[ejstronge]

> Lenders, fearful of being left holding the bag

This is where the logic breaks down - lenders are selling these mortgages irrespective of any other conditions.

The only loans that aren’t sold are unsaleable investor and boutique loans. These wouldn’t be offered to normal borrowers in the first instance (since the loans of a normal borrower would be targeted for resale)

[0cf8612b2e1e]

What I am missing is how do you profit from this. Many of these new entries have to know that the big insurance companies left for a good reason. That the smaller entries cannot absorb the risk they will be facing.

So, what’s the play? I have to assume there is some smart money who has identified a way of discharging the liabilities while still collecting pay, but how does it work?

[roenxi]

I have no idea about these circumstances, but speaking generally...

It is really easy to make money from an irresponsible insurance company if customers have confidence in you. You take in a large amount of money from people insuring their stuff, invest it, make lots of money in the stock market, distribute the money back to the company owners as profit. Good times.

Then the highly predictable crisis that "nobody" predicted happens, the insurance company goes bankrupt, the customers get no payouts and the company owners don't really lose anything because they got their profits out years ago. Sucks to be a customer.

Under modern theory there is a Phase 3 where the government steps in to pay the insurance company extra money and keep them ticking over. It is an optional step and depends on political connections.

The basic idea is that insurance companies are paid to assume risk. But if, when the risk materialises, it turns out that the risk was actually held by the customers or government then it is a bit like the insurance company was making free money in the intervening period.

[nothercastle]

The goal is to underprice risk to drive out competition then grow to a point where you are too big to fail. All the while you collect bonuses as the leader of this scammy enterprise. You bank on events that happen every 50 or 100 years not happening before you grow so big you get bailed out when they do.

[IG_Semmelweiss]

There are some gaps in this argument.

First, insurance boards by each state set the rules of the game, and one of the rules is to have an asset coverage ratio for the risk. Its effectively a sort of liquidity measure. Another one is minimum capital etc. Both are traditionally paid by the original owners.

So, in effect, if the insurer goes belly up owners do lose some of the capital, and owners cannot loot the assets, either. But I agree that overall it is the customer who is most short changed because although they will get a partial payout in a crisis, it wont match their expectation - most of the missing funds will be gone as you have explained.

[sidewndr46]

This should be the abstract for a paper on "Modern Insurance Theory"

[0cf8612b2e1e]

Thanks for this. I was anticipating some grand conspiracy, but nothing need be so complex. Just swoop in offering a product for a market who is required to buy. Pay yourself above market rates, and if you get lucky, you can maintain the system for years before ruin.

[donavanm]

A mismatch in risk and term duration. In the worst case its short term cashflow, converted to profit ona regular basis. the huge tail risk is of a longer (likely) term. On a normal year reinsurance pays out expected losses, the primary insurer keeps their couple of percent margin, business continues. Eventually their optimistic/naive/malign actuarial numbers are shown up, reinsurance doesnt cover it, huge losses, bankruptcy, the profits are long gone and paid out, remaining share and debt holders are wiped out. Their insured customers are covered by the state after much bad pr, or just not covered.

[0cf8612b2e1e]

Duh, I suppose this is obvious. Just take inflated pay as long as the good times last. I was trying to envision some grand huge payout, but methodical grind until apocalypse is fine too.