Risk Sharing Insurance Schemes for Invoice

Discounting Platforms
Antonio Castagna

First Version: January 17, 2022

This version: February 7, 2022

Abstract
This paper analyses how a peer-to-peer (P2P) insurance scheme
can be set up to cover credit losses originated by unpaid invoices traded
on invoice discounting marketplace platforms. We propose i) how
companies selling their receivables on the marketplace platforms can
pool resources to guarantee the coverage of the credit losses suffered
by the buyers of the invoices, ii) how to allocate the share of losses
on each participant to the pool, and finally iii) how to redistribute
amongst participants the remaining share of the pool after the losses
are covered.
We start by studying the trivial case of the loss suffered by the
buyer on a single invoice, then we show how a form of loss coverage
can be obtained by each seller and finally we analyse the full risk
sharing by all sellers, and the insurance mechanism that can be set up
that is fair to each participant.

1 Introduction
P2P risk sharing has been the subject of several works in recent lit-
erature. A very short list, limited to the most relevant to the present

Universita’ di Bologna and Iason Consulting ltd. Email: anto-

nio.castagna@iasonltd.com. This is a preliminary and incomplete version. Please
do not quote without permission. Comments are welcome.

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work, include Abdikerimova and Feng [1], who analyse the concept
of P2P risk transfer and allocation networks; Denuit and Dhaene [3]
who introduce a conditional mean risk sharing mechanism to achieve
Pareto-optimality by using risk-reducing properties of conditional ex-
pectations with respect to convex ordering; based on this approach,
Denuit and Robert [4] formalize the three business models dominat-
ing peer-to-peer (P2P) property and casualty insurance: the self-
governing model, the broker model and the carrier model; Feng et
al. [5] propose a framework for P2P risk sharing pool based upon
Pareto optimality and actuarial fairness principles, providing an exact
solution for allocation ratios in the unconstrained optimal P2P risk
sharing setting, and an application to catastrophe risk pooling with
several P2P alternatives to flood risk management.
The concept underlying the P2P risk sharing is the century old one
of mutual aid, also present in many ancient civilizations: in very basic
terms, it is an arrangement where resources are voluntarily shared
for the mutual benefit of a group of peers. P2P risk sharing may be
defined as the contemporary form of mutual aid, in which modern
technologies facilitate the organisation and working of the scheme.
In the last few years, peer-to-peer (P2P) mechanisms are available
not only for insurance, but also for financial products and services.
Lending platforms, for example, are organised so that prospective
borrowers obtain funding from a group of, possibly not institutional,
creditors. Another very common P2P financial service is provided by
marketplace platforms that allow to sell, and buy, invoices (or, trade
receivables) so that companies, typically SMEs, may access an alter-
native form of funding from investors wishing to access a very peculiar
and interesting asset class.
It is precisely on invoice trading platforms that this work focusses
on, by presenting a form of P2P risk sharing providing credit insur-
ance by the companies selling invoices to investors buying them. This
P2P risk sharing scheme leverages the typical rules that almost the
entirety of the marketplace platforms currently adopt: these rules,
by themselves, do not offer any practical reduction of the credit risk
borne by the investors, but they may be used to set up a much more
effective credit insurance offered to them.
The work is organised as follows: we present an outlook of the typi-
cal rules governing the working of the major invoice trading platforms;
we then introduce a P2P insurance scheme that exploits these rules,
thus providing a credit protection to investors and, partially, to selling
companies; we then investigate how the selling companies contribute
to the collateral pool that covers the credit losses and, after that, how
they participate to possible cash-back payments if any residual collat-

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 eral is left. A simulation of the proposed P2P scheme is shown for a
stylised portfolio of invoices, and a review of some practical issues and
suggestions conclude the work.

2 Invoice Discounting Mechanics of Mar-

ketplace Platforms
Let a company j (j = 1, ..., J) be the seller of the invoice issued by
the debtor company i (i = 1, ...I), with no recourse,1 to the buying
investor k (k = 1, ..., K) on a marketplace invoice trading platform.
The invoice is sold at a discount with respect the nominal amount Ni ,
i.e.: the amount that at the expiry is paid by the debtor company
to the owner of the invoice at that time. The difference between the
nominal amount and the selling price is the yield the buying requires
for the investment.
After the selling company and the investor agree on the price of
the sale Pi , typical arrangements provide for the payment of and ad-
vance amount equal to the nominal amount Ni deducted of the haircut
hci , which is normally set for all trades by the administrator of the
platform in the rules of the marketplace. Hence, the advance amount
by the buyer to the selling company is Ni × (1 − hci ). The haircut
hci , expressed as a percentage of the nominal amount of the invoice,
generates a margin
Mi = hci × Ni
that is reimbursed to the selling company, net of the discount
yi = Ni − Pi
applied by the buyer. So, the reimbursed amount Ci to the seller
equals
Ci = Mi − yi = Pi − Ni (1 − hci ).
The amount reimbursed to the buyer is the advance payment plus the
discount on the nominal amount of the invoice:
Ni (1 − hci ) + yi .

1
By “no recourse” it is meant that, after the sale, the seller is not liable for, nor
affected by, the missing payment by the debtor of the due amount on the expiry date of
the invoice, if not within the limits that will be defined later on in the explanation of
the trading mechanism. Many platforms allow the invoice trading with the “no recourse”
clause. Alternatively, the clause “with recourse” can be adopted, as some platforms do:
in this case the selling company is fully liable for the missing payment by the debtor and,
if the later defaults on the payment at the expiry. it is called to pay back the advance
amount received by the buyer, thus being alone exposed to possible credit losses.

