The Exemption Cliff: Why a 10% Policy Loophole Eats Most of the Backstop

Part 23 of the Fat Tail Notes series — the last garment's loophole is the policy's. Part 22 priced the retail loophole: under full commitment, an exemption rate of just 10% destroyed 85% of the garment, because as long as any override can fire, the worst 1% stays deep. The conclusion for the individual was clean: make the hole narrow. But the individual's hole only eats her own underwear. The backstop itself — the thing every portfolio leans on in a crash — has its own override, and it is the most dangerous one in the series.