Nature's Casino: Catastrophe Insurance and Heavy Tails

Courtesy David Richard, here is an interesting (but very long!) article on catastrophe insurance.

The part that was most interesting to me was the discussion of heavy-tailed phenomena like catastrophes and how one prices insurance for them as a result of that. (The mathematical problem is that the events are so rare that one does not have a large amount of data to get good results by itself. One of the things around this at which the article hints briefly is to use physical models to generate tons of data and then use that to help with the predictions, though that was tangential to the article's crux.)

Also, while the article is interesting, I do find it a bit creepy that there are basically gamblers betting on future Katrinas and that that has become an enormous business since that disaster struck. (The cynic in me isn't surprised, but I do feel somehow disappointed.)

Finally, the author of the article, Michael Lewis, also wrote Moneyball (which has a more baseball-oriented theme).