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0 pointsbawolff6mo ago0 comments

> But if you buy a bundle of CAT bonds that focus on say California Earthquake, Florida Hurricane, Japanese Typhoon, and a Cyber Event, you can imagine the diversification benefit you get there.

Yeah, but imagine how bad a day you're having if all of those disasters happen at once, and then as a cherry on top you lose all your money.

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itake6mo ago

Yeah, it seems like you’d want to buy bonds that covers areas that you’re not personally in…

richardfey5mo ago

Why? It's not like you can influence the trigger of any such catastrophe

pm2155mo ago

Same principle as why many people prefer not to own shares in the company that employs them -- you're already heavily exposed to that specific risk and don't want to add more. If you live in Florida then a hurricane in Florida already might mean financial loss for you if it damages your house, so buying a CAT bond that covers a different thing is more diversified risk: you might get "house is trashed" or "bond is total loss" but at least you probably will not get both at once.

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pinkmuffinere5mo ago

You're not incorrect, but this is the same sort of risk you take when buying an index fund, just that index funds have 100x more entries, so are much more diversified. Eg, we could rewrite this about an index fund like:

"Yeah, but imagine how bad a day you're having if all of those [stocks drop] at once, and then as a cherry on top you [enter a recession]."

I'm not saying this is exactly like buying an index fund. I'm very un-knowledgable about CAT bonds. I'm just saying that your criticism holds for _every_ diversified bundle of risks.

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