alt Hacker News> New “efficiency features” regularly get introduced in ILS and written into contracts. One of the most transformative has been the use of parametrics. Unlike traditional insurance, which calculates payouts based on actual losses (what’s called indemnity), parametric insurance uses preset triggers to determine whether money gets released. During an interview, a London-based parametric expert gave me this example of a parametric scenario: If, during a hurricane, wind speeds off the Florida coast hit a predetermined trigger speed — say 175 mph — at a trigger distance of two miles offshore within a preset longitude and latitude grid, the payout is, in theory, immediate. No actual damage need occur; the trigger measures just need to be met.
Wow, that is absolutely begging for exploitation.
Whoever controls the authority reporting these figures now controls whether these bonds pay out. That in turn means that whoever holds those bonds has a huge financial incentive to manipulate what that authority says.
Put another way, if you're holding a bond that will cost you $100 million if a hurricane windspeed hits 175 MPH, then you have $99 million bucks that are worth spending trying to get the NOAA to say anything but that.
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Sure. Getting reliable data all parties can agree on is one of the biggest challenges to parametric insurance. The data sources I hear about most often are US governmental agencies – and this is a problem, since the US political system is not stable enough to finance its governmental agencies reliably. (Most recently I recall concerns around budget and staffing cuts for NOAA and USGS.)
That said, sane practice for parametric insurance is to have redundancy in data sources, and an agreed procedure for settling differences in conclusions resulting from relying on either of them alone.
People have already done this with NWS weather equipment for federal farm drought insurance: https://coloradosun.com/2024/09/08/patrich-esch-ed-dean-jage...
The same incentive exists for economic figures (inflation linked bonds) and market prices (cash settled derivatives), and it's seemingly not an issue, and those are far easier to game than physical measurements like wind speed or whatever.
I thought you meant it could be gamed in the other direction...
Technically, if all the bond-holders get together, they could spend up to $99M building an extremely powerful, extremely tiny fan pointed directly at the sensor.
Taking your point of view now makes sense on why to defund NOAA, fire everyone that's not going to toe the line, and then have those that will parrot the necessary info to keep from paying out. Make Weather Great Again, just doesn't lend itself to a hat though
Goodhart's law continues to ring true.
This reminds me of a scene from The Big Short.
Towards the end Mark Baum who has bought insurance on house index is frustrated why the index isn’t falling even as the house prices across America are plummeting and foreclosures are rising.
Maybe something fishy was going on.
The obvious counter to that is you’re going to define parameters based on multiple observers. NOAA is not the only authority on Earth who can state what a hurricane’s wind speed is.
So if it is 174 mph insurance pays nothing? After a hurricane destroys a town.
If you can prove the data was altered or tampered with you'd have a solid fraud case though I imagine proving it is the difficult part.
In Turkey the mandatory earthquake insurance for homeowners is owned by the government. It triggers parametrically (> 7 magnitude). In one case at least [1] the government office responsible for announcing the magnitude, AFAD, declared it lower than this threshold although other countries and Turkish research institues measured it as 7.0 . At the end the insurance payout was so much more limited even for people who kist their house and loved ones.
As wiki page mentions in notes section AFAD declared this a 6.6 magnitude earthquake although it was 7.0 . [1] https://en.m.wikipedia.org/wiki/2020_Aegean_Sea_earthquake