Five Hundred Billion

[Doc]

And it's the bare bones estimate of the costs of cleaning up Katrina over the next decade or so. Long term projections.

However, that number could easily double it self once the full extent of cost to rebuild the entire Gulf Coast reveals it self.

Heard this morning that a couple of insurance companies are trying to file for some kind of special bankrupt status, to make the Government pay their bills, because they can not physically pay out the kind of money being estimated. Which means a lot of people depending on insurance monies are probably going to be screwed. Which is unfair and wrong. But what do you do when the estimated pay outs are going to cost more than your company is actually worth?

Five hundred billion dollars. That's a number larger than I can even begin to comprehend. That is a staggering sum of money. :huh:

[Occhidiangela]

Heard this morning that a couple of insurance companies are trying to file for some kind of special bankrupt status, to make the Government pay their bills, because they can not physically pay out the kind of money being estimated. Which means a lot of people depending on insurance monies are probably going to be screwed. Which is unfair and wrong. But what do you do when the estimated pay outs are going to cost more than your company is actually worth?
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Then let every shareholder, board member, and executive in that company cough up the dough to make the difference for their claims. And let them go under once every nickel is paid out to policy holders.

There are reserve requirements. There is massive regulation for insurance companies. Their busniess is risk and risk mitigation.

There is no free lunch, there is no security, there is no entitlement.

Occhi

[Doc]

Then let every shareholder, board member, and executive in that company cough up the dough to make the difference for their claims.  And let them go under once every nickel is paid out to policy holders. 

There are reserve requirements.  There is massive regulation for insurance companies.  Their busniess is risk and risk mitigation.

There is no free lunch, there is no security, there is no entitlement.

Occhi
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I am tossing out random numbers here, so don't rake me over the coals... But if you have an insurance company worth say, 750 million dollars and you get nailed with say, 5 billion dollars in claims, how do you pay that?

Sounds like some kind of Ponzi scheme if you ask me.

But I don't know enough about this sort of situation to make judgements.

[Guest]

Dont be naive.

Cost figures like that are rather meaningless. Specific numbers like what tax payers will pay or what insurers will pay at least have some use in specific cases.

[whyBish]

Then let every shareholder, board member, and executive in that company cough up the dough to make the difference for their claims.  And let them go under once every nickel is paid out to policy holders. 

There are reserve requirements.  There is massive regulation for insurance companies.  Their busniess is risk and risk mitigation.

There is no free lunch, there is no security, there is no entitlement.

Occhi
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Well, that's not how a limited liability company works.

As to risk and risk mitigation, insurance, like banking works on the principal that not everyone will withdraw simultaneously. Insurance companies 'package up' their risks and trade them with other companies to diversify their risk, just like banks do with mortgages.

However, prudential regulation requires that (for banks over here at least) a bank must maintain a minimum of 6% tier one capital and have at least 12% tier 1 and two capital. Tier 1 capital is essentially shareholder funds, and tier two capital is essentially long term debt financing that can almost be treated like equity. You will notice here how the company only has 12% coverage to be considered prudential... and so can lend eight times as much as it has coverage for.

So what happens when you get a 100% event? The company goes bankrupt, the shareholders lose all value, any lenders to the invesetment company loses all money, any purchasers of 'risk packages' is fully liable to pay them, and any mom & pop investors that were sticking in funds to the company to get a better return than the bank lose their entire deposit.

Such is capitalism.

I'll try finding out the U.S. capital adequacy requirements for banks and insurance companies, seem to remember a 20:1 ratio (i.e. 5% coverage), but probably wrong...

--Edit
U.S. requirements for Bank tier 1 capital is 3-4%

[Occhidiangela]

Well, that's not how a limited liability company works.

As to risk and risk mitigation, insurance, like banking works on the principal that not everyone will withdraw simultaneously.  Insurance companies 'package up' their risks and trade them with other companies to diversify their risk, just like banks do with mortgages.

However, prudential regulation requires that (for banks over here at least) a bank must maintain a minimum of 6% tier one capital and have at least 12% tier 1 and two capital.  Tier 1 capital is essentially shareholder funds, and tier two capital is essentially long term debt financing that can almost be treated like equity.  You will notice here how the company only has 12% coverage to be considered prudential... and so can lend eight times as much as it has coverage for.

So what happens when you get a 100% event?  The company goes bankrupt, the shareholders lose all value, any lenders to the invesetment company loses all money, any purchasers of 'risk packages' is fully liable to pay them, and any mom & pop investors that were sticking in funds to the company to get a better return than the bank lose their entire deposit.

Such is capitalism.

I'll try finding out the U.S. capital adequacy requirements for banks and insurance companies, seem to remember a 20:1 ratio (i.e. 5% coverage), but probably wrong...

--Edit
U.S. requirements for Bank tier 1 capital is 3-4%
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Insurance is shared RISK, it is not a guarantee of anything. I understand how corporation and limited liability work, thanks. I'd rather see my suggestion undertaken as a remedy than some "government bail out" crap like the idiocy we got bilked into by GHW Bush on the Savings and Loan bailout. ( I am still steamed about that, given the number of white collar board members, managers, etc who got off scott free and kept their limos . . .

Occhi

[whyBish]

Insurance is shared RISK, it is not a guarantee of anything.  I understand how corporation and limited liability work, thanks.  I'd rather see my suggestion undertaken as a remedy than some "government bail out" crap like the idiocy we got bilked into by GHW Bush on the Savings and Loan bailout.  ( I am still steamed about that, given the number of white collar board members, managers, etc who got off scott free and kept their limos . . .

Occhi
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You realise that, ironically in the insurance company case, that almost all directors of companies have "directors indemnity insurance", paid for by the company, which covers litigation for all but malpractice.

So directors have (at least) two levels of protection (LLC and insurance).

[Occhidiangela]

You realise that, ironically in the insurance company case, that almost all directors of companies have "directors indemnity insurance", paid for by the company, which covers litigation for all but malpractice.

So directors have (at least) two levels of protection (LLC and insurance).
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Hehe, but if that company (the underwriter) also goes under, it can't pay the claim, and they are euchered, right?

Wrong.

I imagine most of the directors hire clever enough accountants and attorneys to get their hands on as much of the assets as they can, screw the policy holders.

Occhi

[martini]

As to risk and risk mitigation, insurance, like banking works on the principal that not everyone will withdraw simultaneously.  Insurance companies 'package up' their risks and trade them with other companies to diversify their risk, just like banks do with mortgages.

In large-scale disasters, it's usually the reinsurers who get hit, and I'd expect the same thing here, unless the insurance company hadn't adequately protected themselves by getting appropriate reinsurance, or unless they insure something so specialized that other insurers won't touch it.

[Occhidiangela]

In large-scale disasters, it's usually the reinsurers who get hit, and I'd expect the same thing here, unless the insurance company hadn't adequately protected themselves by getting appropriate reinsurance, or unless they insure something so specialized that other insurers won't touch it.
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OK, help me out here: who insures inner city slums? I really have no idea.

Occhi

[martini]

OK, help me out here: who insures inner city slums?  I really have no idea.

Occhi
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I was speaking directly to the point that Doc made in his original post about insurance companies declaring bankruptcy. Perhaps I should have included the entire post when I quoted it, rather than an excerpt to highlight the point that I was making - apologies for any misunderstanding.