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 The final cash-flows to the seller and the buyer occur only if the
debtor company i does not default on the due payment equal to the
nominal amount of the invoice. In the event of the debtor’s default,
both the buyer investor and the selling company suffer a loss: the
exposure at the debtor’s default of the investor k is:

EADi,k = Ni (1 − hci ) (1)

which is simply the invested amount corresponding to the advance

amount.2 If the debtor i defaults on the payment of the due amount
of the invoice, then we assume that the buyer suffers a loss for the
entire EADi,k . This means that we are assuming a loss given default
Lgd = 100%, so that the credit loss suffered by the buyer upon debtor
i’s default is

Li,k = Ni (1 − hci ) × Lgd = EADi,k . (2)

Similarly, the loss suffered by the seller equals to the margin, net of
the discount, that is expected to be reimbursed upon the final payment
of the debtor and that we indicated before: Ci = Mi − yi . So the
exposure at default of the seller j is EADi,j = Ci and the credit loss
is Li,j = Ci × Lgd = EADi,j .
This is the basic mechanism by which all the marketplace plat-
forms operate, with few variations on the theme. It is clear that both
the selling company and the investor, in different degrees, may suf-
fer a credit loss if the debtor company misses the final payment. It
is also manifest that, as far as the single invoices are concerned, the
margin referring to each of them does not really work as a credit loss
mitigation device for the buyer, since it is always exposed for the ad-
vance amount. The only purpose pursued by the margin is to retain
some seller’s skin in the game, thus mitigating indirectly the credit
risk borne by the investor by lowering the adverse selection and the
moral hazard risk engendered by the selling company’s behaviour.
Our aim in the following is to find out more effective uses of the
margin originated by the transactions of the invoices on a marketplace
platforms, so as to achieve an actual, if possibly partial, protection of
the credit risk borne by the investors and by the sellers themselves.

2
We are defining the exposure at default only in terms of the invested capital. An
alternative approach could be the inclusion of the discount that is expected to be earned
upon the payment of the debtor, so that the exposure would be EADi,k = Ni (1 − hci ) +
(Ni − Pi ). Our choice implies that the loss and the possible recovery will refer to the face
value, whereas the inclusion of the discount in the EAD would make the loss and the
recovery refer to the market value of the transaction, if also the discounting to present
value is added.

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3 Credit Protection Provided by a Sin-
gle Selling Company for Sold Invoices
Let us assume that the selling company j wishes to use the margin
Mi , for i = 1, ..., Ij , originated by the sale of Ij invoices, so that it
offers some credit protection to the buyer investor k. We assume that
the reference date is t and all the invoices expiry on the same date T :
we will deal the more general case when invoices expiry on different
dates later on. The function Di = {0, 1} is used to indicate the default
of the debtor i (Di = 1); the probability that the debtor defaults on
the payment is PDi (t, T ), which for the moment can be safely written
as PDi to lighten the notation, as well as the survival probability
SPi = 1 − PDi . We assume that the defaults of the Ij debtors are
independently distributed events.
The selling company decides to use the total margin originated by
the sale of the invoices, net of the discount, to cover the credit losses
suffered by the investor k, up to the its available amount at time T .
It should be stressed that the credit losses are covered by the amount
of all available net margins at T provided by all invoices, so that any
link of the single invoice of notional Ni , and the corresponding margin
Mi , with the default of the debtor i is broken. Then, the total net
available margin at T is the pool of collateral CP that covers all credit
losses up to its amount.
To assess the available net margin at the expiry T , we have to
consider not only the discount applied by the buyer, but also the
possible default of the debtor i, since in this case the margin Mi is not
paid, along with the rest of the nominal amount of the invoice, and
it cannot contribute to the total pool CP . We can formally write the
available collateral as:
Ij
X
CP = Ci (1 − Di ) (3)
i=1

Equation (4) shows that the net margin referring to each invoice Ci =
(Mi −yi ) enters the collateral pool only if the debtor i pays the invoice,
or it does not default (Di = 0); when the debtor i does not pay the
invoice (Di = 1), then the corresponding net margin is excluded from
the collateral pool. The expected collateral is:
Ij Ij
X X
ECP = E[CP ] = Ci (1 − PDi ) = Ci SPi (4)
i=1 i=1

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 The credit loss suffered by the investor k, Lk is:
Ij Ij
X X
Lk = Ni (1 − hci )Di = EADi,k Di (5)
i=1 i=1

The expected credit loss ELk is then:

Ij
X
ELk = E[Lk ] = EADi,k PDi (6)
i=1

We can now embed also the protection offered by the seller of the
invoices, so that the net loss suffered by the investor k is:

N Lk = Lk − min[Lk , CP ] = max[Lk − CP , 0] (7)

Equation (7) sets the net loss as nil if the collateral pool is larger
than the actual credit loss; in case the credit loss is larger than the
collateral pool, the net loss equals Lk − CP . The expected value of
the net loss is:

EN Lk = E[N Lk ] = ELk − E[min[Lk , CP ]] (8)

The first addend of the last part of the RHS of Equation (8) is the
expected loss of the portfolio of invoices; the second addend is the
expected coverage of the credit loss provided by the available collateral
and capped at its value. Differently said, credit losses are fully covered
up to the value of the available collateral at the expiry of the invoices.
Needless to say that any remaining sum of the available collateral, after
the coverage of the losses, is paid back to the seller of the invoices.
Disregarding any financial discounting, which can straightforwardly
be included in the analysis, fair actuarial principles imply that the pre-
mium Πk paid by the investor to purchase the protection offered by
the seller, equals the expected value of this form of credit insurance,
capped to maximum amount given by the available collateral amount
or:
Πk = E[min[Lk , CP ]]. (9)
This premium can be paid by the investor as soon as the portfolio of
invoices has been identified and the corresponding value of the avail-
able collateral calculated.

