Absolutely true—they are slightly less related to principle agent problems, but I can add stories illustrating these, because I have some good ones.
Re: Risk distribution, there’s a great game that someone suggested to understand what 100 year floods look like, since people complain they happen every year. Get a room full of, say, 40 people, and give them each 2 dice. Tell them snake-eyes is a flood, then have everyone roll, and to call out if there was a flood. Then roll and announce again. And again. Yes, many “years” will have no floods, but some will have 2 or even 3 - because the risk isn’t highly correlated across areas.
Re: Threshold of misery, I knew an underwriter who said they would write New York City nuclear terrorism insurance whenever they had the chance, at basically any price. His reasoning? He lives and works in NYC, so if a nuclear bomb goes off, he’s dead, and the fact that he lost money isn’t what matters. Otherwise he collects premiums.
Absolutely true—they are slightly less related to principle agent problems, but I can add stories illustrating these, because I have some good ones.
Re: Risk distribution, there’s a great game that someone suggested to understand what 100 year floods look like, since people complain they happen every year. Get a room full of, say, 40 people, and give them each 2 dice. Tell them snake-eyes is a flood, then have everyone roll, and to call out if there was a flood. Then roll and announce again. And again. Yes, many “years” will have no floods, but some will have 2 or even 3 - because the risk isn’t highly correlated across areas.
Re: Threshold of misery, I knew an underwriter who said they would write New York City nuclear terrorism insurance whenever they had the chance, at basically any price. His reasoning? He lives and works in NYC, so if a nuclear bomb goes off, he’s dead, and the fact that he lost money isn’t what matters. Otherwise he collects premiums.