Distressed Underwriting

Abstract

When a firm suffers an extreme property and casualty (P&C) loss it frequently finds it difficult to transfer similar P&C risk in the future. This circumstance adds stress to the firm just as it is trying to recover from the effects of the super catastrophic (Super Cat) loss. For example, numerous directors' and officers' (D&O) claims were filed against firms that engaged in fraudulent new economy-related accounting practices. The severity of those claims was such that the insurance industry in general pulled back from assuming further D&O risk from those firms. Financiers skilled in evaluating volatile risk have stepped in to assume such risk, but for significantly higher prices. This article presents an applied method for pricing post-Super Cat or volatile risk with a margin of safety. It also includes guidelines, such as leveraging brokerage/prime-brokerage relationships, which could prove useful in future distressed underwriting deals.

TOPICS: Real assets/alternative investments/private equity, tail risks, legal/regulatory/public policy