Bitesize InsurTech: Extraordinary Re
October 13, 2017 Chris Sandilands
Extraordinary Re is a “reinsurtech” contract trading platform that connects (re)insurers and capital market investors using proprietary syndication and trading technology.
The business was founded in 2012. Will Dove, an actuary with thirty years of experience in the industry, became CEO in 2015. This is a technical business so we’re going to have to simplify greatly to explain this “Bitesize”.
The business helps (re)insurers bundle peak or difficult-to-place risks and transfer them to the capital markets. Examples are US flood, cyber and contingent business interruption. By doing this, Will hopes a) to give (re)insurers the ability to underwrite a better range of products, b) linked to (a), to close the protection gap for consumers, c) to give capital markets investors greater access to insurance risk, and d) to provide greater market liquidity and pricing transparency.
The mechanism differs from a cat bond / insurance linked security (ILS) because the risk is transferred from the ceding (re)insurer via a reinsurance (or retro) treaty with Extraordinary Re (which will be a Bermuda-domiciled carrier). Extraordinary Re breaks down these hard-to-place risks into tradable instruments – they call them Liquid Insurance Contracts or LICs – which are syndicated to multiple investors who have established trading accounts on the platform.
Each of the trading accounts are pre-funded by investors through a purchase of stock in Extraordinary Re, denominated by a class of shares which track the performance of each investor’s trading account and pay dividends (or not) based on that account’s performance.
For each reinsurance treaty, Extraordinary Re holds the premium paid by the cedent (legally on its own balance sheet and operationally in a segregated account). Claims are paid by Extraordinary Re, which tracks the results of each trading account.
The LICs can be traded between investors who have trading accounts on the platform. Each trading account can construct a customized portfolio of LICs by choosing which risks to subscribe for during the syndication rounds, and can then manage those portfolios by trading with other investors through the platform. The company has built and tested its software to run four secondary auction cycles each day.
Secondary trading is not an important feature of the ILS market at present. Will suggests that this is because instruments are short duration risk (e.g. property cat) held by buy & hold investors. Given the types of risk made available to investors on its platform, Will sees regular trading as more important.
The business is currently raising a round of equity funding to capitalise its Bermuda entity and build the final stage of its platform.
The Oxbow Partners view
Extraordinary Re is delivering two innovations: first, an active secondary trading marketplace for insurance risk, and second it is broadening the types of risk that can be traded with institutional investors.
As ever, we see challenges. First, the cost to insurers of purchasing protection must be the same or lower than the cost in traditional markets (assuming, of course, that there is a traditional market for that type of risk). But some of the risks the company is talking about – for example contingent BI – are hard to model. To what extent will investors be confident that they are not being selected against by (re)insurers, and therefore offer competitive pricing?
Second, there is a question about the liquidity of the secondary market. Are there enough scenarios in which an investor would want to trade into a position that another investor has traded out of? Put another way, to what extent will investors be trading out of positions for reasons other than severe actual or expected adverse development?
We are in no doubt that the business has considered these questions at length – it has an all-star set of advisors. We look forward to hearing more.
Stuart Davies, Chairman of Oxbow Partners, contributed to this profile.
