My understanding is that the insurers like these situations - it makes it obvious how important good insurance is and sales go up. The individual impact seems large to the layperson but is within the models of the insurance and reinsurance companies over time.
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There is an analogous situation in (e.g. sports) betting. Every now and then someone places a really long bet on something like Leicester winning the Premiership and then gets a collosal payout. Inevitably there's some naive speculation that the betting shop will be very unhappy with this. In reality theae u likely events happen relatively infrequently (often disproportionately to even their long odds) and the publicity from such an unlikely win more than makes up for the payout.
Chris Moneymaker* winning the 2003 World Series of Poker main event after winning his entry in an $86 online qualifying tournament (rather than paying the $10K entry fee from his own pocket) was the biggest thing that could have happened for poker.
* - Yes, that's really his name: https://en.wikipedia.org/wiki/Chris_Moneymaker
It’s not random. It’s called the Crentist effect or nominative determinism.
The odds did tighten up after Leicester won the Premier League though. You couldn't get 5000-1 on say Watford winning in 2016-17, the best odds IIRC were more like 500-1.
It seemed like bookies really did adjust their expectations or their risk appetite for long-tail events in this market. And they were probably correct to do so.
Or, cynically, their original odds were right but they have taken the opportunity to reduce payouts because punters now consider that event more likely and thus would accept less.
It's less of an indication of bookies' predictions and more of an indicator of bettors' predictions.
A bookie isn't trying to gamble on the outcome; they're trying to get the bets to all balance out so that no matter what the outcome they take in enough money from the losers to pay the winners with some profit leftover.
As more people bet on a specific outcome, they will lower the odds to make sure that the pool of money taken in is still big enough to pay out if that outcome happens.
Are those two events/teams comparable so that one could expect the same type of odds?
I'm not much into betting, but will not the odds change also based on how people are betting. So if many people started to bet on the unexpected result, due to for example that the unexpected Leicester team won last time, wouldn't odds tighten up automatically?
> Are those two events/teams comparable so that one could expect the same type of odds?
Yes IMO. It might be more rigorous to say: before 2016 there were always a handful of teams priced at 5000-1, after 2016 there were not. The league didn't objectively get more competitive.
> So if many people started to bet on the unexpected result, due to for example that the unexpected Leicester team won last time, wouldn't odds tighten up automatically
Definitely possible, and would explain the effect regardless of whether the punters were smart money Nicholas Taleb types who spotted that black swans were systematically underpriced, or gamblers dreaming of another Leicester payday.
So big payouts become an organic marketing expense. Clever!
Ideally the bookie is acting as a broker and not directly making a market. Theoretically if they’re accepting bets for Leicester winning the Premiership at 5000-1, they’re also accepting bets that amount to that not happening at offsetting odds.
Problem with this: an individual betting shop pays out, the sales lift is shared among the entire industry.
Concentrated downside, distributed upside. I doubt the individual bookie is happy.
Proper betting shops are market makers, ideally balancing their books such that they profit by the house spread regardless of outcomes. A bookie that takes on a substantial net position is accidentally gambling with their own money.
I'm not familiar with betting in general but is there even a bookie this days? Or is that a company (one of the thousands flooding social media with ads lately)?
It seems, like in other industries, being large helps to weather out such rare events.
Most "individual betting shops" are a sales agent where the actual "book" is run through bet365/paddypower (at least the ones aboveboard in the UK).
The corollary is the scenes from the movie “The Grifters” where one aspect of Angelica Huston’s character is she goes to tracks to put large bets on long shots to lower the impact on the mobs illegal bookmaking system, in case the horse actually wins.
It’s not mentioned in the movie. I have to guess that they only do that if there is a large bet pending, rather doing it to all the long shot horses.
Some gambler dropping a 10k bet, and have her put $1k on the horse is enough to really rock the odds. Perhaps, mob accounting is not my specialty. And, of course, it’s just a movie.
Is it? The best "insurance" against this seems to be a rat's nest of sufficiently small LLCs which then conveniently go bankrupt when something big happens (losing only the assets in that LLC at that time). Imagine a shipping company where each ship is its own LLC. If the ship sinks, well too bad, the only meaningful asset that LLC had was the ship, oops.
I assume ships are required by law to have insurance before being allowed to go in certain places, to make sure damage they cause is covered. But that would make it hard to sell "better" insurance than the legal minimum when it comes to catastrophic claims.
That's why insurance is heavily regulated and there are requirements on capital available for claims in order to operate in the jurisdiction. And of course savvy clients (like the ones managing $100MM container ships) will do due diligence on this as well.
Pretty much every large merchant ship already has insurance. The market is saturated and there's no way for sales to go up. Marine insurers might use this incident to justify increasing premiums, though.
I would say yes, but realistically all large enough companies purchase adequate insurance for known categories like property and casualty. So this particular claim probably isn't making waves, but there have been claims in the past. For example, when that dude shot up the AMC theater during the Dark Knight, literally every other theater chain bought as much terrorism insurance as the market would sell them. Ironically, because the risk was elevated after the event, price went way up and coverage offered went way down because underwriters saw it as a losing bet.