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

These risks have big loss years: NFIP example

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. 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. Averages: 1990 to 2006E US 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# THANKS for viewing!