Abstract
Insurance plays a pivotal role within societies and economies and represents the longest established form of systematic risk management in modern capitalist systems. If insurance is the ‘backbone of risk management’ (e.g. Salman, 2015), then insurance’s backbone is, in turn, reinsurance, which insures insurers. Astonishingly, though, despite recent and fruitful developments in economic sociology and social studies of finance, reinsurance remains under-researched. Jarzabkowski, Bednarek and Spee have begun to fill this gap by systematically opening up the rather closed and guarded world of the trading of reinsurance risk.
Making a Market for Acts of God describes and explains this financial market as the key space for financially hedging against the ‘unknown unknowns’, large-scale catastrophes of both human-made and natural kind, recurrently exceeding the US$1 billion range of financial losses. In contrast to other financial markets, reinsurance does not hinge on a single technical device or a regulatory or normative framework pre-defining most of the activities. And yet, concrete collective practices are identified by the authors, which are constituted through interconnected everyday practices of (predominantly) reinsurance underwriters, the professionals crafting reinsurance deals with insurance companies. This book is the outcome of an impressive 3-year-long, global ethnographic study including extensive participatory fieldwork and nearly 400 interviews. Drawing on these rich data, it frames markets as reciprocally constituting, and constituted by, practices and relations between actors through a social practice-theory lens.
The bulk of the book comprises a deep and thorough ethnographic description of relational interconnected individual and collective practices (to a large extent grounded in Theodore Schatzki’s works on social practice; for example, Schatzki et al., 2001). This is followed by the authors’ critical pinnacle as they predict the accelerating changes in the reinsurance practices they have analysed. Leading up to this diagnosis, their work is a detailed analysis of how various risks of potentially devastating disasters (e.g. earthquakes, hurricanes, floods) are rendered as economic objects. They are transformed into tradable financial entities by diverse calculative practices of technical but foremost ‘contextual’ knowledgeable expertise and experience. These chains of interconnected and reiterating practices are at the heart of making this market for catastrophic risks. It is thus a formidable example demonstrating how much a social science perspective, and in particular a practice-theory perspective, adds to our understanding of financial markets and how they are constructed.
It is curious, however, that a book about the trading of risk does little to explicitly theorise ‘risk’. Sociologist Jens Beckert (1996) once pointed out that the nexus of risk and uncertainty ‘offers a systematic vantage point’ for economic sociology (p. 805). The few scholarly contributions to the intersections of natural catastrophes and financial markets have been approaching this field primarily through the issue of risk, its conceptualisation, and political frameworks. Bougen (2003), for instance, explicitly draws on risk-networks, their development in rather political terms and on clashes in emerging systems’ underlying philosophies of risk. Jarzabkowski et al., admittedly at first sight, seem to take the ‘given’ notion of risk within the reinsurance industry at face value (with the only addition being Michael Power’s (2009) critical term of ‘risk-appetite’). Reinsurance underwriters’ diligent and careful processing of abstracted and sometimes flawed modelled representations of unpredictable risks, what the authors describe as ‘contextualising’, occasionally seems to inherently mirror Frank Knight’s (1933) classical notion of uncertainty as the domain of the knowledgeable and experienced entrepreneur, the central figure in ‘modern capitalism’. Nevertheless, from Jarzabkowski et al.’s ethnography it is possible to extract an implicit theorisation, concentrating their approach’s conceptual weight at its very core: social practice and ‘nested relationality’. Risk as an entity is constructed and enacted by the participating actors through their interconnected practical framework in everyday practice. Regarding catastrophic risks, reinsurance practitioners are described to follow a rationale that underpins these risks with an inherent notion of un-calculable uncertainty. Nested relationality, that is, numerous interconnected practices that comprise the market, forms a practical understanding of risk that acknowledges its artificially constructed nature within financial risk management. It is a rather fluid conceptualisation of risk as something contextually dependent on the very practices and relationalities it was produced by and for. So, rather elegantly, the authors indeed manage to draw the contours of a practice-theoretical understanding of risk.
Building upon this aspect, it becomes obvious that once the practices underpinning a specific understanding of risk change, the practices and, hence, the consequences of this particular management of risk change correspondingly. Thus, the main critical argument of the book is that of an alarming and accelerating erosion of the existing everyday practices of global reinsurance. The understanding of risk itself is turning towards a different rationale of risk, namely that of securitisation and commoditisation, throughout the wider capital markets. Giving credit to the existing, traditional system of reinsurance business, the authors highlight the stability-preserving function of this specific market. This feature mainly rests on the fact that most of the practices in constructing reinsurance deals are circled around ‘consensus pricing’ within a cycled annual process, which involves numerous interconnected calculative practices across a considerable range of actors and firms collectively agreeing on prices. With larger, more technical, and more abstracted reinsurance deals and structured finance products (e.g. ‘bundled deals’, ‘catastrophe bonds’), these pricing practices are about to shift dramatically towards the realms of ‘technicalised’ competitive and rather linear forms of pricing, potentially destabilising this very market. With the rise of so-called ‘alternative risk transfer’ (ART) products, for instance, temporally synchronised market cycles and collective pricing and deal making within reinsuring erode as a different set of actors, that is, financial market professionals, partly take over risk assessment and pricing. This might discharge the stabilising features of the traditional reinsurance market which guaranteed sufficient coverage for disasters, while introducing financial market risk practices might lead to an over-abstraction of risk assessment and an underappreciation of intercorrelation within portfolios in a similar way as happened with mortgage-backed collateralised debt obligations (CDOs), which were among those issues initiating the most recent global financial crisis. Only at the very end of the book do Jarzabkowski et al. turn to this issue of eroding risk practices in more detail, using the preceding parts as the trace leading up to this current state of the reinsurance market. These fundamental changes, however, are the utmost pressing issue within the financial world of catastrophe risks. If one takes the authors’ warning serious, these ‘technicalised’ social and material circumstances should be turned to more carefully in further economic sociological enquiries. It seems urgently necessary to disentangle the current socio-materialities, especially, of catastrophe model–based risk assessment and the securitisation practices for catastrophic risks within capital markets in a continuation of the authors’ work presented in this book.
Finally, beyond the merits of the book itself, the project behind it is also a formidable example of how academia can directly reach out into the empirical field. Jarzabkowski et al. (2012, 2015) have consistently published to industry circles, transporting their research findings and alarming conclusions about the drastic changes in the market beyond academia to practitioners and the wider public. Therefore, besides scholars interested in financial markets, market making, calculative practices, applied practice-theory, and ethnographic methodology, this book would be of interest for those concerned with the current (practical) architecture of the reinsurance market and in search of avenues towards preventing the authors’ anticipated parallels to market failures as in, for example, mortgage-backed securities markets. The message is clear: we ought to look out for drastic changes in everyday market practices since collective practices ‘are the crux of systemic health – or systemic risk – within a market’ (p.192).