Industry experts, speaking as part of the latest Artemis Live webcast, have said they believe there is “significant traction” for re/insurance solutions to leverage technology and hedge pandemic risk using parametric triggers.
Last week’s webcast, entitled “Hedging the Next Pandemic with Parametric Capital Market Solutions,” brought together several industry leaders to explore how data and modelling could make risk transfer options for pandemic exposure more possible.
The event was sponsored by Vesttoo, a specialist in risk modeling and alternative risk transfer for the Life and P&C insurance markets, and which was represented by CEO Yaniv Bertele.
Also present on the panel were James Potter, CEO of Rokstone Underwriting, Luca Tres, Head of Strategic Risk & Capital Life Solutions, EMEA at Guy Carpenter, and David Bearman, CEO of Aventum Group.
Asked about the challenge the re/insurance idustry faces in the wake of the pandemic, Bertele noted that a huge “funding gap” has emerged as the industry has been reluctant to expose itself to such a large and systemic risk.
But by utilising data and analytics, Vesttoo is working to create mechanisms to model pandemic risk and allow re/insurers to offer coverage based on parametrics and index triggers, Bertele explained.
“What Vestoo has been doing today is primarily structuring financial derivatives as a complimentary alternative to traditional reinsurance,” he told viewers of the webcast. “We’re essentially structuring the instruments in a way that the risk modeling will be embedded internally on our end, where we act as a one stop shop and transfer the risk from the insurance base to the capital markets.”
The idea put forward by Vesttoo is to take the 2020 numbers associated with excess mortality in the US and compare it with the 2021 mortality data provided by the Centers for Disease Control and Prevention (CDC) to create an index that would have an associated matrix of attachments and exhaustion points.
“An arbitrary cedant that wants to see capacity provided for their losses measured against those numbers could be provided with as much capacity as they wish, assuming that they understand the objectiveness of the index created based on the CDC,” Bertele continued.
“That will enable us to provide you with additional protection against the basis risk, which essentially is a mathematical measurable amount. That is one option. And the second option is essentially taking into account higher or lower attachment and exhaustion points to get a better correlation between what the mortality index will be showing and previous studies of the P&C losses.”
“So there’s a lot of options going forward,” the Vesttoo CEO concluded. “I think the correlation, however, between the P&C losses associated with business interruption and travel insurance, measured against a parametric index that evolves from objective CDC data, we see a significant traction for it, and we’ll be expanding the capacity as we progress.”
Building on this point, Bearman noted that the first mover advantages for firms looking to move into the pandemic risk space are an “attractive proposition,” but noted that the scale of the risk poses a significant challenge.
“The size of the risk is almost unimaginable,” he acknowledged. “The scale is huge, but I don’t think it’s insurmountable.”
“Anywhere where there’s an emerging risk and you can tie capital to risk is attractive to us as a business,” Bearman maintained. “With Vesttoo’s analytics and data capabilities I think there is a world where products can exist, because you can use index triggers like excess mortality triggers.”
“So I don’t think this form of coverage is impossible to provide. Obviously from a business perspective, there is a huge benefit to not having to present a claim, not having to go through proving a loss, and fixed trigger limit pain. So we see a great benefit and a great opportunity. But it isn’t a simple process.”
And this sentiment was shared by Potter, who agreed that parametric solutions to the pandemic challenge are “absolutely something that we’d be looking to do and explore.”
“The world needs to find solutions to this because it’s something that can’t be ignored,” he said. “Coverage is a problem and it’s overtaking the world economy, which is a huge issue.”
On the topic of parametric solutions specifically, Potter added that they would likely provide “an affordable solution against pandemic losses which are otherwise not covered,” in addition to reducing or diminishing any “moral hazard” that could surround this type of coverage.
And speaking on behalf of Guy Carpenter, Tres further noted that, for the ILS markets, there is already some precedent for hedging pandemic risk provided by the World Bank sponsored bond, which triggered in response to COVID-19 last year.
“This did a great job of opening the market to potential future deals of a similar nature,” he said. “In terms whereby a capital market investor can actually add capacity to the space and make sure that we have a sizeable and quick solution to a problem that, as we have all seen, will be there in the future again.”
“In the past pandemic risk, as well as the mortality and morbidity, was actually covered by the reinsurance industry,” he told webcast viewers. “The reinsurance model works extremely well because of diversification by product and by geography. The problem is that pandemic is not local, it is global. Therefore, the correlation played by reinsurance companies doesn’t work any more … That’s why you need that new set of participants to come to the market provide capacity. And that’s the key challenge we have here. And the key challenge that we will try to solve in the coming months.”
You can watch the full hour long parametric risk transfer webcast session on-demand here.
