Insurance-Linked Investments are in Need of Transparency, and AI Provides

Access to investments in the alternative reinsurance market has long been limited due to high barriers of entry and a lack of transparency, but this is radically changing with new technology. Artificial intelligence technologies and a marketplace approach have opened up a whole market of uncorrelated, diversified insurance-linked investment products for institutional investors
February 17, 2022
Insurance-Linked Investments are in Need of Transparency, and AI Provides
Insurance-linked Investments, Transparency and Tech

Historically, access to collateralized reinsurance products was very limited to investors from the broader markets, but that is rapidly changing with new technologies, which not only provide accredited investors with the transparency they need to properly assess investments but also allow rating agencies to rate them.

This is highly relevant in the current volatile economic environment. Insurers are hungry for new sources of capital. Investors, on the other hand, are looking for methods of diversification and alternatives to more traditional fixed-income investments, which are struggling to produce sufficient yield in the low-interest environment.

Indeed, a recent report by consulting firm Mckinsey & Company found that the industry as a whole has to “develop new businesses for the digital age”, stating the need to embrace new technologies as well as develop better capital market tools, matching risk to capital more efficiently.

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That’s where AI steps in, making it possible for ‘low severity, high frequency’ Life and Property and Casualty (P&C) insurance liabilities to be easily and transparently modeled with historical portfolio data. Through these technologies, one can accurately predict expected losses and returns, creating for the first time stable insurance-linked assets with competitive yields. Investors can also monitor their investments as portfolios develop with time, giving them more control over their investments.

“We take the massive amounts of historical data that most non-catastrophe perils have and use it to shape assets that have stable, predictable returns,” says Robert Schumaker, Vesttoo’s Chief Investment Officer. “These types of investment opportunities were typically only available to traditional reinsurers, and you had to have industry relationships to access this part of the market. Thanks to AI technology, we can make this process easier and more transparent. Now we can create marketplaces where investors can analyze and access insurance-linked investments, each with actuarial risk modeling, returns, and even rating assignments from a third party.” 

Vesttoo has been using its proprietary machine learning algorithms to unlock Life and non-catastrophe P&C insurance-linked investments for capital market investors, through its marketplace and Insurance-linked Program (ILP), offering investors the opportunity to invest in a wide range of products adapted to investor risk appetite. Vesttoo has also recently announced the creation of VESCOR, a partnership aimed at providing a steady stream of non-catastrophe investment-grade notes covering P&C liabilities in the US. 

“The biggest advantage of expanding Life and P&C investments is the flexibility they offer,” says Robert. “With the independent expected loss projections that our AI produces, we can create a variety of rated and unrated products across a range of risk and return profiles. So as an investor, you have choices and can mix and match the assets that suit your portfolio’s needs.”

And transparency underlies the entire process. Investors have a unique opportunity to not only access Life and P&C linked assets for the first time, but to have a look under the hood.

“If an investor wants to see a model of the expected loss on an insurance-linked asset, we can show them,” says Robert, “If they want access to the granular data, we can also provide that. That level of transparency makes a world of difference. There is no such thing as the ‘perfect asset,’ but having clear and open knowledge of what to expect from an asset is necessary for any portfolio manager. We’re offering diversification with stable and predictable investments, and we’re backing that claim with independent AI-powered performance analytics and forecasts.”

Reinsurance is a $400 trillion industry, so having more of it accessible to the capital markets can be a significant change. With AI technology, it is now possible to offer stability and transparency to an entire asset class that will likely find a home in portfolios that shape our future. With investment portfolios in need of stable, uncorrelated, and diversified assets, having access to more insurance-linked assets can have a lasting and beneficial impact on the global markets.

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