EARTHQUAKES AND WINDSTORM 3 1 9 H o w DO THESE SIMPLE IDEAS APPLY TO NATURAL DISASTERS ?

The most serious problem with Natural Disaster Insuran c e is that you are very likely to be violating the "ultimate" s imple secret of insurance--i.e, you may not be able to recover past los s e s i n t h e e v e n t of a m a j o r d i s a s t e r , a n d y o u m a y f i n d yourself in a d i f f i c u l t c o m p e t i t i v e p o s i t i o n w i t h i n s u r e r s w h o h a v e avoided this particular disaster, or with new insurers. Sharing the risk with your competitors by reinsurance r educes the threat from existing insurers. However the only pro tection a g a i n s t n e w i n s u r e r s is t h e t i m e ( a n d cos t ) i n v o l v e d i n s e t t ing up an organisation and obtaining a share of the market. The 'd amaged' insurer has a few years to restore his fortunes, but not m uch longer. I f y o u c a n s t o p n e w i n s u r e r s e n t e r i n g t h e f i e ld, b y ( s ay) a State monopoly or a legal device, you avoid this threat, and y ou can attempt to recover your losses by increasing premiums. T h i s is f i n e if i n s u r a n c e is c o m p u l s o r y , b u t if i t is v o l u n t a r y y o u may find that your premiums are too high and that people underi nsure or d r o p o u t c o m p l e t e l y . I t m a y t a k e a l o n g wh i l e t o r e c o v e r p a s t los s e s , a n d c o u l d b e u n f a i r t o t h e (few) p e o p l e w h o r e m a i n i n s u r ed. N a t u r a l D i s a s t e r i n s u r a n c e is a r e a s o n a b l e p r o p o s i t i o n if i t is m o n o p o l i s t i c a n d c o m p u l s o r y . I t h a s p r o b l e m s if i t is v o l untary i n s u r a n c e , a n d t h e p r o b l e m s b e c o m e m o r e s e r i o u s if t h e r e is a p o s s i b i l i t y of n e w i n s u r e r s e n t e r i n g t h e f i e ld. Natural Disaster insurance may be a reasonable proposit ion,

b u t t h e r e is a p r o b l e m in c a l c u l a t i n g r e a s o n a b l e p r e m i u m s . When you start analysing the statistics for natural disasters y o u wi l l soon realise that you are likely to be violating the thir d simple idea--i.e, you may be concentrating on measuring the st atistical r i s k i n a s i t u a t i o n w h e r e t h e " m e a s u r i n g is s p u r i o u s " a n d the c o n c e p t of R i s k T h e o r y is i n a p p r o p r i a t e . T h i s a p p e a r s t o be the case when you are trying to measure the probability of a very rare event. THE PROBABILITY O F A RARE EVENT B a y e s i a n s c l a im t h a t i t is n o n s e n s e t o a s s u m e a b s o l u t e l y stable p a r a m e t e r s (of p r o b a b i l i t y d i s t r i b u t i o n s ) o v e r t i m e , a n d t hey prefer to assume that they vary over time--in accordance with a stable probability law (?).