Insurance Risk as an Alternative Asset Class

Status quo

  • policy holders buy from retail brokers

  • retail brokers buy from 1) carriers 2) MGAs 3) wholesalers

    • only carriers underwrite

  • MGAs do not underwrite and need a reinsurer for the 1) balance sheet 2) license. They pitch they can better underwrite

    • Usually they can get from reinsurance firms like SwissRe or MunichRe. But there are only a handful in the entire world and capacity is severely constrained and backlogged

    • Fronting carriers then existed to also provide this license and balance sheet

      • they still direct risk to the reinsurers

      • effectively they cushion between all the MGAs and the reinsurance firms

      • Fronting carriers can be constrained too because they are ultimately still dependent on reinsurance firms

Problem: reinsurance capacity is constrained.

Demand: investors are increasingly interested in alternative asset classes and diversifying their investments

  • ILS funds also moving away from nat cat given how poorly data there has been

  • Everyone else doesn't understand insurance risk but wants to get a piece of it if the returns are good.

Solution: democratize and sell this risk to investors!

  • helps MGAs get risk placed

  • fronting carriers + reinsurance firms offload their capacity

  • provide a certain return to ILS funds

Questions and risks

  • takes time to see if promised returns materialized

  • ability for the firm running this marketplace of risk to actually understand what is good risk and bad risk

  • ability to get ILS funds involved and investors

  • in an economic downturn, investors move away from new alternative asset classes and stick with more traditional methods