On the Failure of Monte Carlo Simulation and "Catastrophe Insurance"

This paper argued with empirical evidences that insurance and reinsurance are never panacea in the realm of risk diversification in that the very tools based essentially on risk pooling which fails in the universe where occurrence of a single extreme event churns the pool. The author proves "catastrophe insurance" irrelevant and Monte Carlo simulation in cat-pricing fallible, concluding that cat-risk retention, as is employed by developing countries, might be optimal before innovative techniques dealing with randomness of extreme consequences is in sight.