Jeff Guo

Yeah, the country of Jamaica had made a big bet, an actual bet on hurricanes.

Hello and welcome to Planet Money.

I'm Jeff Guo.

This kind of financial wager is called a catastrophe bond.

And the market for catastrophe has gotten really hot lately.

Today on the show, the story of where catastrophe bonds come from, why they've gotten so popular, and how they are changing the way insurance works for Jamaica and for all of us.

But with catastrophe bonds, instead of an insurance company making the payout when things go south, it's investors, people making bets against an earthquake hitting Japan or a wildfire sweeping through California.

Do you accept that title?

Karen is this computer stats whiz.

She specializes in the math of catastrophes.

Her job is to calculate the risk of extreme and rare disasters.

She was one of the first to predict how much damage they might cause and how much the rebuilding would cost.

You see, for insurance companies, hurricanes are a special headache.

Standard insurance works great for covering your typical day-to-day risks, like if a pipe bursts and floods the basement.

Insurance companies can handle all that.

What's much harder for them to handle are the big once-in-a-generation catastrophes, like when a Category 5 hurricane tears through a city and suddenly everybody needs to rebuild their homes.

A disaster like that can overwhelm a single insurance company.

Why is it called reinsurance?

Why is it not like insurance squared?

The insurance companies weren't really sure how much hurricane insurance they actually needed to buy from the reinsurers.