Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

On accelerating the transport of risk to capital (ILS + Insurtech)


The reinsurance and broader risk transfer market is increasingly becoming a process  of matching risk to the right capital in the most efficient manner possible, with industry trends pointing to a need to accelerate the transport of risk to capital.

Insurtech image from Insurance.meCombining ILS structures with Insurtech promises to enhance and accelerate this process dramatically, while raising efficiency and lowering costs, all of which insurance and reinsurance markets need right now.

Reinsurance or the process of transferring a risk to an insurer, who keeps a piece and transfers what it does not want to retain to a reinsurer, who does the same with a retrocessionaire (and so on), has long been a relatively linear value-chain, backed by equity financed balance-sheets.

That began to change in the 1990’s, as financial engineering technology was leveraged to open up the transfer of risk to the capital markets.

As a result the nascent insurance-linked securities (ILS), catastrophe bond, ILS fund and market for collateralised reinsurance structures was born.

Fast-forward a couple of decades and today we see that the risk-to-capital value-chain, which was once linear and equity financed, is now punctuated by shortcuts (or connections) making access to the risk more efficient and backed by multiple types of balance-sheet financed by different third-party investor sources.

All change indeed.

We find ourselves in the midst of ongoing and accelerating change though, with the reinsurance business model facing a complete upending, as rates have softened to the point that for some, underwriting at these levels will not be sustained for long.

But what has the market done to itself through the last few decades of development and structural change? For it has indeed brought these changes upon itself, as ILS and cat bonds are a reinsurance and capital market collaboration and innovation. What has been achieved?

Efficiency and an accelerated passage of the ‘original risk’ (to coin a phrase from PCS’ Tom Johansmeyer) to the ultimate source of capital. An efficient and better connected pipeline for risk to capital.

While some might decry this upending of the reinsurance business model, due to the entry, growth and innovation of the ILS market and its investors, to me it’s a pure and simple evolutionary step-change in efficiency.

None of the rigour or expertise in underwriting insurance risks has been lost. In fact rigour increases all the time, both at traditional and alternative forms, and the tools to support rigour proliferate.

At the same time financial innovation and structuring technology have allowed risk to be packaged, turned into portfolios and offered to the very largest providers of capital in the world as an alternative, risk bearing asset class.

All in the name of progress, keeping up with the way finance has developed over recent decades, increasing connectivity  and accelerating the transfer of original risk to capital.

In the process we’ve seen innovative steps taken by ILS fund managers, which are really centres of underwriting and financial risk asset management excellence, to shorten the path from risk to capital, progress that is now accelerating.

With every progressive step taken we are adding efficiency to the risk transfer process while removing layers of complexity. Ultimately helping to reduce the cost of risk capital and make risk transfer and insurance cheaper as a result, a clear benefit to society.

A shorter, faster passage for risk to be transferred along to capital, with many different types of balance-sheet, or capital pool, ready and able to accept, hold and manage the risk, depending on appetite, requirements and ability.

It’s a significant step forward from the risk transfer market of two decades or so ago, when catastrophe bonds were developed as a way to pass the world’s peak risks on to the deepest and most liquid source of capital available.

So we’ve made great progress, it’s been quite a ride for some in the reinsurance market, in a positive way for many but challenging for others.

And those challenges continue, as is evident from the messaging emerging from this year’s 2016 Monte Carlo Reinsurance Rendez-vous.

But there is no time to relax, rest on laurels, pat backs and congratulate the market on the progressive steps taken to expedite and accelerate the transfer of insurance risks.

What’s coming next is already evident and it looks increasingly exciting.

Insurtech, insurance technology, is now on a mission to upend insurance, reinsurance, risk transfer and even the ILS fund manager model, as it seeks to accelerate the acceleration of efficiency within the insurance risk transfer market and ultimately lower costs.

Insurtech startups have seen the progress made over the last two decades or more in re/insurance and now want to put advanced technology, software engineering and reams of data to work in taking this efficiency to new levels.

I’ve seen startups looking to provide platforms that can structure a risk, complete the contract, transfer it, securitise it and offer it to an investor.

Others want to provide an efficient pipeline, through which an insurance contract can be routed, securitised and transferred to investors.

Still more seek to offer automatic risk to capital transfer with so-called robo-advisor technology providing the end-investor with an optimised portfolio of risk to meet their return requirements and risk appetite.

All quite transformational initiatives, potentially ground-breaking and offering a glimpse of the next step-change to the risk transfer, insurance and reinsurance business model.

Insurtech has witnessed what ILS has done to the risk-to-capital value-chain, the response of traditional re/insurers and now intends to accelerate the transfer of risk to capital even further.

The resulting benefits for society, the insurance consumer and those innovative and forward-thinking enough to ride this wave of progress, will be significant I believe.

Not to mention the additional transparency that could come from such platforms and efficient markets for insurance risk transfer, securitisation and investment. That could accelerate things even further again, as transparency in any market tends to do.

So don’t let the Monte Carlo PR & media machine get you down this week.

Yes, there’s plenty to be gloomy about, even though reinsurers continue to make attractive profits, and I won’t be the first to warn that market conditions aren’t going to get any easier for some (perhaps many) traditional players.

But, in my opinion, the trends we’ve witnessed and I’ve personally been tracking over the last two decades or more  are among the most exciting developments in re/insurance and risk transfer in the markets long and illustrious history.

It’s a fascinating time to be alive and working in reinsurance, ILS and risk transfer.

We’ve much to look forward to, but the risk-to-capital value-chain we see in decades to come will likely look very different to the one we see today.

To me that’s an exciting prospect.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.

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