Technology firm city3k has launched what is believed to be the re/insurance industry's first debt exchange.
Many of the recently-launched internet-based applications targeted at the re/insurance industry have focused on the front-end of the business, trading or exchanging risk. Already, there is a plethora of platforms and on-line exchanges offering new environments for placing business, all of which cite lower costs and faster processes as major benefits to users. Fall-out from this currently burgeoning sector is only a matter of time, particularly since many of the offerings still are limited in the facilities available: few allow users to complete contracts on-line, though, particularly at the high end of the business, there is still a strong sentiment that a face-to-face component is vital in the business.
Nevertheless, the re/insurance sector is moving inexorably towards e-commerce. E-mail is competing with fax as a form of communication, and the advent of digital signatures should help allay fears about the security of information transmitted over the internet.
But it is in the back office realm that technology has the ability to make radical changes and slash expenses. The merger of the London Processing Centre and Lloyd's Policy Signing Office, in a link with technology company Xchanging, is a good example of the re/insurance sector facing up to the pressures of huge costs – estimated at around 30% – though it comes after many years of technology offerings being shunned by the market.
The cost of old business is another facet of business now being targeted by e-commerce companies. In particular, the end of March saw the launch of the city3k Debt Exchange, an on-line marketplace for re/insurance bad debt. According to Swiss Re, about $184bn-worth of business is currently in run-off, and city3k managing director Robin Merttens estimates around $50bn of this is “problematic,” as he describes it.
City3k's move into the debt sector – the first of a number of re/insurance-related e-commerce facilities planned by the company – comes at a time when strategic investors such as investment banks and mutual funds are upping their involvement in distressed debt in the secondary syndicated loan market. Re/insurance debt, however, remains a relatively untouched area, despite its size. To put it into context, about $26bn of the total volume of the secondary syndicated loan market over the course of 2000 has been identified as distressed debt, according to estimates by Loan Pricing Corp. “Right now there's very little trading of reinsurance debt,” commented Mr Merttens. “The capital markets have never had an appetite for trading reinsurance debt because it is very complicated, but we are hoping in the next two to five years there will be a genuine market for it. Appetite for it is very high at the moment, and there doesn't appear to be a genuine competitor (to city3k) at the moment.”
So far – and probably unsurprisingly – the run-off market has been the first sector to embrace the exchange. With Equitas, KWELM and NRG Victory all involved in the development of the exchange, it already featured dozens of trade offerings when it launched in March.
“The run-off community has taken to it the quickest,” said Mr Merttens, though he acknowledged that there was probably plenty of debt that wouldn't get posted on the site.
Members of the exchange get to post debt on the site, either under the company name or its rating. “Everyone has to sign terms and conditions, the rules and regulations of the site,” explained Mr Merttens. City3k provides a policing facility, and trades cannot be completed anonymously. “That gives the company the ability to screen responses so they know who they are dealing with,” he said.
Postings currently contain a limited amount of information, including the type of policy, domicile and date of contract. Mr Merttens sees it growing by the end of the year to include various aspects such as on-line access to policy documentation and more information that will allow users properly to assess the value of debt posted.
“The amount of reinsurance debt is phenomenal and it is not going to go away,” said Mr Merttens. “Currently, the only players are reinsurance professionals with small funds who arbitrage on own capabilities.” The launch of the debt exchange could see that community growing substantially as the value of the re/insurance debt market becomes clearer to the wider world.