Risks, Insuring Fat Tails, and Mitigation Strategies

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Delve into the concept of fat tails, the challenges in insuring high-risk events, and strategies for mitigating losses in the insurance industry. Explore correlations, tail dependence, and the impact of big loss years on insurance costs. Discover how to thin the tails, decouple risks, and reduce insurance expenses.

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Uploaded on Mar 18, 2025 | 0 Views

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Fat Tails Can we insure these risks? Cooke and Kousky nsf# 0960865 Micro Correlations Tail Dependence

These risks have big loss years: NFIP example $4,000,000,000 $2,000,000,000 $0 ($2,000,000,000) ($4,000,000,000) ($6,000,000,000) ($8,000,000,000) ($10,000,000,000) ($12,000,000,000) ($14,000,000,000) ($16,000,000,000) ($18,000,000,000)

And even bigger losses can be expected

Insuring Risks is EXPENSIVE

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida US Florida 40% Measure of firm profitability 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% 94 95 96 97 98 99 00 01 02 Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida US Florida 200% 100% 0% -100% Averages: 1990 to 2006E US HO Insurance = -0.7% FL HO Average = -38.1% -200% -300% -400% -500% 4 Hurricanes -600% -700% Wilma, Dennis, Katrina Andrew -800% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06E Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.