Remark 3.1. The fair premium Π that should be paid by the in-
vestor in Equation (8), equal to the expected protection provided by
the insurance, cannot be calculated in closed form unless we make the
additional assumption, besides that of the independence of the default

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events, that the portfolio of invoices is homogenous, i.e.: all notional
amounts are the same (Ni = N for all i), and all debtors may default
with the same probability (PDi = PD for all i.). We will suggest an
approximation to analytically calculate the premium when discussing
practical applications of the framework we are presenting.

4 Credit Protection Provided by All

Selling Companies for Sold Invoices
It is quite easy to extend the case referring to the protection provided
by a single selling company, to the case when all J selling companies
are willing to use the margin originated by the sale of the I invoices to
provide credit protection to the investor k. Also in this case, we make
the simplifying assumption that the I invoices expiry on the same date
T.
From the investor’s standpoint nothing really changes in terms of
expected losses, expected credit protection and fair premium paid to
sellers: all these quantities are derived from Equations (6) and (9), by
trivially modifying them so that they consider all the invoices sold by
the different companies and the total available collateral on the expiry
date, which formally means that the summations are up to I instead
of IJ .
From the selling companies point of view, two complications arise
and have to be dealt with. Firstly, the total premium Π has to be
fairly split amongst all the sellers; secondly, if the credit losses of
the invoices’ portfolio are fully covered and some amount of the total
available collateral is left, then the residual sum has to be redistributed
to the selling companies. Nevertheless, coping with both problems
requires the preliminary introduction of another general rule to add
to the basic mechanism we have sketched above.
It should be clear that all selling companies contribute to the pool
of collateral but the contribution is effective only if the debtors pay
the invoice on the expiry date T , being nil otherwise. In this case
the selling company itself suffers a credit loss Li,j = Ci , so that it
could be useful to establish a rule that provides for a sort of peer-
to-peer (P2P) insurance, or risk sharing, amongst all the selling com-
panies. This credit loss protection can be achieved if all companies
are granted a share of the possible residual collateral pool (after the
credit losses suffered by the investor k are covered), independently
from their actual contribution to it. Limited to this feature designed
for the selling companies, the credit loss protection mechanism re-
sembles the survival-to-all model of a P2P transfer network (for more

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details on this and several other P2P transfer networks’ models, see
Abdikerimova and Feng [1]).
Once we have defined this additional rule about the repartition of
the residual available collateral, we are in the position to determine
the fair share for each company. To that end, we define the return at
the expiry T of the company j as follows:
 I  XIj
X
Rj = αj Π + βj max CP − Li D i , 0 − Cij (1 − Dij ) (10)
i=1 ij =1

The first addend of the RHS in Equation (10) is the fraction 0 ≤ αi ≤ 1

of the total premium Π that company j receives from the investor k;
the second addend is the fraction 0 ≤ βj ≤ 1 of the available collateral
net of the credit loss of the entire portfolio of invoices, if any amount
is left, assigned to company j; finally, the third addend is company
j’s contribution of the collateral Cij for the invoice ij if the debtor
does not miss the payment, or 0 if the latter defaults on the payment.
The total contributed collateral is the sum of the collateral amounts
referring to all invoices sold by company j, if the debtor ij does not
default.
It is convenient to rewrite the argument of the max operator in
Equation (10) as:
 I
X  XI I
X I
X 
max CP − Li D i , 0 = Ci (1−Di )−min Li D i , Ci (1−Di )
i=1 i=1 i=1 i=1

which, when calculating the expected value of Rj , yields:

Ij
  X
E[Rj ] = αj Π + βj ECP − E[Lk , CP ] − ECij (11)
ij =1

Fairness conditions imply that E[Rj ] = 0, so that the share of residual

collateral is (recalling Equation (9)):
P Ij
ij =1 ECij − αj Π
βj = (12)
ECP − Π
P P
We impose the additional constraint that j βj = 1 and j αj = 1
in Equation (12), so that all residual available cash is redistributed
P
amongst the selling companies. Assuming for the moment that j αj =
P P J P Ij
1, j βj = 1 is easily verified since j=1 ij =1 ECij = ECP and
PJ
j=1 αj Π = Π.

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 A quick look at Equation (12) shows that the company j’s share
of the expected residual collateral (the quantity at the denominator),
is directly linked to the expected available collateral originated by the
invoices sold by the company, net of its share αj of the total premium
Π. It is worth noting that the quantities βj are determined before the
expiry T and they are independent from the actual outcome of the
invoices’ payments.
Finally, we
P need to determine
P the quantities αj : provided that the
constraints j αj = 1, j βj = 1 and αj and βj belong to the rage
[0, 1] are satisfied, we are quite free to choose any rule we like. One
possible solution is to impose that for each j, αj = βj : this is obtained
by setting:
Ij
X
αj = ECij /ECP (13)
ij =1

By plugging Equation (13) in Equation (12), it is easy to verify that

PI
also βj = ijj=1 ECij /ECP and that all constraints are always veri-
fied.
The choice on αj we have proposed, makes both the share of the
premium and the share of the net terminal available collateral equal to
the fraction of the total pool of collateral represented by the expected
collateral provided by each company j. This could be a reasonable
choice because the expected contributed collateral by each company j
depends also on the credit riskiness of the debtors of the sold invoices,
so that both the amount of provided collateral and the creditworthi-
ness of the debtors of the invoices are taken into account.

