Securitisation will only become a viable secondary market if data improves, argues Igor Best-Devereux.
Securitisation is in fashion on the “cat” walks of Monte Carlo and Baden Baden. Notwithstanding the turmoil in the credit markets, the ever-optimistic insurance industry feels that we know how to deal with risk; and foresees not only cost benefits in insurance-linked securities but also the prospect of enhancing liquidity. All a good thing if catastrophe events become more frequent and severe.
Securitisation is a secondary market mechanism; it involves pooling financial instruments and then repackaging them into slices of risk. The insurance market is very familiar with this approach. It has been used to a secondary market (reinsurance) financing risk through the transfer of excess layers, tailoring each to the risk appetite of an underwriter.
The promise of securitisation is to make these layers more available to trade broadly via an exchange rather than by appointment with a limited number of companies. This will help to spread risk further and enhance liquidity.
But let’s get realistic for a moment. We’re at a very early stage and although some are already taking good salaries for standing by to do all these deals, there remains a significant hurdle. The lack of quality data compromises the ability to achieve the volumes that will be necessary to fuel a trading market.
“Until we master the information, the alchemists will be brewing up some volatile potions rather than creating gold
Igor Best-Devereux CEO of eReinsure
Until we improve data consistency, quality and availability there will be no information mastery. Until we master the information, the alchemists will be brewing up some volatile potions rather than creating gold.
There is a lot of discussion at the moment about who will be the natural aggregators of pools of insured risk. Reinsurers, brokers, electronic platforms? Is success going to be a function of global franchise, prior experience, capital, risk analysis or technology? It’s probably too early to tell, but consistent, validated and accessible exposure data will be critical.
Rather than being aggregated in opaque containers, risk exposure should be visible at a granular level. Where, when and how can this data be entered and aggregated in the insurance value chain? With the expansion of electronic platforms for placing risks, the information framework is beginning to take shape to support a new secondary market – ultimately funnelling risk into more transparent containers and enhancing the opportunities for secondary trading of insurance risk.