Real-time portfolio optimisation will transform ILS placements, says Ventus

Using technology to enable real-time portfolio optimisation will transform the way that ILS and traditional reinsurance placements are made, improving costs and efficiencies and allowing capital providers to get closer to the original risk, according to the team at InsurTech MGU Ventus.

Ventus was formed in 2016 by George Reeth, Stuart Mercer and Richard Goldfarb. It deploys 3^rd party data sources, artificial intelligence (AI), natural language processing and cloud-based technology to facilitate data organisation and sophisticated underwriting tools to select and price catastrophe-exposed U.S. commercial risks.

By leveraging these technologies, Ventus aims to enable a risk takers’ portfolio to be known and made available in real time, allowing re/insurance capital providers to price risk formulaically and better monitor aggregations and concentration.

“It is certainly conceivable and technically possible for an insurance policy to be automatically priced against multiple risk taker’s portfolios in real time,” Mercer said. “Ultimately, the policy could then be allocated to the risk taker with the lowest cost of capital.”

Applied to collateralised reinsurers and ILS funds, real-time portfolio analysis could enable collateral requirements to be calculated at any point in time and posted accordingly, facilitating a more efficient posting of funded collateral and improving the Return On Collateralised Equity (ROCE).

This innovative approach contrasts with the traditional reinsurance placement process, which is often drawn out over an extended period of time and leaves reinsurers working with stale data that does not reflect the actual exposure of a portfolio, Reeth noted.

This cycle has been perpetuated for years and has often been attributed to a general lack of investment in data-focused technology, and Reeth suggested that a new approach will likely require “a paradigm shift in data quality, analytics and technology.”

“Given the maturity of the catastrophe models and their widespread use, the analytics and calculation required to price property cat insurance and reinsurance is trivial,” Goldfarb stated.

“In fact, it has become so transparent we believe that it is beginning to show signs of standardization of pricing similar to the options in the financial markets where ‘Implied volatility’ is the accepted language of risk and price.”

In 2017, a formulaically structured reinsurance treaty between an insurance carrier and a collateralised ILS reinsurer was completed, in which the premium was paid according to an agreed formula and the collateral was calculated according to a predefined risk calculation and posted periodically as the risk profile of the subject portfolio changed.

“While a limited example, this shows it is possible to vertically integrate insurance and reinsurance analytics and the reinsurance placement process,” Mercer said. “In fact,” he added, “such a treaty does not need an expiry but rather can be indefinite and need only contain an exit clause for either parties with sufficient notice.”

In addition to real-time portfolio metrics, Ventus believes that it can cut traditional underwriting expenses in half by using technology such as its proprietary software platform, Ventus Insurance Knowledge Interface (VIKI), which it began developing in 2016.