5 Performance of the Proposed Frame-

work with a Homogenous Portfolio of
Invoices
We would like to test the framework within a lab environment by
applying it to a homogenous portfolio of invoices. In reality portfolios
are never perfectly homogenous but usually they are never too far
from this condition, given the large number of invoices traded on a
marketplace platform and their small and similar amount; the debtor’s
probability of default is very likely the variable that really makes the
portfolio depart from the homogeneity condition. Nonetheless, the
aim of this section is to assess the actual protection that the scheme
proposed above offers to the investor, and what the selling companies
may expect to receive back on the residual available collateral at the

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expiry of the invoices, even if we acknowledge the possibly unrealistic
assumption of homogeneity. For the application of the framework to
a more realistic portfolio, see Appendix A.
Firstly, let us define the portfolio in more detail: it is made of
100 invoices, each with an equal face value, say of EUR 100, 000. The
actual value of the single invoices is not important since we will provide
all results as a percentage of the total exposure at default (EAD) of
the investor: assuming a haircut of hc = 10%, it means that, from
Equation (1), the EAD is 90% of the total value of the invoices in the
portfolio. Secondly, we set PD = 5% for all debtors; thirdly, we keep
the assumption of the independence of the events of default. Finally,
for simplicity’s sake and without any loss of generality, we assume
that invoices are sold by one seller only, and that the investor does
not require any discount (yi = 0).
Under these assumptions, the default events are distributed as a
binomial distribution function B(I, PD) with I number of trials (equal
to the number of invoices) with probability of event’s (or, default’s)
occurrence PD. The credit loss distribution is directly linked to the
default’s distribution, since the probability of i defaults corresponds
to the probability of a portfolio credit loss Lk = i × N × (1 − hc).
By the properties of the Binomial distribution, we can easily calculate
statistics of interest; the expected loss is
E[Lk ] = I × N × (1 − hc)PD (14)
The standard deviation, or volatility, of the credit loss is calculated as
q
2
Vol(Lk ) = I × N × (1 − hc) PD(1 − PD) (15)
The expected protection offered by the available collateral pool is cal-
culated as:
I
X
Πk = E[min[Lk , CP ]] = min[iN (1 − hc), C − iN hc]B ′ (i, I, PD)
i=1
(16)
where C = Ii=1 Mi is potential total collateral and B ′ (i, I, PD) is
P
the binomial density function calculated in i, or the probability that
exactly i defaults occur.
Additionally, the homogeneity assumption implies also that βj =
β = αj = α = 1/100, if more seller companies were involved. More
generally, the homogeneity of the portfolio implies β = α = 1/I, so
that there is a perfectly even split amongst the selling companies of
the premium and of the residual collateral at the expiry of the invoices.
Figure 1 plots the portfolio expected credit loss (E[L]), the net
expected credit loss (E[N L]) suffered by the investor, and the the

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 25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Premium E[NL] E[L]

Figure 1: Portfolio expected credit loss (E[L]), expected net credit loss
(E[N L]) and premium (equal to the expected credit coverage, Π), as a per-
centage of the exposure at default (EAD), at different levels of probability
of default PD.

expected credit coverage, equal to the premium Π, all expressed as

a percentage of the exposure at default (EAD), at different levels
of probability of default PD. The portfolio expected credit loss, as a
percentage of the EAD, equals the PD, as it can be straightforwardly
inferred from Equation (14). In the figure, it is plotted as a solid
line with a 45 degrees’ slope. The protection offered by the available
collateral (dotted line in the figure) is almost full, i.e.: it is almost
coincident with the portfolio credit loss, up to around a PD of about
9%, then it begins being lower than the portfolio credit loss and after
a PD of 12% it even starts declining. This behaviour is due to the fact
that the available collateral is not constant, but it is itself affected by
the defaults of the debtors, so that the theoretical coverage up to 10%
of credit losses cannot be achieved. This can be seen in the portfolio
expected net loss (stepped line in the figure) suffered by the investor,
which is almost nil up to 9%, and then it slowly starts increasing, in
a way specular to the decline in the expected credit coverage.
In Figure 2, the solid line shows the expected collateral available
at maturity (E[CP ]), expressed as a percentage of the initial total
collateral, which under the assumptions above is equal to 10% of the
value of the invoices in the portfolio. The expected available collateral
is clearly declining with higher lebvels of PD, from a maximum of 99%
to a minimum of 80%. The expected residual collateral(E[CP ] − Π),
(the expected amount left to be redistributed to selling companies) is
also shown as a dotted a line and, again, as a percentage of the total

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 120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
1%
2%
3%
4%
5%
6%
7%
8%
9%
E[Res. Collateral] E[Collateral]

Figure 2: Expected available collateral at maturity and expected residual

collateral credit, as a percentage of the total collateral, at different levels of
probability of default PD.

