Why insurance companies don’t insure against earthquakes or the ‘Great Correlation’
#### Don’t park under coconut palms
During earthquakes, events that would normally not correlate in any way begin to correlate by a factor close to one.
Let me explain.
For example, the individual insured events of different people in the same region. Usually, if you have a car that cannot be repaired and you apply to an insurance company for compensation, it’s because it was _your_ car that was involved in the accident. And one or two others, of course. Or a coconut fell on your car from a palm tree. You parked in the shade, good for you. But in normal times, it doesn’t affect your friends’ cars, even if they live in the same city. And the insurance company takes it into account in the cost of insurance and premium calculations.
If there is a big earthquake in your city, the probability that not coconuts but whole palm trees or parts of houses or chunks of rock that towers over the city fall on _many_ cars at the same time increases by a huge number of orders of magnitude and becomes comparable to one. And if an insurance company insures such cases, it will sooner or later go bankrupt in a day.
#### How to go bust (some advices)
How does losing a man’s life savings usually happen? Let’s call him Andrey, for example.
For example, Andrey takes his life’s earnings and invests them into the shares of a company, which one day goes bankrupt.
Sometimes, Andrey buys gold with all his money, hides it in the basement, and then thieves come and steal it.
Andrey buys a house, and the house is demolished by a passing hurricane or flooded during a flood.
Andrey invests all the money in the business, the business goes bust.
What do all these cases have in common, except that Andrey (is fool — crossed out) invested his savings in one thing and that one thing didn’t work out for whatever reason?
// The principle “Don’t put your eggs in one basket, diversify your investments” is a topic for seventh grade public school, which everyone knows, so let’s leave it out of the equation for now, it’s not about that now. But then we will analyse it in detail.
That _this particular Andrey_ was unlucky. He invested his money in the wrong company. Hid the gold in the wrong place. Bought a house in the wrong place at the wrong time. Anything can go wrong with a business…
His old high school friend, say Alexei, who lives in a neighbouring state, is probably doing just fine with his, Alexei’s, savings.
Noticing the similarities with insurance claims, are we? The correlation is ~0 between saving Andrei’s and Alexei’s or anyone else’s savings. You personally might be unlucky, but the _likelihood_ of that is pretty small, and besides, the _impact_ can easily be minimized by the very diversification that every schoolboy knows about: not just buying a house, but also gold. Not only do you invest in company shares, but you start your own business. Plain and simple. Don’t be a fool.
#### About favourites and predictions
These days (over the last many decades, probably since World War II) everyone is more or less sure of the stability and steadiness of the U.S. dollar. In any confusing situation, everyone runs to buy U.S. government Treasuries, which are considered equivalent to dollars and are secure because all the U.S. government (through the Federal Reserve, whatever) needs to do in order to pay them back is print or otherwise produce the amount of dollars it needs. And that’s it, the obligation is fulfilled.
That is how it has worked so far and will probably work for some time, probably a very long time. Nobody knows exactly how long, and whoever says he knows, doesn’t know what he’s talking about or is just a crook. Maybe a hundred years. Maybe three hundred. Maybe ten. Maybe six months. Abrupt changes always happen unexpectedly to _mostly_ everyone, and the few who know about them in advance never tell anyone unnecessarily.
One of the problems with a narrative (story) that is all around is that the motivation for those who bet on the opposite outcome becomes extremely large and addictive. If everyone is sure that the favourite will win and the odds on it are 7 to 8, and the odds on the underdog are 1 to 70 and no one wants to bet on it in principle, then whoever at that moment bets a lot on the underdog and can _make_ it win, gets _everything_. EVERYTHING at all. Motivating, isn’t it? And those who might be motivated in one way or another cannot be counted and listed, since they are _everyone_ except those with a vested interest in maintaining the existing order (status quo, a clever Latin word). Most of those potentially interested in changing it are passive and have little power, but there are others.
Now, in mid-2022, there are several finance-related narratives that everyone is pretty much sure of:
The first and longest-standing (a couple of hundred years) universal narrative: ‘money must work’, ‘inflation eats savings that don’t work’.
