Extraordinary Re, a start-up creating a platform that will allow investors to access a broad range of insurance risks more easily, has signed up with trading, clearing and exchange technology and services company Nasdaq to use its market technology.
Specifically, Extraordinary Re will use technology from Nasdaq to help it manage the allocation of capital to assets, which in this case will be insurance and reinsurance risks.
Nasdaq will supply matching engine technology through its Nasdaq Financial Framework architecture. Extraordinary Re will use this technology alongside what it terms its “patented Liquid Insurance Contract risk allocation platform.”
The whole system will be operated on a private cloud and Extraordinary Re also plans to utilise blockchain technology to deliver trading and asset related information to users or investors.
The company currently plans to go-live with its technology platform in the summer of 2018.
“The agreement with Nasdaq is an important milestone in our go-to-market plan,” explained Will Dove, Chairman & Chief Executive Officer, Extraordinary Re. “Our innovative structure and technology will deliver new classes of risk to investors through a platform powered by Nasdaq’s market-leading technology.”
“We are very enthusiastic about the opportunity that Extraordinary Re brings to the capital markets, in particular, for institutional investors and the global reinsurance market,” added Paul McKeown, Senior Vice President, Market Technology, Nasdaq. “By providing the technology to run this new platform, Nasdaq is expanding beyond traditional market operators in powering price formation between buyers and sellers in a completely new asset class. We look forward to supporting Extraordinary Re in their creation of a unique, groundbreaking, new platform.”
Extraordinary Re is an interesting start-up, with its plans suggesting a marketplace for insurance and reinsurance risk of sorts, that investors can sign up to and allocate their capital to risks within a central pool.
At the heart of the Extraordinary Re platform is a reinsurance entity, which the company says will allow it to “access a broad range of insurance liabilities to make them available for allocation among institutional investors.”
We assume this means the start-up is aiming for either a collateralized or rated reinsurance vehicle of some description as the central warehousing for a pool of risks it intends to underwrite.
The firm describes a “new pathway for insurers, reinsurers and managing general agencies around the world to access capacity from the Insurance Linked Securities (ILS) market.”
This does raise a little bit of a chicken and egg question.
By encouraging investors to participate in its platform, Extraordinary Re will build capacity to go out and underwrite risks with.
But until it has those commitments from investors it cannot begin underwriting, we would assume, leaving it with one pre-launch challenge of getting investor commitments for an unproven platform and without an underwriting or returns track record so far.
Of course, everyone starts somewhere in ILS asset management and underwriting, which is at its core what the firm is doing, but Extraordinary Re has a unique offering, of allowing investors to allocate in and out of insurance or reinsurance risks using its technology platform, akin to electronic trading albeit in a fixed pool of risks it seems (fixed by its ability to source, capitalise and underwrite them).
The company says that its investors will be able to “reallocate insurance risks among themselves in a familiar format, powered by tested Nasdaq technology.”
This is interesting, as from the information we have on Extraordinary Re it appears that the company will use a reinsurance vehicle as its risk pooling, or fund, tool, while investors allocate to those risks through its electronic trading platform.
We’d imagine this will involve issuance of preference shares, perhaps for individual cells within the main reinsurance vehicles, allowing investors to buy units of different classes of risk, perhaps (we can’t be certain at this time).
Based on the ability of investors to reallocate those risks, it suggests investors will be able to trade the units of risk between each other, providing an element of liquidity within the platform.
However, most insurance-linked investors are tending to buy and hold risks, rather than trade significantly, so it will be interesting to see how this works. It will also be interesting to see whether the liquidity holds up under times of stress, when losses threaten or under live catastrophe conditions, or whether liquidity evaporates at that time.
Of course, as owner of the reinsurance vehicle, Extraordinary Re could also be a source of liquidity within the platform, but then investors would be relying on an underwriter of risk to buy it back from them, a paradigm that would see the firm as the one holding all the pricing levers, so it’s not clear this would work for investors.
Alongside the trading or matching engine technology, Extraordinary Re plans to use blockchain technology to deliver granular and real-time data to the investors in its platform (perhaps to ceding companies as well, although this isn’t yet clear) and says it will look to deploy other blockchain applications in the future.
Extraordinary Re has an interesting proposition for ILS investors and other institutions, offering what may be a very simple and low-friction way to access insurance risk investments through a technology platform, with a matching engine to enable secondary trading of those risks as well.
But the real key to its success, we feel, will be in how the platform sources its risk.
If ceding insurers and reinsurers can place their risks directly into the system, and perhaps brokers can also use it to place client programs, with the risks directly transferred to the investors and the price set by the markets demand and appetite, then you have a compelling tech-driven risk exchange paradigm.
If, on the other hand, the risks have to be originated by Extraordinary Re, underwritten by its reinsurance vehicle and then placed into the auction for investors to allocate to, you in effect have a controlled risk pool (or ILS fund) with a technology front-end that investors can use to make their allocations.
The latter is a little less compelling, although just as valid an approach and still offering something entirely new to the market.
Of course, it could be something entirely different as well, as a lack of clear information on how the platform will work means we have to make a number of assumptions here.
But any venture that makes it simpler for ceding companies to access capital markets backed sources of reinsurance and retrocession capacity, while also making it easier for investors to allocate to and trade those risks, is still a step forwards for the ILS market and a unique offering that will certainly gain interest in the marketplace.