Diversification
The pooling of uncorrelated risks allowing colossal commitments to be borne with modest capital, the vital resource of reinsurance.
Diversification is the mechanism by which an insurer or reinsurer combines uncorrelated risks, a Japanese earthquake, a Florida hurricane, an Australian drought, on the reasonable bet that they will not all hit on the same day. It is the raw material of reinsurance. It lets a carrier write very large commitments on relatively modest capital, because the capital required is lower than the sum of the risks taken one by one. Systemic risks, pandemic, hybrid war, orbital cascade, wipe out this resource. They correlate every line and every geography at once, and they destroy the independence assumption that pooling rests on. What makes such a risk hard to insure is less its size than its correlation.
Textbook case: a reinsurer absorbs a major hurricane without faltering, because its other commitments are uncorrelated. A pandemic hits all its lines at once, wipes out that diversification and produces a net loss.
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