Catastrophe Swap

  

Categories: Insurance, Derivatives

A financial instrument exchanged in the OTC derivative market that protects investors and insurers from major financial loss due the unpredictable catastrophic loss spewed by Mother Nature.

The participating parties exchange or swap a stream of periodic payments, where the investors’ payments are directly aligned to predicted natural disaster losses measured by the catastrophic loss index, while the insurers’ payments are aligned to the investors’ diversified portfolios.

Not sure who comes out on top. Might be better to place bets on UFC fights instead.

Related or Semi-related Video

Finance: What is Directors & Officers In...100 Views

00:00

finance a la shmoop what is directors and officers insurance coverage? well if

00:08

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]

00:12

feeling you'll sleep better at night if you have it. D&O insurance is just

00:16

insurance like any other kind of insurance only it insurers for board

00:20

stupidity or rather legal definitions of dumb things companies do that costs

00:25

shareholders money and for which the Board of Directors then gets blamed and

00:29

sued in theory if company ever lost a large lawsuit well at worst they would [Man and woman in a court]

00:35

just hand over the keys to the company itself to whoever won the lawsuit

00:38

famously warren buffett founder and CEO Berkshire Hathaway and the largest

00:43

seller of insurance in the world through Geico and other subsidiaries does not

00:47

allow his Board of Directors to carry any D&O insurance because he feels that

00:52

if the company stumbles so stupidly because of poor governance that he along [Warren Buffet appears]

00:57

with all of his boards should suffer the resulting personal bankruptcies that

01:01

would follow with all the lawsuits that would be piled on and yes sometimes

01:05

companies are so corrupt or stupid or unlucky that the damages in a lost

01:10

lawsuit exceed the value of the entire company itself and then the insurance

01:15

company has to be called to cover whatever is left in legal bills after

01:18

the company has been handed over in practice it's not quite that dramatic

01:22

companies carry D&O insurance for smaller things as well like a company

01:27

stock goes from $22 to $14 after a bad quarter and some ambulance-chasing [Company stock graph appears]

01:32

lawyer from New York is able to convince a judge that proper disclosure wasn't

01:37

made about the lack of sales in the Uzbekistan office and to make the

01:41

lawsuit go away the company held hostage pays seventeen million dollars in

01:45

damages to shareholders making a claim the key thing is the shareholders here

01:49

get like pennies a share and the lawyers get millions a typical D&O policy for a

01:54

smaller public company might carry a ten million dollar deductible so in this

01:58

case the first ten million of that seventeen comes out of the company

02:01

coffers and then the money beyond that comes from the insurance company that

02:05

wrote the coverage policy well historically the business of writing D&O

02:09

policies has been a great business for the insurance industry as tons of

02:13

premiums get paid by nervous Nelly directors who in fact never lose [Hammer nails sign to the wall]

02:17

lawsuits and well you know the gravy train keeps on graving... [Man riding a gravy train]

Up Next

Finance: What is Life Insurance (Term v. Variable)?
45 Views

What is term life insurance, and variable life insurance? Hit play to find out, and, uh...let's hope you live long enough to figure out the answers.

Find other enlightening terms in Shmoop Finance Genius Bar(f)