Author Topic: Insuring loans.  (Read 12212 times)

AnilG

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Re: Insuring loans.
« Reply #15 on: March 14, 2015, 08:50:14 PM »
Very interesting idea. Will it be a profitable initiative with retail lenders? Will there be enough retail lenders interested in insuring their loans? IMO, the insured dollar amount with retail lenders will be too small to be profitable. Even at 1.5% a year premium, to generate $100,000 in profit, you will need to insure loan value of $6.7 million at 0% payout or $13.3 million at 50% payout without accounting for any other expenses.

What are the regulatory challenges with it?
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Randawl

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Re: Insuring loans.
« Reply #16 on: March 14, 2015, 09:21:02 PM »
So I guess there are three ways to insure.  I was actually thinking of a way differently than what you described.

1) Insure all losses
2) Prevent Negative income
3) Insure losses exceeding certain thresholds

I was curious about 3.  For example, say the expected default rate on B notes is 5%.  I was asking if you were offering insurance for defaults that exceed 7%, basically putting a floor for the investor that they know ahead of time.  It is similar to preventing negative income, but the floor could be establishing a minimum net return which could be 0%, 1%, etc.

I'm not sure about financial insurance, but regular insurance companies are regulated at the state level at least and are very disciplined in how they invest the money they'll be using for payouts.

#3 is what a certificate investor already has with their "Credit Support Agreement" provided by Lending Club!

Fred93

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Re: Insuring loans.
« Reply #17 on: March 14, 2015, 09:45:50 PM »
What are the regulatory challenges with it?

For starters: State insurance commissions in each of 50 states.

Fred

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Re: Insuring loans.
« Reply #18 on: March 15, 2015, 03:23:28 AM »
Ill get you some better numbers soon - I enlisted my uncle whos a quant, and Im asking around to try to find someone in actuarial science whos willing to help.

Ryanlenea, thanks for your responses.  I'm still interested.  Please share the numbers after you finished formulating your models. 

Are you using the ISDA CDS Standard Model?

A little background about you and your uncle would also be appreciated.

Kombinator

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Re: Insuring loans.
« Reply #19 on: March 17, 2015, 10:11:01 AM »
I am quite interested to hear more about this project as well. Please do provide more info and should you move forward with this I would love to review the product and possibly use it for our portfolio.

RazzleDazzle

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Re: Insuring loans.
« Reply #20 on: March 17, 2015, 03:00:06 PM »
I saw this a while back

https://prezi.com/xsmptqovf3tw/lending-club-strengthening-the-peer-to-peer-community/

Didn't pay much attention - are they still running? Thought it'd be relevant.

Kombinator

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Re: Insuring loans.
« Reply #21 on: March 18, 2015, 10:13:39 AM »
Interesting, but seems this is insurance for the borrowers not the lenders

Ryanlenea

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Re: Insuring loans.
« Reply #22 on: March 18, 2015, 10:38:33 PM »
Very interesting idea. Will it be a profitable initiative with retail lenders? Will there be enough retail lenders interested in insuring their loans? IMO, the insured dollar amount with retail lenders will be too small to be profitable. Even at 1.5% a year premium, to generate $100,000 in profit, you will need to insure loan value of $6.7 million at 0% payout or $13.3 million at 50% payout without accounting for any other expenses.

What are the regulatory challenges with it?

AnilG: It's true, our customer base would have to be very large to make a significant profit, and probably why someone hasn't attempted this sooner. 1.5% is the interest rate I very roughly estimated we would have to charge to make some kind of profit, but initially we might have to bump it up so we could cover operating expenses. I think it could eventually be made profitable. In terms of regulation, I've been chatting with a friend who runs a bank that does healthcare finance, which involves making large loans to healthcare providers; he's interested in helping, and says if we set this up "right" as a CDS platform the regulation wouldn't be as burdensome. I'll ask him exactly what "right" means if we get to that point.

So I guess there are three ways to insure.  I was actually thinking of a way differently than what you described.

1) Insure all losses
2) Prevent Negative income
3) Insure losses exceeding certain thresholds

I was curious about 3.  For example, say the expected default rate on B notes is 5%.  I was asking if you were offering insurance for defaults that exceed 7%, basically putting a floor for the investor that they know ahead of time.  It is similar to preventing negative income, but the floor could be establishing a minimum net return which could be 0%, 1%, etc.

I'm not sure about financial insurance, but regular insurance companies are regulated at the state level at least and are very disciplined in how they invest the money they'll be using for payouts.

#3 is what a certificate investor already has with their "Credit Support Agreement" provided by Lending Club!

