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Michael Lewis on a new way in

posted by Jason Kottke   Sep 14, 2007

Michael Lewis on a new way in which insurance companies are evaluating risk with respect to natural catastrophes.

The logic of catastrophe is very different: either no one is affected or vast numbers of people are. After an earthquake flattens Tokyo, a Japanese earthquake insurer is in deep trouble: millions of customers file claims. If there were a great number of rich cities scattered across the planet that might plausibly be destroyed by an earthquake, the insurer could spread its exposure to the losses by selling earthquake insurance to all of them. The losses it suffered in Tokyo would be offset by the gains it made from the cities not destroyed by an earthquake. But the financial risk from earthquakes — and hurricanes — is highly concentrated in a few places. There were insurance problems that were beyond the insurance industry’s means. Yet insurers continued to cover them, sometimes unenthusiastically, sometimes recklessly.

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