Hacker News Reader

Comment by gregpilling | Hacker News Reader

There are companies that specialize in insuring risks like that. It is a whole sub industry of insuring unlikely to win contests.

https://www.holeinoneinsurance.com/how-much-does-it-cost.htm...

View on HN

Way back in the day, I had a reinsurance company as a client. For those unfamiliar, reinsurance companies insure insurance companies.

For example, they might insure a standard insurance company for automobile accidents, with a $1,000,000 deductible. So the retail insurance company handles payouts up to a million dollars, but when there's a really wild claim, the reinsurance company pays the insurance company for anything over a million.

They end up specializing in rare events that involve large payouts, so they also did things like the hole-in-one insurance you mention above, very common with charity gold tournaments.

They had many stories to tell, including the fellow who played a lot of golf and collected three hole-in-one payouts, and another story about a truck that went off a mountain road, slid down and blocked train tracks, causing a train derailment, with a town below the train that needed to be evacuated.

Who insures the reinsurance company?

Berkshire Hathaway.

Per https://www.reuters.com/article/us-berkshire-buffett-insuran..., they are planning for handling a potential $400 billion catastrophe.

'Berkshire would lose only about $12 billion' aka they expect to be able to cover their share of such a catastrophe.

Hurricane Katrina (2005) was up at 160 Billion and Harvey (2017) hit 125 billion. So 400 Billion is just at the upper end of the expected range.

Yup: https://en.wikipedia.org/wiki/Play_for_a_Billion

> insure the payout for a US$10 million premium.

wouldn't actually giving out the $11mi to the consumer, or picking 10 consumers, create more brand awareness than promising $1bi that nobody can get?

What makes you think that nobody can get the billion?

Insurance policies require you to pay a certain amount guaranteed, then pay back a much larger amount if something unlikely happens. So Pepsi had to pay $10 million. If the right thing happened during the game then Berkshire Hathaway would have paid a billion, and some lucky consumer would have walked away a newly minted billionaire.

The article sort of implies but is unclear.

Berkshire's General Re does reinsurance, not re-"reinsurance". Is there a recursive step -- Could General Re face a claim that it needs to leans on the rest of Berkshire to pay?

The article says its insurance companies face a 2 percent chance of being "$12 billion" insolvent, which Berkshire could cover from non-insurance profits. But would that still be true if the claims came in, or would the non-insurance companies also have correlated down years? I suppose Berkshire Hathaway is big enough that if it came down to it, it could liquidate equity ($500B minus devaluation due to whatever catastrophe) to make good on claims.

No way that Berkshire pays a $500b claim. They would find a way to stick the US taxpayer with the bill as many smaller companies have done before them.

Lloyds of London also do this.

reinsurance is also a nice way to reduce a company's taxes, and to hold money offshore. Many reinsurance companies are owned by another company; but the "re" is incorporated in a low or no tax jurisdiction such as Cayman Islands or Bermuda.

Bizarrely it’s sometimes another division of the same reinsurance company.

I work for an insurer and got talking with one of our pricing guys who told me about a case where one of the big multinationals had one division which was way under it’s predicted claims volume for the year, and another that was over. To rebalance the risk the US division ended up insuring the EU division.

Another story that night was about a reinsurer that through several departments taking on different risks ended up on the hook for a dockyard which caught fire catastrophically. And all the goods in that dockyard. And the boat which started the fire.

That evening led to my drunken catchphrase: “fucking insurance”, said ever more enthusiastically.

It’s reinsurance companies all the way down.

Their names eventually converge toward variants of "Turtle Insurance".

...and "Department Of The Treasury"

... the US taxpayer

actually ...our grandkids. since baby boomers keep voting for deficit-financed tax cuts.

Turtles all the way into the future? :-/

It eventually ends on a reinsurance company that can shoulder insane amounts of risk, e.g. Munich Re, Berkshire Hathaway, Swiss Re etc.

They are doing it wrong - socialise that risk. Here in New Zealand when a big insurer has something bad happen (eg an earthquake flattens a big city) you get bailed out by the government. Departing staff still got big payouts in that era too, so it doesn’t seem to impose any stringent criteria on companies too. AMI specifically. Sarcasm aplenty in this comment.

Even reinsurance has limits, and large earthquakes on major metropolitan centres are basically the one thing that will exceed them (floods can be bad too, but the risks are more predictable, and are often excluded from policies in high-risk areas).

The only alternative to the "government backstop" is that insurers will refuse to write policies or will exclude earthquake risk (in which case the government may need to set up it's own scheme, e.g. in CEA insurance in California).

NZ does have the EQC.

https://www.eqc.govt.nz/

Reinsurance funds typically market themselves as a source of alpha for large institutional investors. The reinsurance company sells bonds that promise a relatively high rate of return, with the caveat that in the event that the fund needs to pay out a large claim, the value of the bond may be nullified.

Wow I'd love to hear some of those stories. What a largely unknown, esoteric and hugely interesting industry.

