Insuring against catastrophe: The coronavirus predicament
People insure themselves against many types of potential catastrophes: a house fire, a car accident, the untimely death of a spouse, a serious health problem. For other unexpected expenses, prudent people, as we say, save money “for a rainy day.” For some reason people and governments have chosen not to insure themselves (individually or collectively) against two catastrophes that have been much in the news lately: pandemics and large investment losses.
There is a connection, of course, for the two are tightly coupled. Here are some of the similarities between the two:
- Both occur at irregular and sometimes very long intervals.
- Both require careful thought and regular financial outlays to hedge against.
- Despite persistent warnings from experts, most people (and governments) did not act on such warnings.
- Now that the worst has occurred, many investment advisors and governments say, “No one could have seen it coming”—even when such a statement can be proven immediately false with easily obtained video evidence!
Will we learn from our current experience?
The answer in some cases will certainly be no because the incentives in our system encourage those in high places to act imprudently. Executives of publicly traded companies have spent trillions of dollars buying back shares of their own companies in order to goose stock prices and make their stock options more valuable—without regard for the need for cash reserves to make it through a recession.
One case that’s making the news is that of the U.S. airline industry. In the past five years the industry as a whole spent $45 billion on stock buybacks in order to enrich top management and shareholders. Now, the industry is asking for $50 billion from taxpayers to bail out profligate managers and their companies. Wouldn’t it be nice if they were asking for only $5 billion instead?
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