Damage-Collateral-Compensation Bonds

Damage-Collateral-Compensation Bonds

GangaPrasad Rao
gangaprasad.rao@gmail.com
gprasadrao@hotmail.com


The Nominal per-capita economic paradigm that many societies have adopted to raise their standard of living is not without its pitfalls. Nominal societies hasten a desired future by accommodating some ’real redux-nominal ZS’, and permitting some ‘hastening risk’ upon members of society. The damages and compensation claims resulting from such risks translating into real events in an inequitable nominal economy are shared by Insurance firms who insure Privates, and implicitly by the society/Government that covers or comes to the aid of the uninsured Public at large. Thus, if Privates enjoyed the benefits of anticipatory insurance post-fact the occurrence of the Risk event, the Public settles for as much EO-compensation as the Government deems expedient. This nominal dichotomy permits consumption-externalities by the Rich, and transfers them to the Poor who are victimized at the receiving end of externality-engendered risks, but at the short end of any compensation.

Consider then, a pseudo-market mechanism to offer a diversity of compensation alternatives to the Public post externality-triggered risk events. Imagine a coterie of Insurance firms joining hands to institute a ‘Damage-Collateral-Compensation’ DCC Bond. The DCC Bond serves as a Collateral for policy-holding Private Insurees. Its units, though exclusively assignable to the insured Privates as guarantee of Insurance payouts, are ’voluntarily’ shared/traded with the Government which acts to protect the Privates in times of public unrest post the occurrence of Risk events. The Bond, with an yield proportional expected appreciation in policy premium, (itself a function of Insurance costs and market returns) and with a sufficiently long, albeit variable term, may safely be assumed to offer a 100% FV (Appreciation+Volatility) Total Return over its lifetime (Thus, firms covering exacerbating risks would cover them for shorter periods mirrored in a shorter Bond term, and vice versa). The Government, in its role as a protector of the public, and toward its responsibilities to the Bond for usurping/sharing/buying Private bond units that it holds untraded, issues dichotomous ’Mirror ZS Coins’: Risk-PV Half-Coins and Gain-FV Half-Coins to the Public Uninsured and the Compensation Suppliers, respectively, as the monetization of the 100% FV return in the opposite of, and in aggregate numbers equal untraded Bond units. These Half-Coins are FV-PV polarized equivalents of untraded bonds. Whereas Risk-PV Half coins, due hastening, attract more of the Volatility/Bond failure Risk and less of the Sustainability-Appreciation-Gain FV, Gain FV-Coins, with more Appreciation and less Volatility, imbue a Sustainability upgrade. Further, and whereas Gain-FV Coins are auctioned to Compensation Suppliers - those who would supply compensatory-, mitigatory- and averting goods and services,- at prices that reflect potential gain at the margin (ie, depending on their assessment of the probability of the risk event occurring, their costs, demand, supply and margins), Risk-PV Coins are distributed equally, but reassigned within the uninsured Risk-group. EO-Compensation Suppliers could trade Gain-FV Coins amongst themselves and thus anticipate demand for EO-compensation goods and services. Risk-PV coins, distributed equally in the Victim group would be reallocated optimally within group members depending on their diligences, individual-specific risk perceptions, and PV lifestyle expectations. Those potential victims with poor diligences and locational risks, would sacrifice current income to buy Risk-PV coins from group members (is, buy ’Public-EO insurance’ incrementally), whereas those others with expectations of higher lifestyle, better diligences and lower risks would sell their Public-EO insurance for current income.Post negotiations within and across groups, the transfer of the averting/mitigating/compensation goods or services would be effected specific to the negotiating parties, ie, their personal valuation of the half coins, it's price within the seller/buyer group and the opportunity costs and prices of the averting/mitigating/compensatory goods/services in the nominal economy. Post the transaction, the Seller would then combine the Risk PV-Coins with Gain-FV Full coins to obtain ’Sustainability Full Coins’ and submit them to the DCC Bond Administrator. The Administrator, upon receipt of Full Coins, would then invalidate them against as many bond units surrendered by the Government on demand to compensate the Seller with nominal monetary units, thus bringing about market-determined efficiency in the distribution of EO-compensation.

In normal times, bonds would be traded in the ’Private’ Bond market, while Half-Coins, issued against the untraded portion of bonds held by Government, would be traded within respective groups. In normal times, private insurees would trade their DCC bonds to the Government if optimistic of the Insurer’s finances and their payouts should an event trigger. The Government's demand for DCC bonds would reflect the state of the Publiuninspired and its plans for them. In normal times, suppliers would buy Gain-FV Coins and produce/construct low cost averting, mitigating and compensatory goods. In such times, the diligent, but at-risk among uninsured would accumulate Risk-PV coins and even make anticipatory deals with owners of Gain PV-Coins - their choice reflecting both, their constrained holdings of Risk-PV Coins and their valuation of alternative averting/mitigating goods and services. Prior to an event, and in times of increasing risk, DCC bonds would trade at a premium, thus inducing Insurance firms to issue ’keys’ that sponsor averting/mitigating action in the society which reduce their future payout obligations. Should an insured risk trigger as an event, the Public Uninsured would seek out Compensation Suppliers, and negotiate the nature and price of mitigating and compensating goods and services they might find useful in the emergency. Post negotiations and compromise - whether in normal times or emergencies, the transfer would be effected specific to the negotiating parties. The Seller would then combine the Risk PV-Coins obtained from the Uninsured, with his own Gain-FV Full coins to obtain ’Sustainability Full Coins’ and submit them to the Bond Administrator. The Administrator, upon receipt of Full Coins, would them invalidate them against as many bond units held by the Government to compensate the Seller with nominal monetary units, thus bringing about market-determined efficiency in the distribution of EO-compensation.

One could list the advantages of such design. First, issuing DCC Bonds reassures policy holders unsure of Insurance payouts in emergencies. Second, it helps avoid immediate monetary and FX impacts on government finances, and thus permits larger compensation to the Public. Third, those with compensatory goods to offer obtain Gain FV Coins at a substantial discount to their FV (Bond ETV ), and are rewarded with a premium post a quick trade with an Uninsured/Risk victim. The Coins permit, even induce anticipatory repositioning, relocation and investments appropriate to each entity’s stake, risks, diligences and plans. The Uninsured may choose the time and nature of compensation - whether anticipatory, or in emergency, and whether averting, mitigatory, or compensatory, and in a location of their choice. Fourth, the creation of an anticipatory market in the provision of averting/mitigatory or compensatory goods also generates a demand from the EO-section of the society that balances private (ZS) demand. Fifth, invalidated bonds reduce supply and thus buttress returns to bond holders. Sixth, the higher yield on DCC Bonds obtained by the Government/Insurees with a rise in insurance premiums, serves as a natural deterrent to, both, exploitation of market power by the coterie/firm, and moral hazard among Private Insurees. All parties - the Private Insurer, the Private Insured, Government as the proxy bondholder, the group of compensation goods suppliers, and indeed, the Public Uninsured, are all benefited. The design possesses properties that are conducive to anticipatory market signaling, and the consequent triggering of market incentives. It boasts of efficiency in anticipating and averting risk, and in anticipatory supply of mitigatory and abating goods and services. Since, both, a Private and a Public insurance market are already in operation, it'd be easy to extend the market to formally implement the above design.

Such designs could be particularly apt, for example, in nominal, per-capita economies characterized by large, widespread public damages from sea-level rise and flooding due unprecedented climate change.