collateral: this quantity runs from a maximum of 90% and it declines

to almost zero at PD = 20%. The redistribution of the expected
remaining collateral, after the credit losses are covered, is strongly
affected by the PD, but we stress that we are not considering here the
premium Π paid by the investor to the selling companies: when adding
also this amount, it is obvious that the expected available collateral
would equal the expected residual collateral, but the fairness condition
we have introduced.
In Table 1 we show the main statistics of the expected credit loss
and the expected credit protection for a specific PD level of 5%: the
average credit coverage, or protection, provided by the available col-
lateral is very slightly lower that the portfolio expected credit loss
(equal to the PD), with a variance about a half that figure. Con-
sidering PD = 5% is an already high level in real situations, we can
affirm that in typical conditions the investor practically enjoys a full
protection of the credit loss .
It can be interesting to have a look at the performance of the credit
protection as a function of the number of defaults: in the case we are
considering, each default produces a credit loss equal to 1/100-th of the
total exposure. In Figure 3 we show the performance of the insurance
scheme with respect to the number of defaults actually occurred.
The total loss is clearly linked 1-to-1 to the number of defaults,
as shown by the solid line; the net loss (dotted line) is nil up to
the 10-th default, then it starts increasing and at the 100-th default
it will be equal to the total credit loss, since no available collateral

12

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 Average Loss 5.00%
Loss Volatility 2.18%
Average Protection 4.98%
Average Net Loss 0.02%

Table 1: Statistics of credit losses and protection, expressed as a percentage

of the exposure at default, produced by a homogenous portfolio of invoices
and the P2P insurance scheme.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

100
12
16
20
24
28
32
36
40
44
48
52
56
60
64
68
72
76
80
84
88
92
96
0
4
8

N. of Defaults

Credit Loss Net Credit Loss Loss Coverage

Figure 3: Portfolio credit loss, net credit loss and credit loss coverage, as a
percentage of the exposure at default (EAD), at 0 to 100 defaults.

is left if all debtors go bankrupt. Finally, the credit loss coverage

(stepped line) is equal to the credit loss up to 10 defaults, then it
starts declining approaching zero at 100 defaults. When we look at
the actual, ex-post, defaults of the portfolio, we may asserts that,
for a homogenous portfolio, a full protection of the credit losses is
provided by the collateral up to 10% of the total possible defaults.
The P2P insurance scheme seems to provide a reasonable coverage to
the investor.
The same analysis can be repeated for the payment, at the expiry
of the invoices, received by the seller company if a given number of
defaults occur: the result is shown in Figure 4, where both the re-
distribution of the residual collateral (stepped line) and this amount
plus the premium received (solid line), as a percentage of the posted
collateral (10% of the invoice value in our case), are plotted. The col-
lateral is completely reimbursed (100%) if 0 defaults occur, then the
percentage declines to zero as the number of defaults approaches 10.

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 170%
150%
130%
110%
90%
70%
50%
30%
10%
-10% 12
16
20
24
28
32
36
40
44
48
52
56
60
64
68
72
76
80
84
88
92
96
0
4
8

100
N. Defaults

Reimbursed Collateral Reim. Coll. + Premium

Figure 4: Portfolio credit loss, net credit loss and credit loss coverage, as a
percentage of the exposure at default (EAD), at 0 to 100 defaults.

When including also the premium paid by the investor, the percentage
of the recouped posted collateral starts from about 150% and declines
to about 50%. It should be stressed that the premium depends on
the probability of default, so that it is not possible to make this result
general.

6 Practical Implementation of the Frame-

work
The P2P insurance framework we have sketched above refers to a very
ideal situation. In this section we will try to cope with some issues
that arise in practical applications.

Invoices Expiring on Different Dates: the Ag-

gregation Period
We have assumed above that all invoices included in the analysis ex-
pire on the same date T . In reality, invoices are traded daily on a
marketplace platform and they may have different expiry date.
One possible solution is to gather all invoices expiring within a
specific aggregation period in a single portfolio and disregard the fact
they expire on different dates. All these invoices will produce a collat-
eral that will be used to cover credit losses due to possible defaults on
their payments: the total credit loss is given by all the defaults of the

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invoices within the period. The reimbursement of the residual collat-
eral will be made only at the end of the chosen period. This period
could be a given quarter or a given month, as an example: since the
longer the aggregation period, the longer, on average, the sellers of
the companies have to wait to know how much collateral is left over
for redistribution amongst them, we suggest a monthly aggregation
period as a good compromise so to have an enough large volume of
invoices and a relatively short time to wait for the reimbursement of
the residual collateral (15 days on average). Clearly, the aggregation
period could be longer if the number of invoices traded in the market-
place is not big enough to have suitable volumes expiring in within a
shorter period.
It should be noted that the issue date, as well as the trade date,
of the single invoices are irrelevant. In theory, an invoice with a very
short time to maturity could be issued and traded within an aggre-
gation period, especially if this is longer than one month: it is not a
problem if this invoice participates to the insurance scheme, since the
total credit loss is assessed at the end of the aggregation period, and
the total available collateral on this date can include also that one
produced by invoices traded within the period. Some complications
could arise for the revision of the premium paid by the investor(s) and
their distribution: more on this in the next subsection.

Grace Period
The default event is defined as a missed payment of an invoice on its
expiry date. Some days of tolerance may be granted to the debtor
so that the default is not immediately triggered on the expiry date:
this grace period could be 10 or 15 business days long. The grace
period for each invoice can be included in the mechanism of the P2P
insurance scheme rather easily, by allowing the reimbursement of the
residual collateral amongst the seller companies only after the end of
the grace period the of the invoice(s) expiring on the latest date within
the aggregation period. As an example, assuming an aggregation pe-
riod referring to a specific month and a grace period of 10 business
days, if the latest invoice expires on the last day of the month, the
redistribution of collateral will be made only after the 10t h business
day of the next month, when the occurrence of the default of the last
invoice may be assessed.

