“Whatever it was, we would put a price on it and sell it”

April 4, 2024 1:26 AM

Cat bonds investors are gambling on nature. If a disaster they’ve bet on occurs, their money is used to settle insurance claims. If it doesn’t, they get handsome returns. For decades, the instruments were a last resort reserved for super-rare events, such as a cataclysmic storm on the scale of Hurricane Katrina. But multibillion-dollar calamities have become alarmingly frequent on a warmer planet. “The insurance market is on edge,” says Seo. “It’s freaked out about risk and wants as little as possible.” from How a Physics Whiz Made a Killing Betting on Nature’s Catastrophes [Bloomberg; ungated]
posted by chavenet (12 comments total)

So it is insurance insurance?
posted by bitslayer at 3:26 AM on April 4 [3 favorites]

Morning Brew did a short on those investing in these.
posted by Lucubrator at 4:20 AM on April 4 [1 favorite]

This was a fascinating and very readable article, thanks for sharing it!

I didn't know "catastrophe bonds" was a thing, and what an interesting cast of characters of the people who do this for a living, especially Seo.

When he was 10, Seo and his father, an economist, had a spirited, all-night discussion about the “investor’s choice” conundrum.

Yep, sounds about right, a 10 year old debating economic principles is exactly the type of person who grows up to be in the business of managing billions of dollars in disaster funds I guess.
posted by jeremias at 4:56 AM on April 4 [2 favorites]

I like reading articles about technical finance when there's no underlying injustice, exploitation, amorality, etc. Reading about the subprime auto loan / insurance group that underwrote Trump's appellate bond, the ethical subtext was basically, yeah our business lies to people about their high interest auto loans, but we're doing a good thing because these people need cars to survive. Not seeing anything similar with this article. It's just a skilled method of addressing a serious problem.
posted by Hume at 5:40 AM on April 4 [2 favorites]

Insurance insurance is reinsurance. This is your insurance’s insurance’s collateralized debt obligation.
posted by Headfullofair at 6:29 AM on April 4 [6 favorites]

> Insurance insurance is reinsurance. This is your insurance’s insurance’s collateralized debt obligation.

yes and also earth's climate is subprime
posted by bombastic lowercase pronouncements at 7:01 AM on April 4 [3 favorites]

When I first saw the phrase "cat bonds" I was simultaneously excited (they figured out how to financialize those?) and appalled (they figured out how to financialize those?). Then of course the meaning kicked in. No one would insure against destruction caused by micropanthers, they'd go bankrupt in months.
posted by praemunire at 7:48 AM on April 4 [10 favorites]

When I first saw the phrase "cat bonds"

Same. I was thinking "how does that work? When the bond matures you get the principal and a cat instead of interest?"
posted by howbigisthistextfield at 8:06 AM on April 4 [4 favorites]

securitize 👏 your 👏 pets
posted by bombastic lowercase pronouncements at 8:06 AM on April 4 [4 favorites]

BRB, buying a tranche of subprime colateralized cat bonds.
posted by neuron at 8:47 AM on April 4 [2 favorites]

Insurance insurance is re insurance. Re re insurance is retrocession.

Insurance is good. And spreading the risk around is good as it means people don't lose the benefit of insurance they purchased if a company goes bankrupt. Availability of predictably priced re insurance means insurers can continue to offer policies to people where the insurer otherwise couldn't tolerate that level of risk. Having talented risk modelers keeps costs more predictable and means they don't leave the market as soon as something bad happens.
posted by lookoutbelow at 9:30 AM on April 4 [2 favorites]

…our business lies to people about their high interest auto loans, but we're doing a good thing because these people need cars to survive

It's the same with payday loans. I've read over the usury laws in my jurisdiction and every single payday loan business here is in clear violation (all fees and penalties are considered part of the effective interest rate, which often pushes them up to 200-300%). The jurisdiction won't prosecute them, stating that the law is only intended to be used against "real" loan sharks and payday loans are necessary, therefore immune. Burn them all to the ground, I say.
posted by WaylandSmith at 1:07 PM on April 4 [3 favorites]