A new start-up aims to enhance the economic resilience of the world’s businesses, by filling business interruption coverage gaps using advanced technology such as machine learning and by leveraging insurance-linked securities (ILS) structures to connect this emerging risk class with capital market investors.
David Soloff, a co-founder of global economic monitoring platform Premise Data, as well as data platform Metamarkets and also a venture partner at VC firm Bowery Capital, has teamed up with high-profile tech investor Chamath Palihapitiya, of early Facebook, venture investment firm Social Capital and more recently special purpose acquisition company (SPAC) fame, to target the insurance and reinsurance market with a goal of creating entirely new categories of risk transfer.
As a result, this isn’t an attempt at pure disruption of the legacy insurance and reinsurance market, which is of course what many in the industry fear from venture-backed sources.
Rather, it is an attempt to leverage the latest advanced technologies, alongside socially focused thinking on economics, capital flows and stressors of them, to create the necessary pre-requisites to allow for meaningful non-damage business interruption risk transfer at scale.
The traditional insurance and reinsurance market has often worked its way around the non-damage business interruption (NDBI) question through the use of exclusions, but this risk is now only expanding and needs addressing to provide the necessary societal and economic protection.
Traditional re/insurance business models have often struggled with the unquantifiable nature of NDBI, or contingent business interruption exposure and the uncertainty inherent in a risk that can be triggered by events that seem unrelated until the correlation occurs.
But advanced software and technologies such as artificial intelligence and machine learning, alongside vast quantities of data and the infrastructure to compute that, promise to unlock greater understanding of the key risks facing society and here OTT Risk, or OTTRSK, has identified an opportunity to unlock a new category and steal a march on traditional industry players.
With Soloff’s background in computing, software, data analytics and visualisation, plus Chamath’s investment and capital market’s acumen, social focus and internet company background, the pair aim to create a company in OTT Risk Ltd. that can offer business interruption insurance, reinsurance and retrocession, to cover the effects of both man-made and natural catastrophes, including volatile political, climate and social factors.
With a goal of filling the business interruption coverage gap to scale economic resilience to these and other events that can have significant economic ramifications for businesses around the world.
The company is engineering a machine learning platform to quantify, backtest, price and insure business interruption risk.
OTT Risk will use numerous inputs to hone its machine learning platform, with the software being “engineered over the top (OTT) of existing open source news, financial, economic, climate and social data networks.”
The ultimate goal is to create technology that will support the sale, trading and transfer of business interruption insurance, reinsurance and retrocession, by pairing investor capital with enterprise risk through a kind of marketplace.
Its proprietary tech approach will make use of both historical and dynamic actuarial models, with the historic helping to quantify risks, derive triggers and degree of catastrophic economic drawdowns, while the dynamic uses machine learning to analyse the volatility for any named perils.
As a result, OTT Risk hopes to be able to quantify and price mid and long-tail economic displacements, so providing for triggers that businesses can buy protection against and that insurers or reinsurers can buy reinsurance and retro against.
Of course, there’s a lot more to it than that and the analysis of the risk over the top (OTT) of other real-time data sources and inputs also promises to hone the protection further.
As ever, with these initiatives it will all be about calibration of triggers, making the coverage sensitive to business stressors and needs, and ensuring the protection is also responsive to events when they occur.
To that end, OTT Risk will offer a range of business continuity protection products, as well as reinsurance and retro, with them designed to minimise basis risk, paying out based on parametric triggers to provide rapid settlement.
OTT Risk aims to have its own capital and we’re told that, to begin, co-founder Chamath Palihapitiya has invested operating capital under the Social Capital banner, while also committing significant capital to collateralize initial transactions as well.
The company also has seed backing from some of the sectors best, in Sean Park of fintech venture investor Anthemis, Barney Schauble of Nephila Capital and Jerry Neumann of Neu Ventures.
But, longer-term, OTT Risk aims to connect this emerging risk category of non-damage business interruption to the capital markets directly, leveraging insurance-linked securities (ILS) structures to do so.
OTT Risk aims to structure alternative capital vehicles, to provide third-party investors a way to “invest in economic resilience protection”, which it believes will be comparable to catastrophe bonds.
The company also hopes that by putting its own capital up to collateralize transactions from the start, other investors will see it has alignment and that this will help encourage them to spend the time getting comfortable with what is a new and highly technical approach, to want to invest in this emerging risk category.
In fact, the company believes that by taking a scalable technical approach, new categories of risk like this can scale the alternative capital and ILS market by “an order of magnitude.”
Why does it think that?
OTT Risk believes this risk category alone, of uncovered business interruption, could over-time represent as much as 10% of the potential global P&C insured loss quantum.
In the US alone, the firm believes P&C insurers write roughly $100Tn of potential loss exposure.
Growing the BI protection market “can happen with innovative technology enabling alternative capital to enter,” OTT believes.
Pandemic business interruption losses are estimated at somewhere around $11TN in 2020 and are expected to perhaps double or more over the next year.
Then consider climate risk, the potential effect on frequency of natural catastrophes and severe weather and how that impacts businesses around the world.
Plus social unrest is seen as another key driver of non-damage business interruption and is seen as a risk trigger that will keep amplifying over time, as recent trends have shown.
All of which points to an enormous opportunity to design and engineer technology that supports quantification and pricing of business interruption, as well as structuring its transfer to the capital markets.
Creating new risk categories in this way is hard and takes time, while the existing insurance, reinsurance and ILS industry can need a lot of support in getting up to speed with understanding tech-driven approaches to these problems.
But the potential rewards and benefits to society of filling the business interruption coverage gap are enormous and the last ten months of global pandemic have clearly demonstrated the urgent need to address issues of this magnitude with some urgency.
Regular readers will know that OTT Risk’s vision is one which we share, that the application of advanced technology alongside ILS structures and efficient capital market funding can help absorb many of society’s largest risks.
Chamath Palihapitiya shared a few words on the OTT Risk mission, “Over the last year a few things have become clear: the world is more uncertain than ever, and the situation for small businesses is more perilous than ever.
“Technology and capital can play a role in solving this problem.
“It may sound boring to some but Insurance is a key enabler of economic growth and backstops trillions of dollars of economic activity.
“As many business owners found out, significant gaps exist in coverage for the business interruptions that are becoming more and more frequent.
“David Soloff and I are building OTT Risk to combine machine learning with traditional risk underwriting to make a meaningful start in filling the business interruption coverage gaps which are upending economic lives.”
Watch our video interview with OTT Risk founders Chamath Palihapitiya and David Soloff, which was part of our ILS NYC event.