Monday, March 19, 2007

A good example...

...of the capital markets at work, distributing risk in the appropriate manner and forcing innovation as to how risk is allocated.  As stated in the last post regarding Buffet, the risks to Hurricane-prone areas have "increased", or at least the perception of that risk has increased with Katrina.  Rating agencies who cover REinsurance companies are going to assess risk based on recent experience (the "availability" heuristic as popularized by Kahneman and Taversky's brilliant work on how humans actually make decisions).  Rates increase.

Solutions will present themself...if government will allow them to.  Finite risk, contingent capital solutions, etc.  Perhaps a private homeowners captive will sprout out of the Keys.

Of course, global warming (or the perception of same) only serves to increase the risk, something risk providers (REinsurance companies) will be happy to provide for a price.

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