Taking a page from movie superstar George Lucas’ book, the insurance industry provides itself with yet another venue…and they do it by bartering catastrophic risks among themselves.

Lucas, the genius behind Star Wars, bartered to reduce his risks by trading a percentage share of his profits. He bartered 1% of the profits in Star Wars for 1% in John Milius’ surfing film Big Wednesday. Although Big Wednesday proved to be a big bust, Milius’ share of Star Wars netted him more than $500,000. Lucas, of course, made less money on the deal…but it could have gone the other way.

Insurance companies are confronted with a different type of risk than a movie producer, one that can be prohibitively expensive. Namely management of catastrophe risks…ranging from hurricanes and earthquakes to riots and other events.

By forming the Catastrophe Risk Exchange (CATEX), insurance brokerages and self-insured entities are able to barter units of their disaster risk by region and peril.

In effect, because insurers are increasingly being barred by regulators from dropping lines of coverage, or from leaving unprofitable states, the industry has embraced barter.

This way they are now able to dilute risk-concentration in one geographic area, by trading a portion of it for risks insured against a different peril in another part of the globe.

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This entry was posted on Wednesday, January 16th, 2008 at 7:28 am and is filed under Global Environment. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.