Randawl: It's true, and I'm looking into this a little further. It's being run through a bank, and I don't think their rate is going to be competitive with what ours could be. Do you, or anyone else know what it is?

Quote from: Fred

link=topic=3100.msg28056#msg28056 date=1426404208
Ill get you some better numbers soon - I enlisted my uncle whos a quant, and Im asking around to try to find someone in actuarial science whos willing to help.

Ryanlenea, thanks for your responses.  I'm still interested.  Please share the numbers after you finished formulating your models. 

Are you using the ISDA CDS Standard Model?

A little background about you and your uncle would also be appreciated.


Fred: No problem! We haven't actually started yet, and I'm not an experienced modeler, so I'm not sure yet, although that seems to me like the easiest place to start. We'll see what the actuary, and my uncle, the hedge fund quant think. I'll defer to them on this.

My uncle has worked for a hedge fund his whole adult life. He's doing a lot of arbitrage, although he's always reluctant to give me specifics because his firm is aggressively proprietary about all their information. He says he "looks for patters in data" and "runs smallish computer programs." Whatever it is, he's doing pretty well for himself.

I'm an Entrepreneur, and have done a lot of unrelated things, but nothing in insurance - some investing in FX is the closest I've gotten. So my "background" isn't very helpful for this business, which is why I've been reaching out to people who work with statistical models. Can I ask what you do Fred? I took you for a retail investor, but you mentioned the ISDA so I assume you have some background in finance?


I am quite interested to hear more about this project as well. Please do provide more info and should you move forward with this I would love to review the product and possibly use it for our portfolio.

Kombinator: I'll keep everyone posted as we move forward. I wish we could start immediately, but I'm still trying to judge the business viability. The last couple days I've been reaching out to people with some more experience in the P2P space to design a study to gauge interest. I was thinking perhaps I could pay a couple bloggers to send out a surveys in their newsletter. I'd welcome any other suggestions. I'd love you to test the product, although that's a ways out!

I saw this a while back

https://prezi.com/xsmptqovf3tw/lending-club-strengthening-the-peer-to-peer-community/

Didn't pay much attention - are they still running? Thought it'd be relevant.

RazzleDazzle: Thanks for sharing, I wasn't aware of this - insurance for borrowers to cover their loan payments if they can't. Does anyone know if it's running? I couldn't find anything about it, save for the Prezi, so I emailed LC to ask. Regardless, I don't think it's an especially needed product considering the borrower demographic on LC, and the fact that there's already a glut of investors trying to snatch up loans, so no real reason to pay more to be more attractive to investors.

If anyone can think of any more reasons why this couldn't work, or would be difficult, I'd love to hear them - I want to be ready for investor questions. Suggestions are welcome too.
« Last Edit: March 18, 2015, 11:00:49 PM by Ryanlenea »

Fred

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Re: Insuring loans.
« Reply #23 on: March 19, 2015, 01:04:18 AM »
I saw this a while back

https://prezi.com/xsmptqovf3tw/lending-club-strengthening-the-peer-to-peer-community/

Didn't pay much attention - are they still running? Thought it'd be relevant.

This looks like a "Payment Protection Insurance" plan -- http://en.wikipedia.org/wiki/Payment_protection_insurance.

See also this link:  http://business.time.com/2012/08/23/make-sure-youre-not-being-charged-this-credit-card-fee/

I'd stay away.

« Last Edit: March 19, 2015, 03:10:11 AM by Fred »

Fred

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Re: Insuring loans.
« Reply #24 on: March 19, 2015, 01:26:53 AM »
Can I ask what you do Fred? I took you for a retail investor, but you mentioned the ISDA so I assume you have some background in finance?

I am a quant, too; had MBA in Finance and PhD in Computer Engineering.  My Folio trading model utilizes a 4+ dimensional price cube of 3rd-derivatives. Still work in progress, though. I am a retail investor -- employing my own "skin" in my models, so I am very cautious about losses and taxes.

I have been with 2 Wall Street companies -- Goldman Sachs and Morgan Stanley, but now with a west coast asset manager.

racist

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Re: Insuring loans.
« Reply #25 on: April 07, 2015, 05:31:10 PM »
It is silly to think about 1K "investment" as about investment. It makes 50 usd per year. It is few hours of work even for well underpaid ppl. There is no sense to invest small amounts like 1K usd to p2p lending.

Also even when there indeed is small probability of loss with 1K investment even with A grades, it would be very small loss that can be covered with work at McDonald very fast and it is not worth of dealing with some insurance company.

It is not a good business to insure against minimal loses.