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Payment and Distribution of the Premium
The buyer(s) of the invoices should decide whether they would like
to buy the credit protection provided by the P2P credit insurance
scheme at the latest the day before the aggregation period begins,
and consequently they should pay the premium. The payment of the
premium can be delayed after the end of the aggregation period if
there is the possibility that some invoices may be traded during the
aggregation period and then added to the insurance scheme later. In
this case, the premium can be calculated at the end of the aggregation
period and then paid. It should also be noted that the premium
must be calculated as if the reference date t were the beginning of the
aggregation period, without taking into account the actual defaults
occurred.

Marketplace Platform’s Role

The marketplace platform plays an important role in setting the rules
of the P2P insurance scheme and in managing it. The platform collects
the information regarding the PDs of the invoices included in a specific
aggregation period; it tracks the defaults, calculates the premiums and
the shares attributed to seller(s), the credit coverage and the residual
collateral left at the end of the period; it makes all the cash transfers
to the investor(s) and to the seller(s).
For these activities, the marketplace platform should be remuner-
ated by a fee, even though it does not have any direct role in the P2P
scheme. Some enhancement of the protection scheme provided by the
platform could be envisaged and an additional premium paid to it.

Approximation to Analytically Compute the In-

surance Premium
The quantity in Equation (9), which represents the expected credit
protection offered by the collateral pool and hence the fair premium
paid by the buyer, can be computed analytically only under the as-
sumption of a homogenous portfolio of invoices, as we have done in
Equation (16). When the amount of the single invoices, or the PDs
of the single debtors are not the same, a numerical computation, such
as a Montecarlo simulation, is required.
We suggest an approximation to analytically compute Equation
(9), by making the actual portfolio as similar as possible to an equiva-
lent homogenous portfolio. The approximation is in the same spirit of
the Binomial Expansion Technique (BET), adopted by Moody’s (see

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Shonbucher [6], Section 10.3 and references therein for more detail),
but we prefer not to rely on the diversity score as in the BET, resort-
ing to a moment matching technique (MMT) instead. The approach
we propose makes it possible to derive the one PD∗ , the one invoice
value N ∗ and the number of invoices I ∗ in a unified and consistent
fashion, and not separately as in the BET.
The MMT equates the first and second moment of the credit loss,
i.e.: their average and variance, of the actual portfolio, to the moments
of an otherwise equivalent homogenous portfolio, by computing the
PD∗ and the N ∗ that yields the equivalence under the constraint that
the total values of the invoices of two portfolios are the same. In
formulae we have:

 X I
Ni (1 − hc)PDi = I ∗ N ∗ (1 − hc)PD∗




 E[L] =
i=1



I
X
2
2


 Var(L) = Ni (1 − hc) PDi (1 − PDi ) = I ∗ N ∗ (1 − hc) PD∗ (1 − PD∗ )



 i=1
 I ∗N ∗ = K


P (17)
where K = i Ni (1 − hc) is total value of the invoices in the actual
portfolio. The solution to the System (17) is:
 PI
 ∗ i=1 Ni (1 − hc)PDi

 PD =
K





2
∗ Ni (1 − hc) PDi (1 − PDi ) (18)
N = ∗ ∗


 KPD (1 − PD )

 I∗ = K



N∗
Equation (16) can now be calculated by using the input in (18). It is
worth stressing that the approximation has to be used only to compute
the quantity in Equation (18); all other quantities, including β and
α in Equations (12) and (13), must be computed with the original
input; in any case they are closed form formmulae that do not need
any numerical solution.

7 Conclusion
The P2P risk sharing framework sketched in this work is, in our opin-
ion, an interesting way to efficiently exploit the typically working rules
of the invoice trading platforms currently operating in the market.

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The practically idle role played by the margin originated by the hair-
cut, can be fruitfully transformed as the main building block of a credit
insurance scheme that offers a useful credit protection to the investors
(and, in part, to selling companies too), and it yields a possible extra
income to selling companies.
Other sophisticated features can be added upon the basic frame-
work we have presented. For example, an institutional insurer may
provide credit protection for the residual losses not covered by the
available collateral at maturity, in the same spirit as in Denuit [2].

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References
[1] S. Abdikerimova and R. Feng. Peer-to-peer multi-risk insur-
ance and mutual aid. European Journal of Operational Research,
299(2):735–749, 2022.
[2] M. Denuit. Investing in your own and peers’ risks: the simple
analytics of p2p insurance. European Actuarial Journal volume,
10:335–359, 2020.
[3] M. Denuit and J. Dhaeneb. Convex order and comonotonic
conditional mean risk sharing. Mathematics and Economics,
(51):265–270, 2012.
[4] M. Denuit and C. Robert. Risk sharing under the dominant peer-
to-peer property and casualty insurance business models. Risk
Management and Insurance Review, 24(2):181–205, 2021.
[5] R. Feng, C. Liu, and S. Taylor. Peer-to-peer risk sharing with an
application to flood risk pooling. Working Paper, 2021.
[6] P.J. Schonbucher. Credit Derivatives Pricing Models: Models,
Pricing and Implementation. John Wiley & Sons, 2003.

