Sustaining Informal Contracting in Reinsurance

Sadie Blanchard (Notre Dame Law School)

Abstract: This paper examines the surprising persistence of informal economic exchange in the reinsurance industry. Remarkably in light of their risk level, stakes, and complexity, reinsurance contracts were for most of their history concluded very informally, including by handshake, scribbles on a napkin, or a “slip” of a couple of pages. This form of contracting continued substantially well into the Twentieth Century, with contract documents leaving key terms “to be agreed” or entirely unspecified. The industry historically governed itself under an “utmost good faith” norm for business relationships, and disputes were arbitrated by industry experts under this remarkably general standard. Today, by contrast, reinsurance contracts are often recorded in documents of over 100 pages. This paper will describe the network structures, the social and business practices, and the economic characteristics of the business that allowed the reinsurance industry to maintain such informality in contracting for such a long time, including as insured risks grew more valuable and complex over the Twentieth Century.