Fat Tails

Tail Dependence

Micro Correlations

Can we insure these risks?

Cooke and Kousky nsf# 0960865

These risks have big loss years: NFIP example

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

($20,000,000,000)

($15,000,000,000)

($10,000,000,000)

($5,000,000,000)

$0

$5,000,000,000

And even bigger losses can be expected

Insuring Risks is EXPENSIVE

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.

94 95 96 97 98 99 00 01 02-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%US Florida

Measure of firm profitability

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

Source: NAIC; 2005/6 US and FL estimates from the Insurance Information Institute.

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06E-800%

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%US Florida

Averages: 1990 to 2006EUS HO Insurance = -0.7%FL HO Average = -38.1%

Andrew

4 Hurricanes

Wilma, Dennis, Katrina

MITIGATION (aka ‘get out of the way’)

Thin the tails

De-couple risks

Reduce insurance costs

Fat Tails

Tail Dependence

Micro Correlations

Cooke and Kousky nsf# 0960865

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