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A Application to a Realistic Portfolio
We would like to show a simple application of the framework to a
randomly generated realistic portfolio, meaning by that that we do
not assume a homogenous portfolio. As far as we limit the analysis to
the calculation of the total premium Π and of the parameters αj and
βj , our task is quite straightforward, if we employ the MMT we have
shown above.
The portfolio is shown in Table 2, where each invoice is numbered
1 to 100 and the corresponding face value, exposure at default (i.e.:
the face value deducted of the haircut, as usual set at 10%), the proba-
bility of default (i.e.: missed payment at the expiry) and the expected
collateral are shown. We assume that all invoices expire within an
aggregation period equal to a given month, say January, and that the
reference date is before the aggregation period starts; we assume also
that all invoices are sold by a single company each.
The calculation of the total premium Π, which equals the expected
coverage of the credit losses, is computed by the moment matching
technique and to that end we reproduce here the first two moments
moments of the portfolio:

Expected Loss 303,784.68

Loss Variance 18,022,580,953.84

The total face value and the unique face value, PD and number
of invoices of the equivalent homogenous portfolio are:

K 5,705,470
N 62,663
PD 5.3244%
I 91

The expected credit loss coverage, that is also equal to the total
premium paid by the buyer of the invoices, and the expected residual
collateral are:

Expected Protection = Π 301,223.89

Expected Residual Collateral 298,981.75

Table 2 shows the resulting α, with the corresponding share of the

total premium allocated to the seller of the invoice. Also β is shown for
each seller, and the expected redistribution of the residual collateral
(i.e.: βj times the expected residual collateral).

