Jeff Guo

It's called Lloyd's of London.

And the folks at Lloyd's, they're kind of famous for selling, you know, unusual kinds of insurance.

Like they're the ones who insured Bruce Springsteen's voice and also David Beckham's legs.

No.

One problem was that Karen's models, they were saying something scary, that the whole industry was vastly underestimating the risk of hurricanes.

So it wasn't just the folks at Lloyd's who were skeptical.

A lot of people were.

Karen's company had a handful of clients at the time who were paying her to predict how much damage this was all going to cause.

Karen says everybody in the industry, they were predicting, at worst, this is a $7 billion hurricane.

But not $13 billion.

That's right.

In the end, Karen's model was pretty close to the mark.

Did you get any like apology faxes saying like, sorry, we doubted you?

A lot more customers.

And at the same time, the reinsurers, like the folks at Lloyd's, they were realizing, oh, no, this hurricane reinsurance is actually a really dangerous market to be in.

But even with those higher prices, there still wasn't enough reinsurance to go around.

By the late 90s, the whole insurance industry was facing this shortage of reinsurance.

And this, this is the defining moment, not just for Karen, but for the whole insurance industry, because this is the moment when the catastrophe bond is born.

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.