When Everyone Claims at Once

Insurance rests on a quiet assumption: misfortunes arrive one at a time. Fires are scattered, so an insurer with a hundred thousand customers can predict losses like a timetable. The pool works because each loss is independent; one member's bad year says nothing about the others.

Some risks refuse to scatter. A flood does not pick one house in a valley; it takes the valley. An earthquake takes a city's homes in one minute. When losses are correlated, when they arrive together or not at all, the arithmetic of pooling collapses. Most years such a fund pays nothing; then every member claims at once, and the fund fails exactly when needed.

This is why fire cover is cheap and easy while flood and earthquake cover is often costly, capped, or run by governments. Insurers also export the problem: reinsurance (insurance bought by insurers) spreads a valley's flood across pools on other continents, on the bet that distant disasters will not share a year.

Some risks are correlated across the whole planet. A pandemic or a worldwide crash reaches every pool at once, and a pool of pools is still only a pool. The reach of insurance ends where the whole world can have the same bad year.