The second, slightly less long-standing narrative (a few decades): “the US dollar is a safe haven”.
A third, equally old: “corporate stocks are a good investment. The S&P500 index is rising faster than inflation”.
A fourth and even less old (maybe a decade) narrative: “gold has lost its value and doesn’t even protect against inflation.
The fifth, of the same age: “why do you need property when you can rent anything?”
Sixth, very recent (one year old): “cryptocurrencies are a bubble”.
#### Smart Eugene
What does the smart elderly Eugene do when he wants to save his savings?
He diversifies his investments and sleeps well.
With part of his life earnings he buys S&P500 index, because he knows that it includes the largest companies of the USA stock market and this in itself is sufficient diversification.
Eugene invests part of his money in currencies. He buys US Treasuries, as the most reliable instrument available on the market. But he does not trust anyone one hundred percent, so he diversifies this investment as well: he opens accounts in three different banks in different parts of the world and invests money not only in dollars, but also in yuan, rubles, euros and Indian rupees. He opens accounts in the most reliable banks of the corresponding countries. The accounts bring Eugene an interest income comparable to inflation.
Eugene knows how to count money, so he doesn’t buy a house, laying out the full amount for it, but takes a mortgage at 1% per annum for 50 years and buys several houses in different places. The money the tenants pay is more than enough to pay the mortgage.
As a reserve, Eugene invests in gold mining shares and some gold in an unallocated metal account at the bank.
What does Eugene _not_ do?
He _does_ not invest money in business, because he himself is not a businessman, and the probability of business success is known to be a small percentage. If he does invest, he does so little by little and through banking instruments, which reduce the risks.
He _does_ not_ buy gold or silver bullion or coins physically, because they have to be guarded, they do not protect against inflation, and they can be stolen and counterfeited.
He _doesn’t_ buy bitcoin and other cryptocurrencies, because he is an old-school man who understands that this is just another fashion and bubble, of which he has seen many in his lifetime and expects to see more.
He _does_ not buy real estate for cash, because he is well aware that if the money is invested in his own house, it turns into a liability, which must be serviced on a monthly basis.
And there are quite a few Eugenes like that around. And they are doing well.
It’s likely that Eugene will be lucky enough to pass on, leaving a handsome sum of money in the accounts to his heirs. And that might be a good strategy in reckoning with that outcome. It’s likely enough, to be honest.
But there is a nuance.
#### Lots of legal terms and a short string of bits.
What _is_ actually owned by Eugene?
Open a legal dictionary: “The owner has the right to possess, use and dispose of his property.
Fine. With the use (consumption, making profit) and disposal (transfer of all rights to the thing), it is more or less clear, but what is “possession”?
Let’s continue our research in the dictionary: “Possession is, in civil law, the actual possession of a thing, which creates the possibility of direct influence on it.
What _really_ is the S&P500 Index? What kind of thing is it? Do you know for sure?
Look, I think the short version is about this: A set of bits on a computer or smartphone hard drive that links to a set of bits on a bank’s servers, which links to a set of bits on a broker’s servers, which links to a set of bits on a depositary’s servers, which links to a set of bits on another broker’s servers, which references a set of bits on the servers of an exchange, which references a set of bits on other servers of the same exchange and other exchanges, which references a set of bits on SEC servers that are sent to those servers from the servers of the companies in that index, and this is all taken as the “S&P500 index”. Well this is a very simplified view, in fact it’s considerably more complicated, longer and confusing. But it gives some idea.
Does Eugene own his stake in the S&P500 Index? Can he influence it? In principle, yes. If all it’s good, he can. And he can even use and dispose of it.
#### Great Correlation (or not so great, but enough)
But the moment this (as yet unknown) event or chain of events occurs that affects the world in such a way that for instance the USA government decides to stop servicing US Treasuries, things will suddenly get very interesting for many. We (okay, me) understand that it is bound to happen, the only question is when. On our lives? On our children’s lives? Grandchildren? Great-great-grandchildren?
