Aon Benfield’s PACE can help ILS funds build optimal risk portfolios

A new platform named PACE, launched by global reinsurance intermediary and capital advisor Aon Benfield, has been designed to help reinsurers monitor catastrophe exposures and can also help ILS fund managers to create optimal portfolios of insurance risk.

The PACE platform will enable users, such as reinsurance companies, ILS fund managers and others that aggregate catastrophe risk, to gain an “enhanced understanding of their exposures”, Aon Benfield says.

The platform is designed to help reinsurers make better use of their capital, providing an enhanced way to monitor their aggregate catastrophe exposures, which should in turn offer more competitive quotes and new lines of business to insurers.

Adrian McFarlane, PACE’s Data Architect at Aon Benfield, explained; “Reinsurers need to optimise their business to consequently improve their return on equity which allows them to provide attractive quotes in an increasingly competitive market. PACE combines sophisticated logic behind the scenes with a simple non-technical interface.

“It has been designed specifically for underwriters to quickly and easily enhance their decision-making and financial planning when taking on new risks. It also enables reinsurers to set a consistent way of pricing across the firm.”

Aon Benfield has launched PACE as a response to the record levels of capital in the reinsurance market, which is pushing reinsurers to explore new business opportunities that match their risk appetite.

The platform, PACE (Portfolio Accumulation for Control & Evaluation), is designed to enable its users to:

• evaluate the impact of individual programmes against their existing portfolio. This determines how much capital a programme consumes in relation to the rest of the portfolio and therefore how much of that business a reinsurer can afford to write.
• understand their overall accumulation of risks by highlighting which regions and perils are most exposed and perform “what-if” analyses. For example: How would a portfolio be affected if large hurricanes occurred more frequently than the catastrophe model suggests? What if a reinsurer increased its share of European earthquake business by 10%?

It’s easy to see how such use-cases can be translated to insurance-linked securities (ILS) fund managers, especially now so many of the ILS funds are incorporating more collateralized reinsurance business into their portfolios.

Dean Roberts, business development executive for PACE, explained to Artemis; “As ILS funds must regularly feedback to investors, PACE enables granular reporting capabilities on performance and exposures across an entire portfolio, including bespoke analysis.

“PACE’s flexibility allows ILS managers to price and model any kind of catastrophe reinsurance treaty – including more complex options – without needing to change the coding of the software. This gives them the agility required to perform in a constantly evolving market.”

With rates-on-line down across key catastrophe risk lines of reinsurance and the softening spreading to other specialty lines of the market, gaining an edge through risk selection, underwriting ability and portfolio optimisation is increasingly key for ILS fund managers.

As a result tools that enable risk controls to be followed and catastrophe aggregations to be monitored, like PACE, are expected to become increasingly important to the ILS fund manager market, as well as to any larger direct third-party investors in reinsurance risk.

And as the ILS fund managers grow and their portfolios become more complex, PACE can help with the management of risks.

Roberts continued; “In addition, ILS fund managers – particularly those with large and sophisticated books of business – can use PACE to create optimal and balanced portfolios to better understand global risks for multiple contracts.”

Reinsurance company MS Frontier Re has been working with Aon Benfield through the testing phase for PACE and has now licensed the platform to gain a greater understanding of its exposure by region and peril.

Catherine Farnworth, Head of Enterprise Risk Management at MS Frontier Re, commented; “Giving our underwriters access to the most valuable data in a short time-frame enables them to make better decisions about employing our capital in the optimum way.”

As risk portfolios become increasingly complex, the need for tools to enable a granular view of the catastrophe risks assumed and the aggregation of exposures held rises in importance. Development of platforms like PACE should help both reinsurers and investors in catastrophe insurance to gain a better understanding of the risks they underwrite.