A few weeks ago a friend sent me a really interesting article about catastrophe (“cat”) bonds. Insurers don’t like correlated risk - it’s not like Omaha is in danger of every driver crashing on the same day, so an insurance company can safely insure drivers there.
Hurricanes are more of an all-or-nothing proposition though: they do hit every house in a city, or none at all. And paying out a claim for every house in a city/region/state would bankrupt the insurer. So cat bonds are a way for insurers to distribute their risk.
The idea is this: I buy a bond from Insurance-R-Us. It periodically pays me back some amount until the bond matures, when the principal is paid back as well. UNLESS some conditions were met. Like, “a hurricane hit New Orleans that caused $X in property damage”, in which case I get nothing back, and the insurer uses the money to pay out claims.
The article is by Michael Lewis (of Moneyball, The Big Short fame, among others). It’s from 2007, about hurricanes and Katrina and catastrophe bonds.
I work at an insurance company. AMA, I guess.