At that moment everything that normally does not correlate with each other will suddenly begin to correlate. For example, (not a fact, but it could be), _simultaneously_ many, if not all, of the world’s major currencies will very likely start having problems. Banks will (temporarily, of course) stop or restrict access to withdrawals from users’ accounts.
The question is, so what does _really_ Eugene own? What does he own — what will he be able to influence, what will he be able to use as intended, what will he be able to dispose of at that point? From the above — there is a possibility that it is roughly nothing. Because in the moments of great correlations everything becomes connected and everything that isn’t directly physically accessible, everything that isn’t really owned by the person will be out of his reach.
Note that the problems with debt servicing on US Treasuries is only _one_ of the scenarios that could lead to such consequences for Eugene.
Too unlikely to be taken seriously, right?
Well, here’s another one on the top of my head:
A medium-sized tsunami in the Atlantic Ocean (which hasn’t happened in a long time, so it will never happen, right?) with a wave height of, say, 20 metres all along the east coast of the US…
A slightly more powerful than usual solar flare, disabling some sensitive electronics on Earth…
Still too unlikely? OK…
Some kind of another nasty virus, temporarily paralysing all transport and logistics chains…
Still too global? OK…
A very local, simple, feasible and practically tested variant: declaring a group of people, which Eugene has the misfortune to belong to, as a group of people, for which the banking services are “suspended”…
And there could be any number of such options. Their unlikelihood is compensated by their potential number. And the result is the same.
Eugene, if he has not had time to go to the next world peacefully, finds himself penniless. _And a lot of Eugenies around_ (and this is an important point). Diversification didn’t help.
But in this situation, unlike the hypothetical robbery of a personal and private basement full of gold coins, it literally is death. Why? Because if you find yourself penniless _alone_, you have friends, family, acquaintances, fellow citizens and colleagues who will support and help. If, on the other hand, everyone around you is in the same situation, there is no one to rely on for help.
Therefore, I consider this risk of any events negatively affecting a large number of people around to be one of the main _real_ risks for people in today’s complex society and those who do not insure against it to be careless cranks who count on the Russian “avos’ ”.
#### WHAT TO DO, CAP???
What would help? Hypothetically? (Doesn’t mean you have to run out right now and invest at least some of it, and this is not financial advice by any means, what kind of financial adviser am I, for God’s sake)
Means of production, physical assets: a farm with its animals; a garden with its trees; a field or garden with its vegetables (and the seeds from them); a piece of forest on your property; the production of something physical that people around you need and will need no matter what: food, materials, machine parts and tools.
Physical currency, cash. Enough US dollars, local currency and maybe a few currencies of your own choosing. There is a possibility that if the dollar shakes, it will shake everything around it, all currencies at the same time. But as long as the dollar stands — this _physical_ basket will more or less retain its value net of inflation. Yes, money will have to be deposited there periodically to maintain purchasing power relative to inflation.
Precious metals in _small_ coins and bullion. Gold and silver, for example. It is the _small_ coins/ ingots bought from official suppliers, as it is less profitable to counterfeit them than larger ones. Counterfeits are thriving in this market.
Bitcoins (sorry). Perhaps it will turn to dust. Or perhaps it will be the only thing valued in tough times along with gold and ammunition.
Guns and ammunition (sorry), if it’s real in your country and if it’s not taboo for you personally. What you can defend is yours. If you don’t have a gun, in which case what you have belongs to the first person to come at you with a gun.
Probably left something else out. Groceries, cellars, shovels and the like are unnecessary, that’s for “survivalists” and that’s not what I’m writing about. But in principle, a house far away from everything industrial is a good investment, and you can have a rest there in the fresh air once in a while.
All of the above may get lost, it may get devalued, but in the event of a “Great Correlation” (or not so great, but unfortunately affecting the group of people to which you belong) _some_ of it will retain its value and help you through the hard times.
Read Remarque and the memories of survivors of the German concentration camps (that was only three generations ago).
Nothing can be predicted, but everything can be more or less prepared for.