The Reinsurer’s Conundrum: The Loser’s Curse

• TBA - Writer
• July 2009
• 

There is also something I like to call the "Loser's Curse." While the winners may someday have "winners remorse," the losers are unhappy immediately.

For the sake of simplicity, the results of the Curse assume that all transactions are quoted simultaneously. The reality is quite different. Reinsurers begin to get market feedback early in each pricing season, and this feedback can affect their pricing for the remainder of the season.

If a reinsurer loses a high-profile account or a disproportionate number of transactions early on, senior managers may attribute the cause of their failure to their own conservative or biased pricing. The conventional reaction to this feedback might be to "correct" the perceived bias by finding the culprit of the conservatism (new trend factors or severity curves, etc.).

Unfortunately, if the cause were simply randomness due to pricing uncertainty, not bias, the "corrected" prices would be biased low. Hence the Loser's Curse. The loser will certainly become a winner more often after the price "correction," but ultimately will feel the Winner's Curse to a greater extent, due to the bias.

By Russ Wenitsky

(The late Russ Wenitsky was Head of Innovation Solutions for Munich Re America until September 2008. Inquiries may be sent to Janet Dezube, Innovative Solutions Partner, at jdezube@munichreamerica.com.)