Leverage InsurTech to match capital efficiency of ILS: John Seo

John Seo, Co-Founder and Managing Principal at Fermat Capital Management LLC, feels that the insurance and reinsurance market will need to make greater use of InsurTech in order to match the efficiency of capital provided by the insurance-linked securities (ILS) market.

Speaking with A.M. BestTV at the 2018 ILS convergence event held in Bermuda recently, Seo highlighted the impressive growth rate of the ILS market over the last two decades, noting that looking forward, he expects the growth to be more transformative, in terms of how it alters practices across the rest of insurance and reinsurance.

Over the last 20 years or so, the ILS market has established itself as reliable source of capacity for the insurance industry to use, and Seo said that now, “the question does turn to the insurance industry, what are you going to do with this new financial technology?”

“I suspect that what we are going to see is that the insurance industries are going to have to use a lot more InsurTech to match the efficiency of this capital that we are providing to them,” said Seo.

It’s a valid point, and draws on what many insurers and reinsurers have been doing in recent times, looking to leverage new technology to lower their costs and improve efficiencies, which includes increasing capital efficiency to match the efficiency of ILS capacity from the capital markets.

Commenting more broadly on the implementation and utilisation of InsurTech, Seo said: “Back-end work is a real slog at the very beginning, in any industry. It is work that’s done quietly.

“But the front-end work I think is the most difficult, because on the front-end in the insurance market, is where comprehensibly all the services of the insurance industry come together, so you’re going to be dealing with a lot of complex dynamics there. But I do think a common element in the way that is going to be addressed is going to be InsurTech.”

The traditional market may need to make the most of the efficiency that technology can provide, in order to enhance its competitiveness versus ILS capital. The question is whether ILS markets can also leverage technology to enhance the efficiency of their capital even further?

Initially viewed by some as a threat, the majority of insurers and reinsurers now leverage ILS capacity in some form, which is testament to the ongoing sophistication of the space, as well as its efficiency and diversification benefits.

This, alongside the willingness of the ILS investor and sponsor base to assume insurance and reinsurance-linked business, has seen the market grow rapidly in recent times, and Seo expects growth to continue.

Looking forward at future growth opportunities, Seo said: “So far, traditionally in the past the growth has been on the natural catastrophe side, but I absolutely believe it’s going to expand outside of that. So, I think that we will actually see, for example, cyber risk become a big part of the ILS market in the future. It is still very early days, and if you say cyber to a lot of potential ILS investors, they are going to be a bit taken a back.

“But I think it is absolutely destiny and unavoidable that we have to be involved.”