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Comment by asdfasgasdgasdg | Hacker News Reader

Should the insurance just find a way to exclude massive, correlated events? That might give buyers a more reasonable expectation of covered losses, given that coverage in such an event is smoke and mirrors anyway. It's all well and good to have liability insurance, since presumably one's own liability is fairly uncorrelated with other people's liability. Flood insurance, financial instrument insurance, etc. is more questionable to me.

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That is what the reinsurance market is for. Natural disasters are when insurance is most needed, to rebuild a whole community. Disasters are locally correlated, but generally not globally correlated. The global insurance market can handle them just fine, and in fact are a great example of a place where insurance is needed - large, unpredictable, rare, and too expensive to handle by yourself. That is just the same as individual insurance, just at a larger scale.

> Should the insurance just find a way to exclude massive, correlated events?

Why exclude when reinsurance can deal with them fairly easily? The insurance company sells bonds that only pay when the massive, correlated event doesn't occur. Financial markets like those, because while they may be 'correlated' in a sense, they are still largely uncorrelated with global growth trends - they're free diversification from their POV. And the "wisdom of the masses" takes care of the modeling - the bond price tells you (and the company) how likely the massive event is expected to be. No added model risk!

The Act of God / War liability exceptions carry a lot of that weight.

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