ILS & Fintech – Robo-adviser as third-party reinsurance capital allocator

by Artemis on June 28, 2016

Fintech is, along with Insurtech, a darling of the venture capital world, as technologists and financiers turn their heads towards finance, investment, the insurance and reinsurance market with a vision of changing the status-quo, raising efficiency and replacing incumbents.

One of the developments in financial technology that has been more successful is the robo-adviser (or robot adviser), an automated or algorithmic investment advisor that can select assets based on a users inputs, in terms of risk appetite and return requirements.

While all the discussion in insurance and reinsurance circles is naturally about insurance technology (or Insurtech), largely focused on how technology can disrupt origination, pricing, placement of risks, it transpires that a robo-advisor is set to begin allocating capital to an insurance-linked securities (ILS) fund.

A new “automated online investing service” called Building Benjamins℠ has been launched by independent investment manager Tradition Capital Management, with the help of digital wealth management technology provider Invessence.

As a service, Build Benjamins requires a minimum investment of $50,000 and the technology platform will recommend one of six investment portfolios constructed by Tradition Capital Management for the client to allocate its capital to.

Invessence’s technology, which includes robo-advisory services, enables investment managers to offer clients a seamless user experience, while advice is provided based on user or client inputs, enabling the right portfolios to be offered to the end-investors.

In this case, with Building Benjamins, the investor will be able to easily open an account online, deposit their money, state their preferences and the technology will advise them on suitable or relevant portfolios managed by Tradition.

Where this gets interesting is the fact that Tradition’s portfolios are focused on providing investors, largely retail or high net worth, with access to alternative and diversifying asset classes which can often not be found as easily through exchange traded funds.

The portfolios mix low-cost ETF’s with “mutual funds that provide access to asset classes that are not efficiently available in the ETF structure,” according to the announcement.

In case you hadn’t guessed where this article is going, these diversifying asset classes that investors will soon be able to allocate some capital to through the Building Benjamins online interface include reinsurance and ILS.

Tradition, it turns out, invests in the Stone Ridge Reinsurance Risk Premium Fund as one of the diversifying asset class mutual funds it leverages within portfolios it constructs for its clients. At the end of March 2016 the investment manager had around $2.22 million invested in the Stone Ridge mutual ILS fund, which allocates its capital to catastrophe bonds and other reinsurance linked assets.

So it seems likely that investors using the robo-advisor tool Building Benjamins and who select a relevant portfolio, may in fact be allocating capital indirectly into the insurance-linked securities (ILS) market, through an investment in funds managed by Stone Ridge.

It’s fascinating to think that a piece of web-technology providing robo-advisory services to investors will be allocating third-party reinsurance capital to an ILS fund, albeit in a slightly roundabout route via the investment manager Tradition.

The addition of the Stone Ridge ILS mutual fund as part of the Tradition managed portfolios would make sense, ILS and insurance linked investments can provide attractive returns with much lower correlation and relatively low volatility as well, over the longer term.

Developments like this are not going to immediately move the needle in terms of ILS and third-party reinsurance capital growth, but they are a clear sign of what could happen as the insurtech and fintech waves develop and converge with ILS techniques.

Already, multiple insurtech start-ups are focused on building products that will more directly enable the connection of risk and capital, or facilitate the smoother and more efficient transfer or exchange or risk and risk assets, with a focus on capital markets investors.

The insurtech and fintech wave has seen the efficiency brought to reinsurance by ILS capital and they intend to replicate or build on this and indeed accelerate the disruption, through the application of technology.

Could we see a day where an ILS investor selects peril diversity, geographical focus, risk levels and appetite on-line and a system automatically builds them a portfolio of insurance and reinsurance risk? Perhaps, particularly if acceptance of parametric catastrophe and weather risk as an asset class took off.

It’s likely a long way off right now. But I wouldn’t rule anything out once the convergence trend (of re/insurance and capital markets) we have already witnessed gets accelerated even further with the help of efficient technology.

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