4 ms·
> New “efficiency features” regularly get introduced in ILS and written into contracts. One of the most transformative has been the use of parametrics. Unlike t
by munificent 1y ago
> New “efficiency features” regularly get introduced in ILS and written into contracts. One of the most transformative has been the use of parametrics. Unlike traditional insurance, which calculates payouts based on actual losses (what’s called indemnity), parametric insurance uses preset triggers to determine whether money gets released. During an interview, a London-based parametric expert gave me this example of a parametric scenario: If, during a hurricane, wind speeds off the Florida coast hit a predetermined trigger speed — say 175 mph — at a trigger distance of two miles offshore within a preset longitude and latitude grid, the payout is, in theory, immediate. No actual damage need occur; the trigger measures just need to be met.
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.
- deleted 1y ago[deleted]
- gruez 1y agoThe same incentive exists for economic figures (inflation linked bonds) and market prices (cash settled derivatives), and it's seemingly not an issue, and those are far easier to game than physical measurements like wind speed or whatever.
- jallmann 1y agoManipulation of reported economic numbers has been an issue in the past, see LIBOR.
- krisoft 1y ago> and those are far easier to game than physical measurements like wind speed or whatever. 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.
- singleshot_ 1y agoReplace the anemometer cups with slightly larger ones.
- 56544562 1y ago> and it's seemingly not an issue 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?
- jowea 1y agoThere have some governments outside of the developed world accused of manipulating inflation numbers.
- polynox 1y agoThe Libor scandal is not an issue?
- kqr 1y agoSure. Getting reliable data all parties can agree on is one of the biggest challenges to parametric insurance. The data sources I hear about most often are US governmental agencies – and this is a problem, since the US political system is not stable enough to finance its governmental agencies reliably. (Most recently I recall concerns around budget and staffing cuts for NOAA and USGS.) 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.
- soulofmischief 1y agoGoodhart's law continues to ring true.
- dylan604 1y agoTaking your point of view now makes sense on why to defund NOAA, fire everyone that's not going to toe the line, and then have those that will parrot the necessary info to keep from paying out. Make Weather Great Again, just doesn't lend itself to a hat though
- the_pwner224 1y agoPeople have already done this with NWS weather equipment for federal farm drought insurance: https://coloradosun.com/2024/09/08/patrich-esch-ed-dean-jagers-ranchers-fraud-insurance/ https://coloradosun.com/2024/09/08/patrich-esch-ed-dean-jage...
- bgnn 1y agoIn Turkey the mandatory earthquake insurance for homeowners is owned by the government. It triggers parametrically (> 7 magnitude). In one case at least [1] the government office responsible for announcing the magnitude, AFAD, declared it lower than this threshold although other countries and Turkish research institues measured it as 7.0 . At the end the insurance payout was so much more limited even for people who kist their house and loved ones. As wiki page mentions in notes section AFAD declared this a 6.6 magnitude earthquake although it was 7.0 . [1] https://en.m.wikipedia.org/wiki/2020_Aegean_Sea_earthquake https://en.m.wikipedia.org/wiki/2020_Aegean_Sea_earthquake
- timhigins 1y agoIf you can prove the data was altered or tampered with you'd have a solid fraud case though I imagine proving it is the difficult part.
- o1bf2k25n8g5 1y agoI thought you meant it could be gamed in the other direction... Technically, if all the bond-holders get together, they could spend up to $99M building an extremely powerful, extremely tiny fan pointed directly at the sensor.
- ethagnawl 1y ago... or purposely get sick and start coughing in crowded places.
- vishnugupta 1y agoThis reminds me of a scene from The Big Short. Towards the end Mark Baum who has bought insurance on house index is frustrated why the index isn’t falling even as the house prices across America are plummeting and foreclosures are rising. Maybe something fishy was going on.
- PaulRobinson 1y agoThe obvious counter to that is you’re going to define parameters based on multiple observers. NOAA is not the only authority on Earth who can state what a hurricane’s wind speed is.
- ngold 1y agoSo if it is 174 mph insurance pays nothing? After a hurricane destroys a town.
- genedan 1y agoIt depends on the details of the product. In theory you could get a product that doesn't have a cliff and it will be priced accordingly. These are basically equivalent to options in finance.