Samir Shah, the ex-Head of Insurance Capital Markets at AIG, has joined Ledger Investing as Chairman and CEO. The Silicon Valley backed insurtech start-up is focused on creating a business-to-business marketplace for the securitisation of insurance risk, a vision Shah has helped to crystalise.
Ledger Investing has been targeting the world of insurance securitisation for some months now, after the founders identified the opportunity to connect risk with capital more efficiently through the use of advanced technology.
In the insurtech world truly disruptive start-ups are actually still few in number, but Ledger Investing’s vision promises to offer a more radical approach to how insurers create value in the risk to capital value-chain and make risk transfer to the capital markets more efficient.
The Ledger Investing solution will be a B2B online marketplace, where insurers can sell and investors can buy numerous types of securities linked to all different classes of insurance risk.
Through the combination of financial and software engineering, the team aims to create a marketplace for securitising insurance risks that is both efficient and scalable, enabling cedents or sellers of risk to quickly and cost-effectively securitise them, while investors can access diversified opportunities to invest directly in financial instruments tied to insurance or reinsurance risk.
Shah, who after a period as an adviser to Ledger Investing has now joined the insurtech start-up officially as its CEO, sees the solution as a progression towards his vision of Insurance 2.0, enabling insurers and reinsurers to transition from a business model focused on warehousing risks, to one where value is created through the ability to assess risks and transfer them to investors.
The original founders of Ledger Investing, Aymeric Rabot CTO and Julien Brissonneau COO remain with the start-up and alongside Shah will drive Ledger Investing’s next phase of growth.
Shah explained the thinking behind Ledger Investing to Artemis; “We recognise that insurers create value in two ways. First by originating and assessing insurance risks and secondly by warehousing risks.
“Current thinking combines the two and does not recognize that these are indeed two separate actions – much like how a Lloyd’s managing agent works with capital providers – but by warehousing risks off balance-sheet, by sending them directly to investors in alternative capital markets through ILS, there is an opportunity to increase the value of an insurance company.”
Shah continued, highlighting that re/insurers that recognise this distinction and leverage efficient platforms to transfer insurance risk to capital market investors stand to benefit through increased returns-on-equity (ROE’s), as they would require less capital on their balance-sheets and at the same time earn a profit from financing risks off-balance sheet through a lower cost-of-capital.
The current traditional insurance and reinsurance business model is capital-intensive and as a result it can mean that insurance products are priced higher than perhaps necessary, given the capital behind the business requires greater returns.
By efficiently connecting insurance risks directly to capital market investors using a technology platform, Ledger Investing expects that the benefits will ultimately flow through to the insurance consumer, as risk transfer becomes more efficient, transparent and lower-priced.
Re/insurers that truly embrace the transfer of risk to the capital markets can also benefit through more stable earnings expectations, as profit from risk financed off-balance sheet would act more like fee income (similar to an asset manager).
Also positive for those embracing this model, is the ability to have flexible capital off the balance-sheet, something that is difficult to achieve where all a re/insurers capital is permanent capital, Shah said.
Additionally and also good for the insurance and reinsurance industry as a whole, by embracing the transfer of risk to capital market investors through a platform like Ledger Investing, re/insurers have the opportunity to increase their capacity at will, unconstrained by the concentrations of risk as they would be on their own balance-sheet.
Shah said that investors will also benefit from the Ledger Investing approach and platform.
The start-up, which is still in development, emerges at a time when the interest in insurance-linked securities (ILS) is still very high, but opportunities to access the asset class have been limited by market forces. That should ensure that Ledger Investing is well-received both by experienced ILS investors and ILS fund managers, as well as the many institutional investors sitting on the side-lines of this market.
“Ledger Investing will offer investors the ability to access pure insurance risks so that they can optimize their own portfolio across all asset classes,” Shah explained.
“The platform will also offer much greater transparency on the insurance risks transferred and invested in, as well as greater liquidity,” Shah said, features he termed as “key” in the Ledger Investing platform.
Ledger Investing is also interesting as the insurtech start-up was accepted for and went through the YCombinator Fellowship program, a program for potential high-growth, tech start-ups run out of California’s Silicon Valley by venture capital firm YCombinator and will likely continue in its core program.
As you’d expect, with such a radical and disruptive business model, Ledger Investing has been receiving significant interest from VC’s and we’d imagine from re/insurance sector insurtech funding schemes.
“The timing is right for insurers to pursue a transition to this new business model, given the significant tail wind from market conditions that has led to the well-documented and enduring trend of new capital entering the market from stable institutional investors,” Shah told Artemis.
He went on; “Commoditisation of insurance capital is an opportunity for those who take advantage of the capital market trends and a threat to those who fight it.
“Reinsurers have been doing this, but primarily as a defensive measure. Insurers have an opportunity to use the capital markets to play offense and can make a much larger impact on the industry as a result.”
Shah said that with capital commoditised now in many other industries and sectors, insurance and reinsurance are among the last but the process is now underway.
The end-result will be a transition from an opaque, relationship based, bespoke market business model, to transparent and standardised markets in risk, with the key to commoditising insurance capital being the transparency of the risks transferred, a transition that Ledger Investing wants to be the platform for.
The platform will offer re/insurers and investors a risk-transfer term sheet and securitisation platform, providing greater transparency to insurance risks than ever seen before thanks to the availability of policy data and analytics.
Ledger Investing will also offer tools to help both re/insurers and investors make full and effective use of the insurance securitisation platform, including workflow tools, documentation and legal structures that are designed with efficient, one-stop execution in mind.
With an estimated $4.8 trillion of re/insurance capital in the world, but just $70 billion or so currently securitised through the ILS market or in collateralized reinsurance, Ledger Investing is targeting a potentially enormous market opportunity.
If successful in developing its platform, we’d anticipate the start-up working with insurance companies on one side, sourcing, analysing and offering risks into its system, while investors and ILS funds on the other side access the risk in securitised form. The platform could also offer a tool to ILS funds, enabling them to transact more directly and efficiently with ceding insurers.
The vision aligns well with our own here at Artemis; that efficient capital started the disruption of insurance and reinsurance markets through the adoption of capital market techniques, securitisation and ILS funds, and that the next major disruption will be how efficient technology can accelerate this evolution of the re/insurance market.
Ledger Investing is taking aim at this opportunity and with the addition of Samir Shah to the team it’s making a big statement to the market about its intentions.
For full disclosure, Steve Evans, Owner & Editor of Artemis.bm, has been acting as an advisor to Ledger Investing.