So I think structurally, the conclusion here is that 'cat bonds are an example of how insurers can work with abstract risks, and so any risk (such as global pandemic) could be worked with this way', and the rest of the book then examines how people are trying to actually do so with pandemic risk.
Wow, that is absolutely begging for exploitation.
Whoever controls the authority reporting these figures now controls whether these bonds pay out. That in turn means that whoever holds those bonds has a huge financial incentive to manipulate what that authority says.
Put another way, if you're holding a bond that will cost you $100 million if a hurricane windspeed hits 175 MPH, then you have $99 million bucks that are worth spending trying to get the NOAA to say anything but that.
I’m not so sure about that. I bet that we could tamper with an anemometer somewhere out in a field. Easiest is to put brushless motor with a propeller next to it and blow propwash on it. More technically difficult is to tamper with the signal between the sensor and the station, or MitM the station.
If you are careful and only modifying the measurments when the weather is already crummy they might not even suspect.
Sounds like you do see an issue after all. Is it obfuscated? Hidden in complexity? Is it artificial to appear as one thing while indirectly, as a side effect, leading to another?
That said, sane practice for parametric insurance is to have redundancy in data sources, and an agreed procedure for settling differences in conclusions resulting from relying on either of them alone.
MarkusQ•5h ago
For that matter, I'm also reminded of credit default swaps, and Lehrer's "We Will All Go Together When We Go."
falseprofit•5h ago
kqr•3h ago
So while locally catastrophes can cause other catastrophes, for the most part earthquakes in Thailand does not trigger wildfires in Texas. Nor does a hurricane in Florida one year cause more hurricanes in Florida the next year.
simicd•1h ago
Say you're a primary home insurer in the US. If a hurricane hits you might not have enough capital to rebuild all the homes. A reinsurer which is also covering Europe, Asia, LatAm, etc. is less likely to go bankrupt. The reinsurer can cross-subsidize and use the insurance premiums from other regions to pay out the claims from the US market. All that matters is that on average the loss probabilities and severities are estimated correctly.
And this is just using one line of business as example, reinsurers are covering property, casualty, life and health which add extra layers of diversification.