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• Tuesday, December 13, 2005 05:19 AM

  Betting on pandemic

  There is one extremely valid reason for a market in bird flu futures to exist: life and health insurers will lose massive amounts of money if there is a pandemic. If this market was to get big and viable enough, it could be used to hedge such a risk, and could become an economically efficient way to spread the risk and keep these companies afloat. An insurer that knows it will lose, say, $20billion in the event of a pandemic could buy a contrat that will pay them if there is a pandemic, offsetting some of their losses. This is a good thing.

  Furthermore, if they could get an active terrorism market going, there would no longer be a need for TRIA, the taxpayers would be out of the business of insuring for terrorism risk, and the insurance markets would no longer be so worried about terrorism, particularly nuclear, biological, radiological and chemical attacks. This could be a great thing if it works out.

  I know it sounds grim, but the reality is that the economy will suffer a serious disruption in the event of a big pandemic or big terror attack, and a futures market in such things could very well help to mitigate - not eliminate - the impact.

  —KMM Read KMM's other letters
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