What makes you think that nobody can get the billion?
Insurance policies require you to pay a certain amount guaranteed, then pay back a much larger amount if something unlikely happens. So Pepsi had to pay $10 million. If the right thing happened during the game then Berkshire Hathaway would have paid a billion, and some lucky consumer would have walked away a newly minted billionaire.
Berkshire's General Re does reinsurance, not re-"reinsurance". Is there a recursive step -- Could General Re face a claim that it needs to leans on the rest of Berkshire to pay?
The article says its insurance companies face a 2 percent chance of being "$12 billion" insolvent, which Berkshire could cover from non-insurance profits. But would that still be true if the claims came in, or would the non-insurance companies also have correlated down years?
I suppose Berkshire Hathaway is big enough that if it came down to it, it could liquidate equity ($500B minus devaluation due to whatever catastrophe) to make good on claims.
No way that Berkshire pays a $500b claim. They would find a way to stick the US taxpayer with the bill as many smaller companies have done before them.
reinsurance is also a nice way to reduce a company's taxes, and to hold money offshore. Many reinsurance companies are owned by another company; but the "re" is incorporated in a low or no tax jurisdiction such as Cayman Islands or Bermuda.
Bizarrely it’s sometimes another division of the same reinsurance company.
I work for an insurer and got talking with one of our pricing guys who told me about a case where one of the big multinationals had one division which was way under it’s predicted claims volume for the year, and another that was over. To rebalance the risk the US division ended up insuring the EU division.
Another story that night was about a reinsurer that through several departments taking on different risks ended up on the hook for a dockyard which caught fire catastrophically. And all the goods in that dockyard. And the boat which started the fire.
That evening led to my drunken catchphrase: “fucking insurance”, said ever more enthusiastically.
They are doing it wrong - socialise that risk. Here in New Zealand when a big insurer has something bad happen (eg an earthquake flattens a big city) you get bailed out by the government. Departing staff still got big payouts in that era too, so it doesn’t seem to impose any stringent criteria on companies too. AMI specifically. Sarcasm aplenty in this comment.
Even reinsurance has limits, and large earthquakes on major metropolitan centres are basically the one thing that will exceed them (floods can be bad too, but the risks are more predictable, and are often excluded from policies in high-risk areas).
The only alternative to the "government backstop" is that insurers will refuse to write policies or will exclude earthquake risk (in which case the government may need to set up it's own scheme, e.g. in CEA insurance in California).
Reinsurance funds typically market themselves as a source of alpha for large institutional investors. The reinsurance company sells bonds that promise a relatively high rate of return, with the caveat that in the event that the fund needs to pay out a large claim, the value of the bond may be nullified.
