The Business of Betting on Catastrophe
11 comments
·June 23, 2025munificent
gruez
The 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.
krisoft
> 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.
jallmann
Manipulation of reported economic numbers has been an issue in the past, see LIBOR.
null
MarkusQ
This reminds me of the predator hierarchy (for example, see Colinvaux's "Why Big Fierce Animals are Rare"): the reinsurers spread the risk from various insurers and for various catastrophes around among a pool of meta-insurers. But this pool is necessarily smaller than that of primary insurers, and their risks more likely to be correlated (catastrophes can cause other catastrophes, and multiply primary insurers can be affected by the same catastrophe).
For that matter, I'm also reminded of credit default swaps, and Lehrer's "We Will All Go Together When We Go."
falseprofit
One aspect worth pointing out is that ILS are transferring insurance risk outside of the insurance industry. Appetite has gone up and down but e.g. hedge funds would normally not be available to assume insurance risk otherwise.
paxys
As if pandemics weren't already political enough. Let's get large corporations, investment funds and billionaires involved and give them direct stake in declaring what is or isn't a pandemic, how many deaths have happened in a certain area, what was the cause of death etc. That should end well.
Onavo
Not sure what the controversy here is. Catastrophe risk is the bread and butter of property insurance.
falseprofit
Felt like the article ended before a thesis statement.
gwern
> She is the author of “Investable! When Pandemic Risk Meets Speculative Finance – A Cautionary Tale,” from which this article is adapted.
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.
> 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.