Planet Money Summer School Intro Econ 8: Risk & Disaster
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Aug 26, 2020 In this podcast, the hosts discuss the concept of risk and disaster. They explore risk-taking, professional gamblers, and their approach to assessing probabilities. They also delve into the role of insurance in mitigating financial risk, the evolution of insurance policies, and the exclusions and limitations of insurance. Additionally, they cover the reasons why people buy insurance and how it helps to mitigate the negative effects of risk. The chapter also explores the concept of insurance as a risk management tool and discusses moral hazard and adverse selection.
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Reading The Homeowners Policy
- Jacob read his 23-page homeowners policy and found surprising specific coverages like missiles and volcano lava.
- He used the fine print to reveal how insurers sort risks into covered and not covered buckets.
Fire Spawned Modern Insurance
- Fire was the original huge risk that led to early insurance and private fire brigades for insured homes.
- As new suburban mortgages spread, insurers expanded coverage to many more perils beyond fire.
Why Policies Exclude Catastrophic Risks
- Insurers exclude correlated events like war because simultaneous massive losses would bankrupt them.
- Policies list many exclusions to avoid covering risks that can't be pooled reliably.