You bet your friend that the Dallas Cowboys won’t win the Super Bowl for the next five years. But it’s a bit more complex than just a straight up bet. There are terms.
The deal goes like this: You will pay him $100 every time that the Cowboys win the Super Bowl, and he’ll pay you $10 a year at the start of every season for five straight years.
Now, you’ve made an interesting bet. You’re guaranteed to get $50 over five years. But if the Cowboys win five consecutive Super Bowls, you’ll end up paying $500 total ($450 net).
Given that this is a lot of money you could lose, you turn to a friend of yours and ask him to insure some of your potential losses. You say that you’ll give him $2 a year out of the $10 payments...as long as he’s willing to pay $50 if the Cowboys win the Big Game, and you aren’t able to meet your obligations to the original friend. He accepts that deal, knowing how rare it would be for the Cowboys to win even one Super Bowl, let alone one.
One Cowboys win wouldn't bankrupt you. But two might be a catastrophe, not just for your bank account, but also for the morale of everyone in America. Your payments to the person to back up your payments if too many wins are similar to what is known as a catastrophe reinsurance policy.
Insurance companies will buy reinsurance to protect against the aftermath of a massive catastrophic event, or a series of them. Think of an insurance company that must pay for damage from hurricanes...and then a second hurricane hits just months later.
Catastrophe reinsurance lets insurance firms shift some of the risks to other companies in exchange for part of the premiums they receive from policy buyers.
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Finance: What is Directors & Officers In...100 Views
finance a la shmoop what is directors and officers insurance coverage? well if
you ever sit on the board of a public company you'll want this or at least a [People sat at a table in a meeting]
feeling you'll sleep better at night if you have it. D&O insurance is just
insurance like any other kind of insurance only it insurers for board
stupidity or rather legal definitions of dumb things companies do that costs
shareholders money and for which the Board of Directors then gets blamed and
sued in theory if company ever lost a large lawsuit well at worst they would [Man and woman in a court]
just hand over the keys to the company itself to whoever won the lawsuit
famously warren buffett founder and CEO Berkshire Hathaway and the largest
seller of insurance in the world through Geico and other subsidiaries does not
allow his Board of Directors to carry any D&O insurance because he feels that
if the company stumbles so stupidly because of poor governance that he along [Warren Buffet appears]
with all of his boards should suffer the resulting personal bankruptcies that
would follow with all the lawsuits that would be piled on and yes sometimes
companies are so corrupt or stupid or unlucky that the damages in a lost
lawsuit exceed the value of the entire company itself and then the insurance
company has to be called to cover whatever is left in legal bills after
the company has been handed over in practice it's not quite that dramatic
companies carry D&O insurance for smaller things as well like a company
stock goes from $22 to $14 after a bad quarter and some ambulance-chasing [Company stock graph appears]
lawyer from New York is able to convince a judge that proper disclosure wasn't
made about the lack of sales in the Uzbekistan office and to make the
lawsuit go away the company held hostage pays seventeen million dollars in
damages to shareholders making a claim the key thing is the shareholders here
get like pennies a share and the lawyers get millions a typical D&O policy for a
smaller public company might carry a ten million dollar deductible so in this
case the first ten million of that seventeen comes out of the company
coffers and then the money beyond that comes from the insurance company that
wrote the coverage policy well historically the business of writing D&O
policies has been a great business for the insurance industry as tons of
premiums get paid by nervous Nelly directors who in fact never lose [Hammer nails sign to the wall]
lawsuits and well you know the gravy train keeps on graving... [Man riding a gravy train]
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