A new startup called OTT Risk is looking to provide business interruption (BI) reinsurance capacity, via the use of advanced technology and with the support of insurance-linked securities (ILS) structures, in an effort to address coverage gaps that exist around the world.
The COVID-19 pandemic and subsequent lockdowns highlighted the significant coverage gaps that exist for business continuity losses.
In 2020, pandemic BI losses amounted to a huge $11 trillion and on the back of ever-increasing globalisation, could reach as much as $23.5 trillion over the next three decades.
With the frequency and severity of events on the rise, OTT Risk notes that millions of businesses are exposed to BI risks. However, and as highlighted by the recent FCA BI insurance test case in the UK, P&C insurance excludes the majority of BI risks to which SMEs and corporates are exposed.
Traditional insurance and reinsurance business models have, for the most part, struggled to create adequate structures to enable meaningful transfer of non-damage BI risks. Typically, re/insurers avoid this area with the use of exclusions within policies but as the risk continues to expand it’s become clear that this part of the marketplace needs to be addressed.
Enter OTT Risk, a technology-driven startup led by David Soloff, a co-founder of global economic monitoring platform Premise Data, as well as data platform Metamarkets and also a venture partner at VC firm Bowery Capital; who has teamed up with Chamath Palihapitiya of early Facebook, venture investment firm Social Capital and more recently special purpose acquisition company (SPAC) fame.
OTT Risk has identified a significant opportunity for large-scale technological approaches to fill the BI coverage gap, where traditional forms of insurance and reinsurance risk transfer have failed to produce an effective solution.
To start, OTT Risk is focused on creating the framework and enabling the capital to support reinsurance capacity to help make insurers more confident and able to provide business interruption covers.
By leveraging the latest advanced technologies, socially focused thinking on economics, alongside capital flows and stressors of them, OTT Risk is targeting the creation of a platform that enables meaningful non-damage business interruption risk transfer at scale.
The startup will utilise advanced tech such as machine learning and longer-term, has a view to tap ILS structures to connect non-damage BI directly to the capital markets.
A look at the company’s investment thesis reveals that OTT Risk is engineering a machine learning (ML) platform to quantify, backtest, price and insure BI risk. The platform will adopt a proprietary approach that combines both historic and dynamic actuarial models.
The historic approach “quantifies trigger and degree of catastrophic economic drawdowns” while the dynamic approach “uses ML to determine current volatility regime for named perils.” According to OTT Risk, this hybrid method “enables novel methods for quantifying and pricing mid and long-tail catastrophic economic displacements.”
Additionally, the new BI platform has been designed to support multiple parties in the insurance chain, which OTT Risk says will be supported by its own capital. This includes primary insurance direct to corporates underwritten either directly or through a fronting arrangement; reinsurance cover for primary insurers that ultimately enables carriers to backstop BI risks; and retrocession protection for reinsurers looking to hedge potentially systemic BI exposures driven by volatile political, climate and social factors.
“OTT Risk and Social Capital will create an investment management affiliate to invest premium flows in order to expand coverages while increasing shareholder value,” notes the startup.
Unsurprisingly, the BI fallout as a result of restrictions implemented by governments in an effort to mitigate the spread of the novel coronavirus has taken centre stage. But as OTT Risk highlights, the effect of climate change is driving greater frequency of natural catastrophe events which further stress and dislocate global supply chains.
Add to this the fact that social unrest has nearly tripled over the past ten years and is set to expand further, and the potential for BI losses as a result of large economic dislocations is vast.
In fact, OTT Risk states that global commercial P&C premiums is “dwarfed” by uninsured BI losses. The startup finds that commercial property premiums represent just c.$200 billion, or around 2% of COVID-19 BI losses; while in the U.S., P&C players underwrite c.$100 trillion of potential loss exposure.
“The BI market could over time represent 10% of the global P&C insured loss; this can happen with innovative technology enabling alternative capital to enter this market,” says OTT Risk.
Adding: “This represents a significant opportunity for large-scale technology approaches to fill the coverage gap, where traditional insurance has failed to deliver a viable solution.”
The startup will offer affordable business continuity products to reduce basis risk for the insured, and pay out parametrically, which enables rapid payout.
Of course, parametric structures are a common feature within the ILS market and have been used to transfer an array of risks to the capital markets, notably providing the world’s poorest and most vulnerable with essential protection against things like droughts and tropical cyclones.
At OTT Risk, it’s clear that the goal is to provide deep business interruption reinsurance capacity with ILS capacity as a way to support this.
The startup states that it will also structure alternative capital vehicles, providing third-party investors with a platform to invest in “economic resilience” protection, comparable to catastrophe bond structures.
The potential rewards and benefits of filling business interruption coverage gaps around the world are staggering, and as demonstrated by the arrival of a global pandemic, there’s a very real and urgent need to tackle the issue.
“While there are large technical and actuarial hurdles to backstopping BI risk, data and Machine Learning (ML) approaches are proliferating in such a way that they can meld with and enhance traditional risk underwriting approaches.
“Filling the BI coverage gap will scale economic resilience in the face of these more frequent and severe economic catastrophes due to climate, global health and political event triggers,” explains OTT Risk.