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Id. N. N EAD PD E[EC] α β Premium Exp. Res. Coll
1 54,758 49,282 7.40% 5,071 0.84% 0.84% 2,545 2,526
2 59,433 53,490 7.40% 5,503 0.92% 0.92% 2,762 2,741
3 62,862 56,576 1.90% 6,167 1.03% 1.03% 3,095 3,072
4 57,611 51,850 8.80% 5,254 0.88% 0.88% 2,637 2,617
5 52,458 47,212 2.90% 5,094 0.85% 0.85% 2,556 2,537
6 99,571 89,614 8.90% 9,071 1.51% 1.51% 4,552 4,519
7 81,809 73,628 4.90% 7,780 1.30% 1.30% 3,905 3,875
8 69,935 62,942 3.60% 6,742 1.12% 1.12% 3,383 3,358
9 43,542 39,188 7.20% 4,041 0.67% 0.67% 2,028 2,013
10 68,804 61,924 4.50% 6,571 1.09% 1.09% 3,298 3,273
11 29,290 26,361 7.30% 2,715 0.45% 0.45% 1,363 1,353
12 53,593 48,234 3.20% 5,188 0.86% 0.86% 2,604 2,584
13 42,587 38,328 7.60% 3,935 0.66% 0.66% 1,975 1,960
14 28,573 25,716 8.20% 2,623 0.44% 0.44% 1,316 1,307
15 51,257 46,131 1.10% 5,069 0.84% 0.84% 2,544 2,525
16 60,137 54,123 4.70% 5,731 0.95% 0.95% 2,876 2,855
17 75,405 67,865 6.10% 7,081 1.18% 1.18% 3,553 3,527
18 93,940 84,546 6.60% 8,774 1.46% 1.46% 4,403 4,371
19 91,752 82,577 3.40% 8,863 1.48% 1.48% 4,448 4,415
20 35,838 32,254 4.40% 3,426 0.57% 0.57% 1,719 1,707
21 63,575 57,218 8.60% 5,811 0.97% 0.97% 2,916 2,895
22 52,840 47,556 5.00% 5,020 0.84% 0.84% 2,519 2,501
23 50,130 45,117 4.40% 4,792 0.80% 0.80% 2,405 2,387
24 96,319 86,687 2.00% 9,439 1.57% 1.57% 4,737 4,702
25 72,401 65,161 1.00% 7,168 1.19% 1.19% 3,597 3,570
26 40,379 36,341 5.20% 3,828 0.64% 0.64% 1,921 1,907
27 52,854 47,569 7.50% 4,889 0.81% 0.81% 2,454 2,435
28 59,236 53,312 5.90% 5,574 0.93% 0.93% 2,797 2,777
29 38,101 34,291 7.90% 3,509 0.58% 0.58% 1,761 1,748
30 65,173 58,656 1.30% 6,433 1.07% 1.07% 3,228 3,204
31 99,056 89,150 6.20% 9,291 1.55% 1.55% 4,663 4,628
32 75,312 67,781 3.50% 7,268 1.21% 1.21% 3,647 3,620
33 52,908 47,617 6.00% 4,973 0.83% 0.83% 2,496 2,477
34 89,033 80,130 2.90% 8,645 1.44% 1.44% 4,339 4,306
35 95,212 85,691 4.50% 9,093 1.51% 1.51% 4,563 4,529
36 65,490 58,941 5.50% 6,189 1.03% 1.03% 3,106 3,083
37 53,132 47,819 1.80% 5,218 0.87% 0.87% 2,619 2,599
38 99,011 89,110 4.40% 9,465 1.58% 1.58% 4,750 4,715
39 49,338 44,404 8.40% 4,519 0.75% 0.75% 2,268 2,251
40 54,503 49,053 8.70% 4,976 0.83% 0.83% 2,497 2,479
41 28,780 25,902 6.30% 2,697 0.45% 0.45% 1,353 1,343
42 41,781 37,603 4.30% 3,998 0.67% 0.67% 2,007 1,992
43 98,860 88,974 5.80% 9,313 1.55% 1.55% 4,674 4,639
44 46,020 41,418 2.40% 4,492 0.75% 0.75% 2,254 2,237
45 28,982 26,084 8.10% 2,663 0.44% 0.44% 1,337 1,327
46 97,426 87,683 8.10% 8,953 1.49% 1.49% 4,493 4,460
47 79,241 71,317 2.40% 7,734 1.29% 1.29% 3,881 3,853
48 49,161 44,245 2.70% 4,783 0.80% 0.80% 2,401 2,383
49 92,200 82,980 3.20% 8,925 1.49% 1.49% 4,479 4,446
50 56,927 51,234 4.10% 5,459 0.91% 0.91% 2,740 2,719
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 Id. N. N EAD PD E[EC] αj βj Premium Reimb. Res. Coll
51 95,578 86,020 5.30% 9,051 1.51% 1.51% 4,543 4,509
52 45,827 41,244 6.00% 4,308 0.72% 0.72% 2,162 2,146
53 33,784 30,406 2.60% 3,291 0.55% 0.55% 1,651 1,639
54 95,811 86,230 2.70% 9,322 1.55% 1.55% 4,679 4,644
55 28,363 25,527 5.10% 2,692 0.45% 0.45% 1,351 1,341
56 81,189 73,070 8.80% 7,404 1.23% 1.23% 3,716 3,688
57 81,700 73,530 4.90% 7,770 1.29% 1.29% 3,899 3,870
58 90,114 81,103 9.00% 8,200 1.37% 1.37% 4,116 4,085
59 64,801 58,321 3.10% 6,279 1.05% 1.05% 3,151 3,128
60 51,090 45,981 7.90% 4,705 0.78% 0.78% 2,361 2,344
61 53,502 48,152 5.30% 5,067 0.84% 0.84% 2,543 2,524
62 77,331 69,598 8.70% 7,060 1.18% 1.18% 3,543 3,517
63 50,973 45,876 5.70% 4,807 0.80% 0.80% 2,412 2,394
64 93,566 84,209 8.20% 8,589 1.43% 1.43% 4,311 4,279
65 67,205 60,485 8.50% 6,149 1.02% 1.02% 3,086 3,063
66 73,971 66,574 6.80% 6,894 1.15% 1.15% 3,460 3,434
67 58,702 52,832 3.10% 5,688 0.95% 0.95% 2,855 2,833
68 70,171 63,154 6.30% 6,575 1.10% 1.10% 3,300 3,275
69 46,756 42,080 1.90% 4,587 0.76% 0.76% 2,302 2,285
70 69,324 62,392 8.80% 6,322 1.05% 1.05% 3,173 3,149
71 37,175 33,458 7.30% 3,446 0.57% 0.57% 1,729 1,717
72 27,013 24,312 4.30% 2,585 0.43% 0.43% 1,297 1,288
73 40,320 36,288 5.50% 3,810 0.63% 0.63% 1,912 1,898
74 64,476 58,028 7.10% 5,990 1.00% 1.00% 3,006 2,984
75 87,827 79,044 5.50% 8,300 1.38% 1.38% 4,165 4,134
76 67,684 60,916 3.60% 6,525 1.09% 1.09% 3,275 3,250
77 27,075 24,368 5.70% 2,553 0.43% 0.43% 1,281 1,272
78 98,927 89,034 4.20% 9,477 1.58% 1.58% 4,756 4,721
79 57,951 52,156 6.70% 5,407 0.90% 0.90% 2,714 2,693
80 99,053 89,148 6.80% 9,232 1.54% 1.54% 4,633 4,599
81 36,809 33,128 2.00% 3,607 0.60% 0.60% 1,810 1,797
82 39,797 35,817 1.30% 3,928 0.65% 0.65% 1,971 1,957
83 47,416 42,674 6.80% 4,419 0.74% 0.74% 2,218 2,201
84 43,729 39,356 7.30% 4,054 0.68% 0.68% 2,034 2,019
85 79,359 71,423 2.40% 7,745 1.29% 1.29% 3,887 3,858
86 94,980 85,482 6.70% 8,862 1.48% 1.48% 4,447 4,414
87 59,246 53,321 7.20% 5,498 0.92% 0.92% 2,759 2,739
88 81,372 73,235 6.00% 7,649 1.27% 1.27% 3,839 3,810
89 77,086 69,377 4.10% 7,393 1.23% 1.23% 3,710 3,682
90 71,420 64,278 1.60% 7,028 1.17% 1.17% 3,527 3,501
91 59,712 53,741 7.40% 5,529 0.92% 0.92% 2,775 2,754
92 44,241 39,817 3.50% 4,269 0.71% 0.71% 2,143 2,127
93 61,619 55,457 5.70% 5,811 0.97% 0.97% 2,916 2,894
94 80,007 72,006 7.10% 7,433 1.24% 1.24% 3,730 3,702
95 45,001 40,501 7.20% 4,176 0.70% 0.70% 2,096 2,080
96 71,977 64,779 6.80% 6,708 1.12% 1.12% 3,367 3,342
97 48,857 43,971 5.40% 4,622 0.77% 0.77% 2,320 2,302
98 57,692 51,923 2.80% 5,608 0.93% 0.93% 2,814 2,793
99 84,629 76,166 2.80% 8,226 1.37% 1.37% 4,128 4,098
100 60,667 54,600 5.70% 5,721 0.95% 0.95% 2,871 2,850
22
Table 2: Main details of a portfolio of invoices and calculation of α and β,
with respective Euro amount, for each inovice.

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