Recession Insurance

Recession Insurance
The current global economic crisis is an opportunity for some new experimentation that might not lead to its resolution, but might also set in place institutions that help to prevent future crisis. Recession insurance is one such idea.
About:
Governments may offer ‘recession insurance’. Companies and/or individuals would buy insurance policies, pay a regular premium for them, and receive a benefit if, some measure of the economy, such as GDP growth, dropped below a specified level. Such insurance would help firms and people deal with the ‘extreme uncertainty’ of the current economic environment.
Benefits:
v In contrast to fiscal policy, recession insurance imposes no costs on the government, for if it stimulates confidence, then the risk being insured against is prevented. The government’s ability to offer such insurance on a large scale is sufficient to make it costless, so can favor a public scheme over private insurers initially will work.
v The real problem that we are currently facing is one of paralysis: uncertainty has placed many spending decisions—by business (on higher output) and by consumers (on the items that businesses produce) --- on hold. Reducing uncertainty might augment, or even be superior to, fiscal stimulus programs, for it would address the root cause of the unwillingness to spend.
v Banks might condition loans to their purchase of recession insurance, which might help credit markets function better, addressing a serious problem underlying the current crisis.
Tantalizingly, this would create ‘a market-based view of future output and the likelihood of severe shocks’, although yet to be explained how this market would be structured.
The IMF authors are not saying that governments should do this with recession insurance, so perhaps they mean that governments would auction off the policies, which would create a market price. But the market price would depend especially on how much insurance a government decided to auction off, because the supply would influence the price both directly and through the insurance’s effect on the underlying recession risks.
Governments are in a good position to create new risk-management policies, and they can then set an example for private insurers to follow. But, as an alternative to the IMF proposal, there could be purely private recession insurers.
Any instances?
v Such insurance already exists on a small scale in the form of credit insurance against unemployment in America. A New York- based firm, the Assura Group, has been working for four years on a plan to launch privately issued supplement unemployment insurance to anyone.
v In a recent paper, an economist proposed that governments issue shares in their GDP, with each share amounting to a trillionth of GDP. These ‘trills’ would help individual countries manage their GDP risks. We thought that the issuers of such securities would have, in effect, a form of recession insurance.
Get started
1. First one needs to find the market-price of these recession insurance policies.
To create a market price for recession risk is to offer the commodity company’s shares, like for oil price risk, but plans for GDP risk are on the drawing board. These securities can be offered in pairs- one long and one short- and, unlike in a government- run scheme, in whatever quantity the market demands.
One problem with market-based policies is strategic adoption and cancellation. GDP risk is a long-term risk. The price of the insurance would have to be adjusted regularly to adjust for varying public knowledge of the likelihood of a recession, and people could not be allowed to cancel their policies, and stop making payments, whenever the economic outlook became rosier.
2. Once we have a market price for recession insurance or similar products, the question then arises: will it be so high that few people want to buy? (Will there be any buyers?). We know that we are probably in a recession right now, and may be for some time. So the expected losses currently are enormous. As a result, people may balk at the price and not want to buy the insurance. The only insurance that people might think they can afford could carry a large deductible, and if the deductible is very large, people might not feel so reassured by this insurance.