Swiss-headquartered fintech Cerchia is making progress as it looks to raise around US $200 million from investors and lenders for deployment to a new ILW structure that it believes can help reduce the risk of trapped capital.
Having undertaken a study recently alongside Kriesch Advisors, Cerchia believes that the industry-loss warranty (ILW) product can, in some cases, result in investor collateral being held for longer than perhaps it should be.
With this research in mind, the company is developing an ILW with terms that are clearer and will allow for collateral to be released more readily, when it is becoming certain losses won’t creep to a level where recoveries would be made.
This new concept has been developed to protect investors and Cerchia is now making progress on sourcing around US $200 million in capital that it says it can deploy via this ILW product in advance of the US wind season.
Cerchia has already signed a number of partnerships, with various non-traditional lenders and investors, with the goal of pooling funds in a Bermuda reinsurer, which would be a licensed SPI.
This reinsurer will, in turn, enter fully collateralized ILW structured reinsurance agreements, and Cerchia says it will work with brokers to build a portfolio of single-risk ILWs.
With ILW rates-on-line at record levels, as Artemis’ data on ILW pricing shows, Cerchia believes this ILW-only strategy could be very attractive in 2023.
The company says that expected risk-adjusted returns, not including the risk-free return on collateral investments, can reach anywhere from 10-35%.
The ILW contract language will seek to give investors certainty over the finality of the period collateral can be held for, aiming to reduce this to around a maximum of 6 months, which Cerchia and Kriesch Advisors research suggests is the optimal required.
Cerchia said that it is in talks with what it terms “non-traditional investors,” so investors either new to the ILS market, or less typical to bring at least US $200 million of fresh risk capacity to ILW buyers, before the Atlantic hurricane season begins. But the company said that multiple gates are in place to provide KYC and AML checks with different, helping to ensure funds are appropriate and sources of capital don’t hold any counterparty risk for cedents.
The portfolio of ILW’s will be targeted at attachment points in the far tail of the risk curve, such as US named storm at $100 billion or higher.
Cerchia intends to construct a portfolio across multiple single-risk ILW contracts, allowing for diversification.
Michael Rey, CEO of Cerchia, added, “Cerchia’s vision has always been to connect and scale beyond the status quo. We are excited to provide, with our solution, value to two ecosystems at once.”
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