They used to talk about anti-selection (a/k/a "adverse selection"). For example, if a retail insurer has no reinsurance, it has to incorporate both the probability of claims and the distribution of payout sizes.

But if they have reinsurance, the payouts are 'clipped' at their deductible. This means that they have an incentive to take on clients that are less likely to have any sort of accident, even if when they do have an accident, it has catastrophic consequences.

This means that a reinsurance company cannot rely on the overall statistics for claims, because the insurance companies that buy reinsurance price their products with reinsurance in mind. The people unlikely to run into massive claims will end up in pools where the retail insurance company doesn't buy reinsurance.

So they have to carefully price the reinsurance to account for the fact that the insurance company is packaging their most reinsurance-sensitive pool of customers together.

That was not the kind of story I was expecting but was far more interesting. Thanks for sharing.

You just described the finance industry as well.

You can save yourself a lot of adjectives by saying "dirty".

A few years ago I was in charge of monitoring a hole in one contest for a golf tournament.

Anyone who got a hole in one was to receive $10,000. All I had to do was hang out in the shade and not get killed from golf balls while watching everyone's attempts.

I asked the tournament official where that 10k comes from, and he said from an insurance agency. They paid $200 insurance. No one ended up getting a hole in one that day.

Apparently some golf players even carry hole-in-one insurance against themselves, to cover the unexpected cost of the traditional celebratory round of drinks for everyone in the club afterwards.

https://priceonomics.com/why-golfers-buy-hole-in-one-insuran...

If I recall, there was a basketball one where the insurance company didn’t want to pay because the shooter had paid college ball. The team wound up paying to avoid the PR disaster.

YES! This was at a Chicago Bulls game in the late 90's iirc. I watched the game on TV. The shot was from the free-throw line to the basket on the opposite end of the court. The guy shot one handed, wheeling his arm around wide to throw the ball with a great arc.

It took a few seconds to travel through the air, and from the moment he released the ball the crowd was silent - we could all see it was looking on-target. It went through the hoop! It barely nicked the rim on its way down, so after it went through it ricocheted hard to one side, in my memory it was a near 90-degree turn.

The crowd went wild. Everyone was thrilled to finally see someone win that prize. I don't remember how much it was, but I do remember it was a very large cash prize.

And then, like you said, the next day the prize company said they wouldn't pay because there was some stipulation that participants could not have played any pro or college basketball. Public sentiment turned harshly on the team - you see, to take away his prize would be to invalidate the joyful moment we all shared watching that shot. If he didn't win, what the heck did we just see?

I don't know if the insurance company changed their minds or if the team just ate the cost of the prize, but it didn't take long for the Bulls to realize what was the right thing to do, and do it.

Thanks for bringing back these fun memories.

Here's a video of the shot: https://youtu.be/Q_k1qg6_9f4?t=1m10s

Thank You! I was pretty sure it was the Bulls but I couldn’t find it after 3 or 4 Google searches, and chalked it up to too much drinking in college.

I found a story about it, if anyone is curious

https://www.upi.com/Archives/1993/04/18/Chicago-Bulls-Millio...

It is interesting. It took me a while to find an article that described his "near disqualification" [1]. Am I imagining things, or is it like all the top results, even for an event so long ago, are tilted towards "of course he'll get the money, who said otherwise?" But clearly it was said. Maybe it was a risky play by the prize company to rope in the team & some partners into chipping in to pay for the loss, which might have crippled them [2]. And then a lot of spin after the fact by the team to save face. They were forced to legitimize a shady move by a business partner, who threatened their reputation. Some rough lines to FB/CA?

"It takes time to make up a hit like this . . . but I know this will generate enough business to cover the loss."

[1] https://www.highbeam.com/doc/1P2-4165888.html

[2] http://articles.chicagotribune.com/1993-04-16/news/930518041...

For $1m, the Bulls could avoid to pay it, and should, since they violated the terms of their insurance contract, and they are a huge profitable professional business, not a rube.

> Calhoun said he would not be quitting his job as a sales associate at the Reliable Office Superstore in Bloomington

Anyone that thought he could quit his job needs some math lessons and financial education. $1M isn't enough to retire if you're under 30, especially when taxes come out.

"quitting your job" is not "retiring", and $1M in 1993 generates a decent enough amount of long term interest for a low cost of living area.

^ it would also solidly cover educational expenses and income loss, etc, in the event one wanted to change careers. One could move to the industry of one's choosing with that kind of cushion.

The prize was paid out at $50k/year for 20 years. After taxes, that could cover a modest living in many parts of the country, but I'd agree that is not "quit your job/retire" money, even in the 90's.

The story calls him a "A $5-an-hour office supply store salesman", so at 2,000 hours a year it's $10,000. That makes the gross prize money five times his salary.

He could easily have paid for someone to attend Harvard on the prize money (https://www.thecrimson.com/article/1990/3/20/ivy-tuition-rat...).

Prize indemnity insurance!

https://en.wikipedia.org/wiki/Prize_indemnity_insurance

Reply on news.ycombinator.com