I have a tiny bit of relevant experience.
With a typical insurance policy (like your auto liability policy or your homeowners) the price is made up of three pieces:
[ ]An amount to cover the expected payout
[ ]An amount to cover the operating expenses
[ ]An amount to cover the "rent" of capital necessary in case the actual losses exceed expected losses. (Some call this "profit", but it truly is a charge for risk.)
Very roughly speaking, the percentages are 70%, 25% and 5%.
There's a specialized area on insurance often called "hole-in-one" insurance, because it covers things like cares or cash payouts for hitting a hole-in-one, or some other similar situation. Because the amounts are often modest, the risk charges for prizes, even of a million dollars, are fairly modest.
A billion is in new territory.
The risk charge will be the biggest component of the price, followed by the expense component, and the expected loss cost, typically the largest component, will literally round to zero.
So I said I sort of have some experience.
If you are sued in court, and lose, you can ether pay up or appeal. However, if you appeal, you will have to put u a surety bond in the amount of the judgement as part of the appeal. They want to make sure you don't "lose" some of your assets while the appeal is in progress. Surety bonds are typically not all that expensive. Even when judgments are a few million, it isn't hard to find someone who can use a portion of their capital to cover the possibility that you cannot pay. However, a couple decades ago, there was a massive tobacco lawsuit. I don;t now recall the exact details, but the judgement was in the billions. They were considering appealing, but had to deal with the non-trivial issue of obtaining a surety bond, which literally meant that insurance companies would have to earmark billions of dollars to cover the possibility of a default. Even if the default is unlikely, you have to have the full amount, and more. I was convinced it could be done, and pitched a project to assemble the world's largest surely bond, using a consortium of companies. I spent a little time thinking about how it should be priced, and the conclusion was that the risk load for the use of capital would be the largest component. Unfortunately, the project never went anywhere, but there are parallels between that potential project, and the pricing of this coverage.
Sorry, way OT, but an interesting blast from the past for me personally.
