Fund Insider

Can We Insure Against Systemic Risk?

All insurance is designed to protect against what is called idiosyncratic risk but can also suffer from system risks.

Take for instance your home owners insurance. The property insurers can easily withstand a single claim on a single home, but a hurricane can potetnially wipe out an insurer if enough damage is done, that's systemic risk. They used to price a policy considering the potential that YOUR home will be damaged, but they got smarter and started charging higher premiums if your home was in an flood zone, coastal area etc. Problem is, in financial insurance the persons at AIG needed to be able to identify such hot spots and charge appropriately. They didn't know, nobody knew how easily then entire real estate market could collapse. The closest we have come to this in decades was the S&L collapses of the early 90s when mainly real estate in Texas was affected. Once could price a policy differently for mortages concentrated geographically than one distributed, based on that bit of history, but when the entire country goes down the tube, yes, systemic risk impacts us all.

Let's hope there is no plague. Whomever is left living will criticize life insurers for not forseeing the potential that a very large % of policy holders would die in a short span of time ! If they considered that potential, you couldn't affort life insurance. In the end, our society is always backed by the govt, or not and then you end up with the great depression under Hoover.