Dollars and Jens
Sunday, September 12, 2004
known unknowns
Pepsi just did its Billion Dollar Giveaway, in which it didn't give away a billion dollars. Of course, even if it had, it wouldn't have; the possibility was insured against, by the good people at Berkshire Hathaway. And even then, the money was to be paid so far in the future that, if you wanted it now, it would only be a quarter of the amount.

As there was a 1 in 1000 chance of a $250,000,000 event, a sort of "fair value" of $250,000 could be assigned to the risk. In fact, while terms weren't disclosed, I would assume that the money that changed hands considerably exceeded this, for all the reasons insurance exists as a business: risk has disutility, and even a mind-bendingly financially solid company — I own stock in Berkshire Hathaway, by the way — is going to charge a premium for carrying that. What's interesting about this risk, as opposed to the more quotidian risks against which insurance companies insure, is that it's so easy to quantify. Sure, companies have actuaries and underwriters and have a decent handle on how much risk they're taking on when they write a car insurance policy, but they kind of know there's a certain amount of variety in the categories into which they can put people, and you can get a wide range of quotes if you call a number of even reputable insurance companies. Any range Pepsi would get would be based not on estimates of risk, but simply how willing the company would be to bear that risk; Berkshire Hathaway is extremely willing to bear risk, as long as it feels it knows what that risk is that it's bearing.

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