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A digital reinsurance marketplace – how close are we?
Alexandre Casey, Senior Underwriter for Hiscox Re, and Lidia Bozhevolnaya, Head of Partnerships for Hiscox Re, discuss how the lockdown can help accelerate evolution towards a truly digital marketplace.
We are in the midst of a global homeworking revolution. Trading floors and offices are empty, and the majority of the financial services industry continues to operate remotely from the homes of employees. At Hiscox, we currently have over 95% of our 3500+ staff around the world, from claims and underwriting to IT and operations, all working successfully from home. What an epic demonstration of the power of the today’s technology!
Given this rapid and drastic shift to remote working, it’s worth contemplating why the reinsurance market is so wedded to many of its person-to-person interactions and rituals, and how we can use this period as an opportunity to proactively push our thinking in terms of how we can innovate to build a digital market fit for the future.
The good news is that there are a number of start-ups – as well as more mature companies, especially brokers with various forms of electronic market places – who are already pushing novel ideas about the way reinsurance is transacted and spearheading change towards a digital marketplace.
Creating a digital marketplace
To make a digital marketplace a reality, we need solutions that can address the five key elements of the placement process:
- Common data standards: to enable easy exchange and interpretation, analogous to what exists for trading of financial instruments such as bonds or derivatives
- Risk directory: an online marketplace for risks, open to all parties or select group of parties
- Risk / capital matching: a mechanism to provide pricing across a wide range of markets, including an auction approach
- Binding: the ability to bind electronically and automate trade entry either in an online platform or directly into a proprietary underwriting system
- Clearing: from the time of binding a risk to the time a transaction is settled, including financing of premium and claims.
From the cohort of insurtechs taking on the challenge, three of them stand out to us given our first-hand experience of working with their platforms – Akinova, Tremor, and Riskbook. These three companies have already come up with innovative approaches for how underwriters source risk in new markets; how buyers can get quicker feedback on risk pricing; and how to create the foundations for a fully electronic reinsurance marketplace.
Akinova strives to replicate traditional trading online
Akinova has set probably the most ambitious goal for its platform, looking to fully replicate the traditional trading environment online. A slick online application allows brokers to list their risks on the market with accompanying documentation and then conduct auctions between either designated capacity providers or the marketplace as a whole.
Taking the reinsurance market online and logging trades electronically is a huge step forward compared to the current shuffling of papers around the City of London and other major reinsurance centres. In addition, the auction functionality provides the sort of market intelligence on placements that helps both buyers and sellers understand current trading behaviour better to ensure a more efficient market.
The platform has even made inroads towards the introduction of its own clearing house for collateralised trades to handle the provision of capital directly. The added chat and news functionality also adds some of the more informal and community building market elements, akin to what Bloomberg does for financial markets.
So far, Akinova’s trades have tended towards the more emerging areas of the reinsurance market – including their first parametric cyber trade with Hiscox in December 2019 – to get some traction in a market where traditional products already have a functioning, if inefficient marketplace. Looking forward, it could become the go-to place for traditional risk or a secondary market for insurance risk in the future.
Tremor aims to enable cost efficiency
Auction site Tremor aims to provide an online marketplace for trading risk. It’s primary objective is to improve price discovery for a risk, making transactions more cost efficient for buyers. It has already found some success with more traditional cat reinsurance. Tremor also launched a weekly Industry Loss Warranty (ILW) auction in the middle of the COVID-19 disruption to keep delivering liquidity through any potential market dislocation, resulting in their first bound ILW transaction in April.
The minimalist online interface and key marketplace management information from Tremor makes it a simple yet effective risk trading tool to get both reinsurance buyers and sellers onboard early without overcomplicating the process. If the platform continues to gain traction, it could become a cornerstone of a seller’s distribution strategy, or a buyer’s reinsurance purchase.
Riskbook goes for democratisation of access to risks
Riskbook's goal is to become for reinsurance risks, what Zoopla is for home selling and buying. Effectively a listings site, Riskbook allows brokers to list risks and underwriters to browse the marketplace for programs that fit their appetite depending on geography, product type, size of premium base, etc. When a suitable risk is found, the underwriter can send a notice of interest to the placing broker with the subsequent negotiations and any placement taking place back in the real world.
At the heart of its value proposition is the democratisation of access to risks, globally, without the need to have boots on the ground. Its recent approval to bind risks for Lloyd’s is an important milestone and will give Riskbook the capability for risk placement in addition to listing.
As it builds out the volume of risks, Riskbook has the potential to provide a huge amount of management information on new markets for reinsurers targeting growth in particular areas, including the identification of the major players and the size of the market. It will allow reinsurers to consume market intelligence remotely and independently – a process that currently heavily relies on the intel from local brokers.
Common data standards will be key
While these three companies address most of the elements required to build a digital marketplace, we are yet to see a solution to the challenges around common data standards.
Without common data standards, capital providers can’t compare deals on a like-for-like basis and optimise their trades. However, given the fragmented nature of (re)insurance market and the multitude of stakeholders who would need to align, it is not a challenge that we expect a start-up to tackle on its own.
We are optimistic that the Future at Lloyd’s program will address this challenge through the complex risk platform workstream. Get this right and it could provide the final piece of the puzzle that unlocks the potential of what a truly digital marketplace could do for the reinsurance industry.
The opportunity is right here, right now
The compulsory pandemic lockdown has probably done more to accelerate changing behaviours in this industry than any other event in recent memory. The opportunity to build on those gains is right here, right now.
At Hiscox Re & ILS we aim to play our part in realising the ambition of a digital marketplace and salute all those entrepreneurial insurtechs out there who are instrumental in driving this evolution forward.