinsured losses.

By: Kyle S Mon, 13 Jul 2009 16:31:48 +0000 It seems like this happens every few years. There is a huge disaster and all the insurers become insolvent and retreat from the cat market except for Berkshire. Gradually, everyone forgets about the disaster and comes back in to the market, squeezing margins. Just wait until the next big hurricane – Berkshire will be back in the market again.

By: Dave Mon, 13 Jul 2009 14:36:21 +0000 They wrote half as much in 08 than 06 because prices had come down for cat risk. Nothing to do with their credit rating.

I agree with James’ comment. Reinsurers’ credit quality is usually a difference of type rather than one of degree; you’re either an acceptable risk or not. For some lines of business, contracts don’t settle for years (even decades) and only the best-rated reinsurers are on the ‘security list’ and so allowed to quote.

Once you’re on the list, though, you don’t get any added economic benefit from further strenghtening.

BRK is still as highly rated as you’re going to get, so they will write whatever they want, if they deem it profitable enough.

By: James Goodchild Mon, 13 Jul 2009 14:00:07 +0000 I am pretty sure this explanation is false.
I work in the insurance / reinsurance industry & pretty much no-one hedges counterparty reinsurance risk, let alone with a name like Berkshire:
– Sad to say it, but the way insurance accounting works (a very esoteric subject) means that reinsurance assets are booked at par notwithstanding the reinsurer’s CDS spread. Buying a CDS hence would just add to reported volatility, even if economic / real risk is reduced.
– I would severely doubt that a Berkshire CDS would be payable in the event of their default. Its a world ending event – would the CDS counterpart(ies) still be around? I doubt it.