Waylon Wong

This is when the insurance companies get an idea.

They're like, if we can't get enough reinsurance from Lloyd's of London, maybe we could also go around them.

You know, go straight to Wall Street.

There's a whole world of investors out there.

Maybe some of them might want to get in on this catastrophe reinsurance game.

That is, unless a big enough hurricane strikes sometime during those couple of years.

In that case, the investors don't get their money back.

The insurance company gets to keep that $200 million and use it to cover people who are rebuilding their houses.

For a long time, not that many investors were interested in catastrophe bonds.

Because even if you believed Karen's models, you were still literally betting on hurricanes and natural disasters.

These risks were a little too exotic for most of the starched shirts on Wall Street.

And Ethan's firm specialized in what are called alternative investments, like buying out people's life insurance policies or betting on the future sales of some life-saving drug.

And they were also early investors in catastrophe bonds, bought millions of dollars worth of them.

For some people, diversification might mean, OK, instead of putting all of our savings into Apple stock, maybe we'll buy some IBM stock or McDonald's stock.

Maybe we'll buy a little piece of every company in the S&P 500.

This is why some people really like catastrophe bonds, because they tend to be so uncorrelated with your other investments.

You know, the profits or losses at Microsoft and McDonald's have very little to do with chances that, say, a typhoon will or won't hit the Philippines next year.

And Ethan says when you put cat bonds side by side with corporate bonds that are similarly risky, some cat bonds will pay you a lot more interest.

When Ethan first got into cat bonds in the 2000s, the market was tiny.

Over the past couple years, they have exploded into an almost $60 billion market, and one that is still growing exponentially.