Jeff Guo

A catastrophe bond is basically a way for insurance companies to sidestep the reinsurance industry, to get reinsurance not from reinsurance companies, but from a much broader pool of people, from investors.

And here we should take a minute to explain how these catastrophe bonds or cat bonds actually work from the point of view of the investors.

Basically, it's like making a loan to the insurance company.

Investors might put up $200 million and the insurance company hangs on to that money for a couple of years.

And in the meantime, pays the investors a bunch of interest.

Then, after a couple years, the investors get their original $200 million back, plus all of that interest.

So with cat bonds, the investors are taking on a major risk.

They could lose all their money with one big catastrophe.

This is where Karen's models come in.

Her models made this market for cat bonds possible because they could show investors exactly what risks they were taking on.

But for some investors, the weirdness of cat bonds, that was kind of their appeal.

Back in the 2000s, Ethan Powell was a manager at a multi-billion dollar investment firm based in Dallas, Texas.

And there's one big reason why investors like Ethan chase these kinds of alternative investments.

In fact, it's a very traditional reason.

The goal is diversification.

Don't put all your eggs into one basket.

Actually, Ethan, of course, has this alternative metaphor.

But Ethan is like, well, what if there's a recession?

All those stocks might go down all at the same time.

So for Ethan, a really good alternative investment is something that is so unrelated to the rest of the economy, where even if the entire stock market crashes, at least your alternative investments are doing OK.