Tom Johansmeyer, AVP – reinsurance services, marketing at ISO/Verisk Insurance Solutions, takes a look at the issues surrounding exchange-traded risks and the best way to make the market in them work.
Last month, ILS Convergence was abuzz with talk about exchange-traded catastrophe instruments—which many of us shorthand to ‘exchange-traded risk’. I remember being bombarded with questions about liquidity and how to develop a ‘robust’ secondary market. Such topics are incredibly important, and we should begin thinking about them now. Planning up front makes long-term success more attainable. However, any new endeavor needs to survive the difficult early days that can crush even the most important market-changing initiatives. And exchange-traded risk is no exception.
To get an exchange-traded risk (or listed ‘reinsurance commodities’) to work, you need to adopt the start-up company mindset. You approach the world with a grand vision for how you’re going to change it. You imagine your fully built-out solution set and think with pride about how it will drive a new way of doing business in a particular industry—or for the world as a whole. And then reality hits. You think about how you’re going to get through the first year—or, in some cases, even the next few weeks. To realise any profound long-term result, you first have to survive.
As I learned working for start-ups during the ‘dotcom boom’—and then in its aftermath, when I took a stab at entrepreneurship myself—any solution needs to be able to provide sufficient value in its early days to survive long enough to make the grand vision possible. This is particularly true of exchange-traded risk. While conventional start-ups, if they have enough merit, can raise sufficient capital to weather the early ups and downs, exchange-traded risk needs to provide immediate value to attract more cedants to make attaining critical mass possible.