Crisis Insurance – My Financial Idea From 2008

During the last financial crisis, this blog was focused heavily on finance. One of my ideas back then was a hedging strategy people could use when times were good. It involved buying “insurance like” investments against the very company or industry that employed you.

The way it would work is that if your industry took a sudden a massive decline, your investment hedge would pay off. Let me provide an example.

During the dot-com boom, I worked for a telecom. Many people don’t know this, but the collapse in market value from telecom was far worse than the dot-coms. There were people inside my company buying the company stock as it skyrocketed in value. Then the market crashed and our company went out of business. They weren’t hedged. They lost everything. Their jobs and their investments. Their career path was also set back for months or years.

In July 2008, I posted these  “half” ideas.

True Job Insurance Means Shorting Your Own Company

True Job Insurance Means Shorting Your Own Company Part 2

In Part 1, I made the case for buying out of the money puts on the company that you work for, provided they were a publicly-traded stock. That way if your company tanks and your job is at risk, your investment would pay off. But during good times, those options would expire as worthless. Think of it like auto or fire insurance. You pay a small amount monthly and hope nothing bad happens.

In Part 2, the idea was modified to buying puts on the sector you work in. That is further diversification, as it doesn’t restrict the inverse-bet to a single publicly traded stock. Here is the example I provided in that post:

Sue quits her job and decides to start her own luggage business. She pools her money and loans to start production on her product line. Then 9/11 hits. Nobody is traveling. Nobody is buying luggage. Her business is wiped out before her first sale. The undervalued unexpected event hit her hard. Had Sue purchased some long term puts on a travel related sector such as airlines, she would be much better off. And it wouldn’t have cost her much money.

As you can see from these ideas and the feedback that I received in the comments is that building this type of investment hedge would be far too complicated for most investors.

I do think there is a business opportunity here for an institution to step in a provide a “crisis-like” investment that an employee or business owner could purchase. There are way more sector-based ETFs today than back in 2008 and the cost of transactions has dropped to zero on many platforms. This product could be highly personalized.

This is just a draft idea of a financial product. Whether you use options, ETFs, or even go long on things that do well when things go bad (the US Dollar, Treasuries) would be up to the company providing the product.

Right now travel and restaurant workers are losing their jobs in the millions. What if they had the opportunity to purchase “economic crisis” insurance from a company that managed a portfolio of options that became valuable in a time like this?

The caveat here is that this type of insurance would either be the cheapest or pay out the most when markets are healthy with low volatility. The insurance would likely not make sense once a crisis hit.

It sucks to lose your job and it sucks to lose your investment. And it doubly sucks if you lose them both at the same time. I hope someday this type of personalized crisis insurance is as readily available as any other type of insurance. And if this type of product is already available, I’m unaware of it.

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Photo by Markus Spiske

2 Comments

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  1. It’s a brilliant concept in my opinion. If you could find a way to implement it in a real-world way that would be impressive.

    But I’m not sure about the ability to convince an average-joe that this is a good idea. Most people have little concept of hedging their investments and lack self-awareness about their own risk tolerance.

  2. @Derek – Thanks and I agree about the average Joe. I’m thinking the ideal customer for a version 1 would be a small business owner.

    Also, if this type of insurance became too popular (like auto insurance) the underlying options might get priced too high to make it viable.

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