Letter from the Editor

Diversification Rules All

By: | August 1, 2013

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

It’s the burden of risk managers to consider things that few others would want to consider.

This “Black Swan” issue is dedicated to that premise. We asked ourselves and our modeling and insurance sources, what would happen if the almost unbelievable happened?

What if an asteroid struck New York? What if a freakish geologic event, the Laki Fissure, that last happened in Iceland in 1783, were to occur again?

We don’t feel that we’re reaching. In the ever-expanding world of risk that we cover, the possibility of such events seems somehow more possible now than previously.

Just three years ago, a hurricane that would impact New York was thought to be so low frequency and so high in severity that it could be defined as a Black Swan event.

And then it happened. Perhaps the event was not in alignment with a true worst-case scenario, but what happened in New York when Sandy veered toward it was frightening enough.

Our research into Black Swans leads us to place even more value on the principle of diversification of risk.

As horrific as it would be if an asteroid exploded above New York, there are carriers that could survive such an event if they are diversified enough, according to our sources.

There is little doubt that if that type of asteroid hit, or if a massive geological eruption were to again kill one quarter of Iceland’s population, that many insurance carriers would disappear. But the strong would survive.

And key to that strength is diversification of risk, balanced against appetite, as carriers drive themselves to produce top-line growth.

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