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(For new reader and those who request 好友请求, please read my 公告栏 first).
Hurricane Katrina, Statistical Modeling of Catastrophe, and Scientific Discovery
This week is the two year anniversary of the largest natural
disaster in the U.S. history in terms of human and financial losses. Many
insurance companies went bankrupt; the city of New Orleans has not
completely recovered. The New York Times yesterday ran a 8378 words
(30 typewritten pages long) article about a little known story behind Katrina
that is fascinating to me and possibly equally fascinating to the science net reader because:
1. The story explains in layman's terms how to correctly predict and hence insure the cost of a major natural disaster,
hurricane or earthquake, that may occur only once in a 100 years.
2. This is a difficult, unknown and little studied statistical
problem. Unlike life insurance where there are ample data on which to
built very reliable statistical models
3. How two scientists, one female and one Korean American starting in
the 1970's began to study this problem mathematically. In particular this
Korean American John Seo, a biophysicists from MIT and Harvard,
abandoned his training and turned his attention to this problem of pricing
catastrophic insurance.
4. Seo's research and solution is both original and practical
Hurricane Katyrina vindicated him and he now reaps both fame and fortune
as well as provided a valuable financial service to the public.
5. (Note added 8/29/07) Once the price of catastrophic insurance is
correctly priced, one can then proceed to spread the risk among general
investors who are willing to assume a small portion of the risk in return
for certain investment results. The vehicle is something called
catastrophic-bonds which can be traded.
entire article is available at
http://www.nytimes.com/2007/08/26/magazine/26neworleans-t.html
It is a fascinating read for anyone interested in scientific discovery and
real world application. (Note if NYTimes website is not accessible in
China, perhaps Science Net can arrange reprint permission if enough readers demand)
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