| Topic : Life on Credit |
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Posted in Community :
Credit Risk Management
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Activity:
Question posted: 06 03 2008 22:30:17 +0000,
1 answers, 203 views, last activity
07 06 2010 20:18:08 +0000
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I need your help conceptualizing alternative risk management financial structures for individuals. Most people carry insurance, which could be viewed as a loan, but does not make for a very good investment. The question is, can you conceptualize innovate financial structures that are accessible to middle income Americans?
Getting creative, a “micro cat bond” (i.e. a catastrophe loan) is like insurance, but the opportunity cost is shifted to the lender. It’s like a mortgage that is forgiven in the event of a catastrophe. The loan might be appropriate for individuals with a high tolerance for risk, such as young people. The cat risk and opportunity cost to the lender would be priced into the interest rate, along with the individual’s credit rating, and perhaps structured for their risk tolerance. Would you use such an instrument? Does it already exist?
This is like insurance, but your money can in theory work harder for you if it’s in your 401k and not in the insurer’s portfolio. An earthquake is not going to hit your 401k. In fact, some people use this logic to justify no insurance at all. Yet the idea is more transparent than traditional insurance. If I am misguided here, please correct me. Why would such a model not work? Is it just too risky?
1 Answers for "Should you borrow against catastrophe?"
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So you're suggesting a high return bond in the social milieu -- sort of
like a junk bond? As a bondholder, I get a high rate of return, so long
as there's not an earthquake (the equivalent of the company folding)?
As a borrower, of course I have to pay high rates, but at least there's
a market for it.
This is an excellent idea. Current catastrophic insurance is
terribly expensive. I believe it would be interesting to socially
responsible funds as well as a hedge instrument against exposed
securities.
Prev1NextShowing 1 - 1 of 1
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"Should you borrow against catastrophe?"
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