Experimentality of Markets: Natural Disaster Risk Markets, Reinsurance, and the Sociology of Catastrophe Modelling

This project revolves around the question of how socio-technical epistemic practices and devices of risk create markets and how markets are then further shaped by socio-technical risk governance of these practices and devices. The market focused on is the financial market for natural disaster risk in which a variety of structured financial products are traded, so-called 'insurance-linked securities' or ILSs - a market where natural catastrophes effectively are rendered financial economic products. At the centre of this market is 'catastrophe modelling', the epistemic practice of catastrophic risk assessment in which myriads of potential natural catastrophic events are artificially modelled and translated into common financial risk measures. This practice emerged as a confluence of risk assessment methods from earth science (seismology, earthquake engineering, meteorology, etc.) and the insurance industry starting in the mid-20th century. It is applied to manage insurance companies' financial uncertainties of large-scale natural catastrophes in disaster insurance policy pricing. Chiefly, however, it is applied by reinsurance firms, the insurers of insurers, who guarantee the solvency of, and thus the ability of claims payments by, insurance companies in case of huge financial losses due to occurring natural catastrophes.
The central problem of managing these risks is an epistemic one: the unknowability of when, where, and how severely a natural catastrophe, such as an earthquake or a hurricane, will unfold. As natural catastrophes are highly individual and infrequent, an artificial history of 'imagined' catastrophic events is being simulated and used for projecting possible financial losses. The outputs of these modelling practices are rendered in common financial portfolio risk quantification. By making natural catastrophes 'connectible' to common financial market practices, financial engineers based on it highly risky insurance-linked securities like 'catastrophe bonds' starting in the early 1990's. They allow capital markets investors, instead of reinsurance companies, to provide the capital for potential pay-outs while profiting on high interest rates. The risk of natural catastrophes has since been increasingly loaded onto the general financial markets system - today about 20% of catastrophe reinsurance is placed here, instead of the 'shielded' space of reinsurance companies' traditional risk management practices. How this shift, generally referred to as the 'convergence of insurance and capital markets', will alter global catastrophic risk management and what consequences it might have for systemic global financial stability is in itself highly uncertain.
This ethnography- and interview-based project tries to answer the question of how exactly the ILSs market was enabled by this epistemic practice of catastrophe modelling. More importantly though, this project frames catastrophe modelling as an 'experimental' practice, which does not necessarily produce viable truths, but creates an epistemic space, a form of Baudrillardian 'hyper-reality', in which ILSs legitimately can exist. This form of experimentality is based on the relational, decentralised, and distributed practice of catastrophe modelling and the socio-technical struggles in rendering it legitimate. Thus, the major unit of analysis will be that of 'communities of practice' of catastrophe modelling throughout reinsurers, catastrophe modelling firms, regulators, ILSs financial firms, and rating agencies. The core question will be, whether this inherent and constant experimentality destabilises the epistemic state of the market, on which it ultimately hinges. Or whether it opens up an 'ordered' space of permanently adjusting negotiations about the financial 'ontology' of natural catastrophes as a new form of risk management and socio-technical governance of epistemic risk models in an extremely uncertain market.