Tech can “bridge the gap” to hedging pandemic risk: Artemis Live

As part of the latest Artemis Live webcast, industry experts argued that utilizing technology will be critical in enabling the reinsurance and alternative capital markets, or ILS sector, to help hedge pandemic risk using parametric solutions.

The webcast, entitled “Hedging the Next Pandemic with Parametric Capital Market Solutions,” brought together several industry leaders to explore how data and technology could make risk transfer options for pandemic exposure more possible.

The event was sponsored by Vesttoo, a specialist in risk modeling and alternative risk transfer for the Life and P&C insurance markets, and which was represented by CEO Yaniv Bertele.

Also present on the panel were James Potter, CEO of Rokstone Underwriting, Luca Tres, Head of Strategic Risk & Capital Life Solutions, EMEA at Guy Carpenter, and David Bearman, CEO of Aventum Group.

As a backdrop to this discussion, recent renewals have seen insurance and reinsurance players scramble to exclude pandemic risks from their books, due to the size and systemic nature of the peril, plus the unintended nature of the cover they have in many cases found themselves on the hook for.

But Bertele argued that more sophisticated utilization of technology could help the capital markets to get a handle on pandemic risk, and “bridge the gap” between the now-familiar territory of catastrophe risk and some of the more complex long-tail risks.

“I think that the lack of capacity essentially evolves from a funding gap,” the Vestoo CEO said, adding that a parametric approach could help to “democratize” the ability to buy into financial instruments.

This will help to diversify the types of cedants that can tap into solutions such as insurance-linked securities (ILS) or cat bonds, he explained, to include not only larger cedants but also small and medium enterprises.

“With that in mind Vestoo is tapping into those markets one by one, opening up the ability for them to share that data with us, through which we will structure financial instruments to transfer the risk to the capital markets,” Bertele told viewers of the webcast.

“And on the other hand, we’re educating third party independent entities on our risk modeling, so that we can eventually deploy those deals with the global capital markets.”

Building on this point, Bearman noted that the first mover advantages for firms looking to move into the pandemic risk space are an “attractive proposition,” but noted that the scale of the risk poses a significant challenge.

“The size of the risk is almost unimaginable,” he acknowledged. “The scale is huge, but I don’t think it’s insurmountable.”

“Anywhere where there’s an emerging risk and you can tie capital to risk is attractive to us as a business,” Bearman maintained. “With Vesttoo’s analytics and data capabilities I think there is a world where products can exist, because you can use index triggers like excess mortality triggers.”

“So I don’t think this form of coverage is impossible to provide. Obviously from a business perspective, there is a huge benefit to not having to present a claim, not having to go through proving a loss, and fixed trigger limit pain. So we see a great benefit and a great opportunity. But it isn’t a simple process.”

And this sentiment was shared by Potter, who agreed that parametric solutions to the pandemic challenge are “absolutely something that we’d be looking to do and explore.”

“The world needs to find solutions to this because it’s something that can’t be ignored,” he said. “Coverage is a problem and it’s overtaking the world economy, which is a huge issue.”

On the topic of parametric solutions specifically, Potter added that they would likely provide “an affordable solution against pandemic losses which are otherwise not covered,” in addition to reducing or diminishing any “moral hazard” that could surround this type of coverage.

And speaking on behalf of Guy Carpenter, Tres further noted that, for the ILS markets, there is already some precedent for hedging pandemic risk provided by the World Bank sponsored bond, which triggered in response to COVID-19 last year.

“This did a great job of opening the market to potential future deals of a similar nature,” he said. “In terms whereby a capital market investor can actually add capacity to the space and make sure that we have a sizeable and quick solution to a problem that, as we have all seen, will be there in the future again.”

Continuing, Tres observed that there was interest in pandemic hedging before COVID-19, but few transactions came to fruition due to pricing challenges.

“In the past pandemic risk, as well as the mortality and morbidity, was actually covered by the reinsurance industry,” he told webcast viewers. “The reinsurance model works extremely well because of diversification by product and by geography. The problem is that pandemic is not local, it is global. Therefore, the correlation played by reinsurance companies doesn’t work any more … That’s why you need that new set of participants to come to the market provide capacity. And that’s the key challenge we have here. And the key challenge that we will try to solve in the coming months.”

You can watch the full hour long pandemic risk transfer webcast session on-demand here.