Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Time for reinsurance & ILS to embrace electronic trading & transfer of risks


As the reinsurance and insurance-linked securities (ILS) community adapts to full remote operations and working from home, this industry that has thrived on face-to-face contact now needs to rapidly embrace the electronic trading and risk transfer tools that are available to it.

electronic-reinsurance-ils-tradingIn these uncertain and challenging times, as the Covid-19 coronavirus outbreak continues to spread and worsen in many countries around the globe, society is steadily being locked-down and movement restricted, resulting in a massive reduction in international travel and face-to-face meetings.

In the broader financial markets this is driving a final pivot to full electronic trading at many exchanges around the world, as the last remaining open-outcry pits and trading floors take up the digital trading platforms that so many other assets and financial instruments are traded on.

These legacy face-to-face and open-outcry financial markets were outliers already, as most of the financial world can already do its job just as well (largely much better and more efficiently) over the phone and a computer interface, as they can in person.

But in reinsurance and insurance-linked securities (ILS) the market remains one where face-to-face meetings, roadshows and in-person negotiations to arrange the placement of risks is still the norm.

Till now that is.

For our unique and globally important marketplace, this enforced isolation and segregation from others, be they team or counterparties or service providers, is a significant change in normal business operations.

But it’s a change that can be overcome, as has quickly been evidenced by the ILS market and its participants remaining fully operational and offering full continuity to its investors and cedents so far.

The reinsurance renewals are fast approaching though and while brokers will be submitting everything electronically, as they have for some time, there is a real need for the transaction itself, that all important matching of risk and capital, to occur electronically as well.

At a time like this it seems an opportune moment for the market to realise the efficiencies that are possible with full electronic trading and transfer of risks.

There has always been a high-level of nervousness over the potential for risks to become ever more commoditised, if they were to be traded over digital systems.

But with the face-to-face aspect of the market and the travel intensive schedules of many participants now removed from the equation, for now at least, isn’t this the right time to rapidly move forwards to adopt what efficient risk transfer options are available?

It’s not just to facilitate remote working and make this more easy for the market, it’s to allow the efficiencies to be realised at a time when companies could find themselves under more pressure as well.

While the reinsurance and insurance-linked securities (ILS) market will not stop operating under the current levels of lock-down and isolation caused by the coronavirus outbreak, it still has the potential to hurt some companies in the space.

Hence making the market operate more efficiently seems key at this time and there is a big piece of it that can be optimised significantly through the adoption of electronic trading and transfer of reinsurance or retrocessional risks.

I’m not talking about back office systems to record placements, or blockchain systems that enable information transfer, what the market needs is tools, platforms and marketplaces that allow for optimisation of the allocation of risks to capital.

Lead / follow doesn’t need a reboot, as some might suggest. It’s an obsolete idea of how a marketplace should work.

What other industry has participants in it that can’t provide an informed bid for what they want to buy and so just follows somebody else’s analysis?

The real goal, and the opportunity at this specific point in time, is for a reboot of the actual transfer of risks and matching them with capital.

It needs to be optimised, efficient, based on risk appetite and capital cost/efficiency, with risks matched to markets by advanced technology.

As the reinsurance and ILS market becomes more adept at working remotely, naturally the value of face-to-face and travel will diminish, as business has to continue as usual.

One of the ways the market can do that is by embracing electronic trading and transfer of risks.

Options already exist of course, with digital platforms launched by insurtech start-ups making it much easier and more efficient for risks to be placed, transferred and ultimately matched with capital.

One of those start-ups that is of particular relevance to the ILS market and alternative reinsurance capital in general is Tremor.

We spoke with Sean Bourgeois, Founder and CEO of Tremor, who gave us his thoughts on the challenge the current outbreak and enforced remote working presents to insurers, reinsurers and ILS players.

“The insurance and reinsurance industries must continue to trade – unlike many other sectors, re/insurance in many cases is not a discretionary purchase, it’s not optional,” Bourgeois explained.

Adding that, “The re/insurance industry however is facing unprecedented challenges to trade given the traditional negotiation and placement process. But, the reality is that the industry is not geared up to work remotely and traditional distribution in particular is going to be particularly challenged.”

Tremor plans to announce new initiatives in the coming weeks to try and bring new options for trading to re/insurers and ILS funds and is working to support existing clients with their program placement and risk transfer needs.

Using technology cedents can offer risks to markets, while markets can make their appetite for those risks know, then the technology can match the two with the best outcome for both sides.

While these technologies remain relatively young, now seems the right time to embrace them. Not just for efficiency, but also to ensure that risk transfer continues and the market functions optimally through a particularly challenging time.

A lot is required to happen for trading to move to fully electronic means, not least data standardisation and greater levels of transparency surrounding deals. But already there are options to operate more digitally and efficiently.

The time for the reinsurance and ILS market to properly embrace and at the very least try out these kinds of technologies is now and if participants move in this direction then once the current crisis has passed we could see a much more efficient and highly optimised reinsurance and retro placement process, with better outcomes for everyone.

Back in 2008 I wrote the following:

The time is ripe for electronic trading of risks. With so many securities, options, derivatives and futures for other products being traded electronically, why not catastrophe products?

A market so entrenched in data and analytics should be easy to translate to electronic transfer.

I’m still waiting.

But, right now there seems a need for this, greater than we’ve perhaps ever seen before, which could provide additional impetus to make more progress in this general direction.

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