Funding the X-Prize

Thursday, August 30th, 2007

Alex Tabarrok discusses Funding the X-Prize:

Yesterday, Tyler and I met with Tom Vander Ark, the president of the X-Prize Foundation, to discuss and debate the future of prizes. One interesting bit of trivia that Tom mentioned was that the X-Prize was funded with an insurance contract. The funders paid the premium and the insurance company agreed to pay if the prize conditions were met.

To figure out how to price the contract the insurance company called ‘the experts’ at Boeing and McDonnell-Douglas. According to the experts the conditions for the X-Prize to be won (carrying three people to 100 kilometers above the earth’s surface, twice within two weeks) were so unrealistic as to be basically impossible within any reasonable time frame. Thus, the funders got lucky. The insurance company offered the contract at a very low premium and the rest is history!

Insurance companies don’t seem to understand risk all that well.

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