Worsening Weather Is Igniting a $25 Billion Market
"Against a backdrop of rising climate volatility and social shifts, demand for #WeatherDerivatives is surging.
While a [catastrophe] bond may pay out if a 100-year storm tears through a community, a weather derivative can compensate a tourism business if there are too many rainy days, or a farmer if a hot summer stresses her crops."
@CelloMomOnCars The USA savings & loan/junk bonds crisis of the late 1980s and the financial meltdown of 2007 had a common cause. Risks were underestimated, possibly obfuscated. With junk bonds, the evangelists relied on a theory that the high risks which justified high returns were overstated, thus something that looked like clever arbitrage.
Besides the inversions when owners collect for not providing services, should an investor believe the fund managers have the probabilities correct?
@CelloMomOnCars This being asked of someone living in Southern California, where home insurers are leaving the market because fire risk looks too large to them.
I understand how it is analogous, but are the actuarial data as comprehensive and precise for 100 year storms, etc.? And, if weather damage probability is underestimated, what happens when claims exceed assets?
(And, I’ll note that it’s not being called insurance. I would guess it’s to avoid more strict regulations and accountability.)
@pomCountyIrregs@CelloMomOnCars The real kicker of 2008 was that the prime credit band took on extraordinary losses (as opposed to the traditional blame on subprime - the fact that it will default is in the name). The real risks are the interior states being marketed as safer than they really are (hi tropical diseases!).
@momo And, while the derivative market assumed the underlying assets safe, because of historic records for housing, lenders were expanding (and management taking big bonuses) via no income/no verification loans.
But let’s not deep dive those histories. My point is that these types of market devices rely on historical statistics and I believe that climate and weather are too complex and the interaction with people is too vast to say that it will be addressable with business school gimmicks.
Insurance is all about playing the statistics: that's what all those actuaries do, right?
Except that now the volatility in the weather and the underlying shifts in the climate is undermining the basis of all that statistics gaming. Look at all the insurance companies losing money and going belly up.
I think a few people will make money off all this but it will end in tears for many.
Add comment