Tremor launches weekly industry loss warranty (ILW) auctions

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Tremor Technologies Inc., the technology-based programmatic risk transfer marketplace provider, is launching weekly auctions of industry loss warranties (ILW’s), with which it hopes to add efficiency to the process of ILW trading.

auction-trade-buy-sellTremor noted the challenges currently being faced in the traditional insurance and reinsurance market due tot he Covid-19 coronavirus pandemic and the importance of keeping risk and trades flowing.

This is especially key at this time of year, as reinsurance buyers and sellers are focused on renewals from April through June and into July, which also makes this a peak time for trading of industry loss warranty (ILW) instruments, as markets look to hedge positions and protect their portfolios.

Tremor is opening its weekly online industry loss warranty (ILW) auctions from April 2nd 2020 and will then host a weekly auction every Thursday, with which it hopes to deliver greater continuity to the ILW market while also adding efficiencies to the trading process.

Both buyers and sellers of ILW protection are welcome to participate, traditional or alternative, with both rated and fully collateralised options to trade ILW’s available.

“The re/insurance market must remain open for business, Tremor intends to not only play its part to ensure that this happens by helping to facilitate traditional transactions, but we are continuing to modernise trading in the process,” Sean Bourgeois, Founder & CEO of Tremor explained.

Tremor’s advanced and programmatic marketplace allows for the matching of risk and capital in the most optimal way, with allocations of risk delivered to capacity providers based on cedent preferences, as well as capacity’s appetite for risk and cost-of-capital.

Taking trading electronic in the current pandemic crisis, when the reinsurance market has been forced to stop travelling and work remotely and from home is the only way to ensure that the industry comes out the other side of the situation better prepared for any future occurrences and also fitter for the future, we believe.

The ILW instrument is ideally suited to an auction scenario, as the typical binary and transparent nature of the industry loss trigger means there is far less documentation and data to be consumed, meaning trades can happen relatively quickly and auctions run on a regular basis.

ILW’s are typically used as a structure providing retrocessional reinsurance protection, but on a higher-resolution basis can also provide value for other protection buyers, including those with broad regional type exposures and insurers looking to protect their coastal portfolios.

“While some in the market are calling for delays and automatic contract extensions, we believe that we can help the market transact faster and more efficiently with our fully cloud-based marketplace technologies – even when facing the enormous challenges the market faces today,” Bourgeois said.

Tremor intends to post a range of frequently used ILW structures to each auction.

Parties can submit blind, sealed bids to buy and/or sell the posted ILW. Once the bidding closes, Tremor will compute a market clearing price for each ILW and any resulting trades, the company said.

Tremor further explained how the weekly ILW auctions will work:

  • US wind and earthquake perils will be available initially, followed by additional regions and perils in coming weeks.
  • Each structure will have a fixed insurance form and ISDA form contract wording from which participants may choose.
  • Participants are not known to each other in advance, and bids are blind and sealed; Tremor will reveal identities after the auction for parties who transact. Participants who are unable to transact in the auction will not have their interest revealed.
  • An A.M. Best credit rating of A- or better or fully collateralized commitments are required for protection sellers.
  • The bidding window will close at the end of the day each Thursday, the auction will run and results will be reported the following day
  • Tremor will publicly report the clearing price for each ILW; when no trade clears, Tremor will report the spread to the first dollar of trade.

Tremor’s powerful, proven market clearing technology enables participants to execute complex trading strategies. Bidders commit to the quantities they want to buy or sell at each price. Bidders can also leverage complex constraints to transact the coverage that is best for them, for example, to sell only the $10M of ILW protection that offers the best margins. These tools allow bidders to trade with confidence in the face of today’s challenging market.

Tremor has partnered with PCS, a Verisk business, for this ILW trading initiative, with initially the PCS catastrophe loss estimates for the United States, Canada, Japan, and the Asia-Pacific region, as well as global cyber to be used as the reference trigger on transactions cleared.

That brings significant optionality to protection buyers and sellers, as never before have these ILW triggers been so readily available and simple to trade.

“I’ve been a believer in Tremor since its earliest days and feel strongly that their technology can help address an important need in the global ILW market,” commented Tom Johansmeyer, head of PCS.

“Increased demand for ILWs over the past twelve months could potentially increase even more as a result of the impact COVID-19 could have on market conditions. The time is right, and the team is right. Tremor’s approach to market design should help protection buyers and sellers operate efficiently. We look forward to supporting Tremor in this initiative, particularly as we add more risk areas to our portfolio, which will help Tremor broaden its support to the global re/insurance industry,” he added.

We spoke to Johansmeyer to get more insight into the Tremor weekly ILW auctions and what they could mean for the use of PCS triggers and the industry loss warranty market as a whole.

He explained, “There’s been a lot of discussion about opportunistic ILW trading, but it can be difficult to accomplish on a market-wide basis. Everyone always points to how easy it is to get an ILW done – and it’s true, as long as the hard parts are sorted out. The hard parts are finding a cedent and market, and getting them to agree to a price. I can see Tremor helping with this process for some trades, particularly when time is of the essence or when a cedent and broker may need access to new sources of capacity.”

“With Tremor’s approach, I could see brokers expanding their regular access to new or different ILW markets. The space is fairly siloed right now, and a broader view of trading alternatives can help.”

PCS sees the potential for having ILW’s regularly available to trade on an online platform as a potentially important driver of awareness of the ILW structure and availability of the product to entirely new cedents and capacity providers.

Johansmeyer said, “Over the long term, we see the approach being key to helping cedents and markets access ILWs for new and emerging risks and classes of business. Over the past three years, we’ve launched new reporting solutions for marine and energy, Japan, cyber, terror, Asia-Pacific, Latin America, and large onshore losses. And the first trades are always laborious. They take a massive amount of commitment from a broker willing to show some vision and put in the work, a cedent open to being first in the barrel, and a market that’s going to deploy capital on something not yet tested. Anything that could make that process for the three players involved in a trade is profoundly helpful. Tremor could supercharge the efforts of the broker, give the cedent a wider range of trading partners, and make it possible for a market to deploy more flexibly and opportunistically – and earlier in the development cycle for a new risk.”

As ever, Tremor has broker front of mind when it comes to its technology driven approach to matching risk and capital in the most efficient manner possible.

Tremor said it will partner with brokers in innovative ways in order to supply trades to its continuous ILW marketplace, believing that “brokers will continue to play an important role providing guidance and technical expertise as needed.”

That’s crucial.

Platforms, such as Tremor, offer brokers the best way to enhance the value they bring to their clients at this time.

While some brokers are reported to be struggling with business as usual from home, even the larger firms, and with renewals looming. It is key for brokers to embrace modern ways of connecting their clients with the markets that provide them capacity.

Here we have an opportunity for brokers to step up and demonstrate that they can embrace technology to make their own jobs more effective and add value for their clients, which will likely result in more highly optimised trade execution as well.

The ILW market is a particularly interesting one, as it is not too big, has some significant brokers involved in it, and could seemingly be taken online relatively easily, if the tools are available.

Tremor is offering a key component of this and one that benefits broker, cedent and market alike, in adding efficiency to the process and optimising the placement of risks.

This is also a great opportunity for ILS funds, who both provide capacity for ILW trades and also use the instrument as a hedging tool.

Platforms like Tremor lower some of the barriers and also level the playing-field, letting efficiency, risk appetite and cost-of-capital dictate the placements, driven by rich preferences set by the cedents and markets.

It will be interesting to see how brokers respond to this and perhaps also telling once we see who shies away from a frictionless opportunity to take their ILW trading into the digital realm.

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