Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 12

The Beginning of the Entrepreneurial Years

Insurance

You don't need to pray to God any more when there are storms in the sky, but you do have to be insured.

—Bertolt Brecht

Berkeley in the 1960s ushered in a dramatic transformation felt throughout the rest of the country. It was the epicenter of free love, free speech, drugs, and radicalism. To many it was a period of catastrophic social change. At the time, however, I had a very different notion of catastrophic change.

My interest in insurance began when Robert “Bob” Goshay, a gregarious colleague at Berkeley and an insurance expert, asked one day, “Do you think catastrophic risks could be transferred using futures markets?”

Bob believed the idea was transformational and I thought it was feasible. It was that conversation, and a subsequent one in 1970 when we discussed the 1966 earthquake in Parkfield, California,¹ which inspired our research. We collaborated on a paper that explored the feasibility of a reinsurance futures market, published in The Journal of Business Finance in 1972.²

In 1973, Bob took a year's sabbatical at Lloyd's of London, attempting to convince its management and membership that these new insurance risk transfer mechanisms would enhance underwriting profits and reduce risk. Primary insurance firms at the time hedged themselves using reinsurance companies, which insured insurance companies that had too much risk in their books. Post sabbatical, Bob reported, “Lloyd's is living in the nineteenth ...