RWRI Part 3: Representative Agents

This article is the third of a 5-part series covering the Real World Risk Institute’s 1-week mini-course on Real World Risk, held in NYC. There’s statistics, complex systems theory, and strong opinions ahead. I’ve learned far more than I can adequately represent here, so these will more or less be my raw notes. You can find Part 1 and a Table of Contents here.

The first bit of Day 3 is courtesy of guest lecturer Arie Haziza, who does Catastrophic Risk Analytics.

When dealing with catastrophes, here are some rules of thumb:

• Model what can be modeled
• Don’t lie about what you can’t model
• Be thoughtful and honest about the limits of your models

Generally speaking, higher-deductible insurance plans mean better coverage. Why? More “skin in the game”. The insurance company is a little more protected, a little more likely to stay in business, and in a better position to safely offer good coverage. This may seem obvious, but stop and think about how this principle can apply to other domains.

Insurance is risk transfer from one party to another. You give (some of) your risk to a company in exchange for fees etc. Re-insurers do the same thing by…