rogerk2

Bailout Datapoint of the Day, AIG Edition

Part of the problem is that none of the insurance companies were prepared for the 100-year storm. They could handle one Katrina, but not six in the same year.

That's how the financial system collapse hit AIG and others insuring counterparty risks. If one company fails, the insurance reserves are sufficient to pay off counterparties who took out insurance. If 100 companies fail at the same time, there's not enough reserves available to cover all the counterparties' policies simultaneously.

If you owned a house in Florida and Katrina destroyed it, you're still on the hook for the morgage. You probably had mortgage insurance to cover such a loss. But if your insurance company also insured thousands of other homes that got destroyed, overrunning it's financial capabilities and causing it to go belly up, your insurance is worthless. And you're still on the hook for the mortgage, on a now non-existant house.

Insurance is a necessary evil to protect against unforseen events, but no company carries enough reserves to cover really major catastrophies...6 Katrinas in a year, a major earthquake along the San Andreas fault in California, a nuclear war, a meteor impact, etc. We all know these events are going to happen sooner or later, but we're not willing to pay the upfront cost to build a reserve large enough to insure against them.