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The industry came up with reinsurance for this reason.
by silverquiet 3y ago
The industry came up with reinsurance for this reason.
- bombcar 3y agoI think the main disconnect is the state believes "incident X" will happen Y% of the time, and the insurance companies believe it will be Y+X%, and they're not willing (or can't find a reinsurance backer) to roll it. The state, of course, can be the reinsurance issuer of last resort if they really believe their numbers are correct. Or do something like the California Earthquake Authority which everyone knows is vastly underfunded, but at least there's the hint of a promise that when the Big One™ comes, they'll get emergency funding: https://www.earthquakeauthority.com https://www.earthquakeauthority.com
- bkberry352 3y agoReinsurance doesn't make the problem go away. Sure it caps State Farm's exposure to these correlated events, but it won't bring their combined ratio into balance. State Farm would still be on the hook for the first $XXX million in losses. I would also expect it to be harder (read: more expensive) to buy the reinsurance given the increasing risk.
- lotsofpulp 3y agoStep 1: purchase reinsurance Step 2: use reinsurance to cover losses Step 3: reinsurance premiums go up or reinsurer refuses to insure you
- bombcar 3y agoSell reinsurance in a loop via tranches and everyone makes cash until the disaster happens and everything goes bankrupt. AIG anyone?
- crotchfire 3y agoThis is exactly what Lloyds does.