14 September 2015 Insurance

Industry ripe for exchange-traded risk platform

The re/insurance industry is much more accepting today of the validity of exchange-traded risk (ETR) than at any time in the past.

That’s the belief of Tom Johansmeyer, assistant vice-president of Verisk Analytics, who has been working with ISO, an information provider property/casualty insurance risk, to better understand the needs of the industry and explore the potential for establishing an ETR platform.

He envisages such a platform allowing participants to take a position on either side of a trade without originating the security.

Johansmeyer believes the industry is increasingly open to such ideas. He notes that in the past two years he has also witnessed the transformation of the so-called cat bond lites from a little understood ‘alternative’ product to one that is now widely accepted as an almost standard risk transfer vehicle.

“Cat bond lites have gone through the learning cycle and you now have more fertile ground for an exchange-traded solution to come as a result,” he said.

“The problem with cat bond lites is that you can only take so much expense out of the transaction. You can’t continually cut your way to growth. We think that you can improve on that.”

Another drawback of the cat bond lite, he said, is that you still have to issue a security, which enables it to be traded and become part of a portfolio.

The exchange-traded model is not without problems, however. The biggest obstacle is a lack of takers on the risk side of a potential platform.

“There are plenty of capital providers but few on the other side of the transaction. I need a risk provider as opposed to a capital provider,” Johansmeyer said.

“There needs to be sufficient volume to meet the demands of capital on the other side. We need to find a way to bring risk into the exchange-traded environment in order to create a market.”

But for this to happen it needs a commitment from the entire industry.

“It’s a hard one to crack,” Johansmeyer conceded. “No single company can make that happen, it’s got to be an industry-wide collaboration.

“It’s too soon to tell just how far away we are from it. We are not in the business of forcing something on to the market but this has come up repeatedly with clients over the past two years. There are more discussions than ever before.

“For us it is an opportunity to play a new strategic role with our clients and help foster the development of innovation that will ultimately drive the industry forward.”

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