Vesttoo: Using AI to manage actuarial risk through the capital markets
Originally written by Roger Peverelli and Reggy de Feniks - Founders The DIA Community, published on the DIA website on 5 Jan, 2021
In these volatile times, insurers are challenged to find innovative methods to limit risk exposure and control costs in order to stimulate growth and stay afloat. Traditional reinsurance is very limited in terms of capacity – the vast majority of reinsurance deals are concentrated in a small number of global reinsurers. Reinsurers are facing the same challenges their clients are facing, leading to increasingly costly traditional reinsurance deals, and even more limited capacity. Furthermore, traditional risk models employed for reinsurance provide much less accurate assessment of risks. All of these factors have led to a large gap between supply and demand.
Vesttoo provides a solution for the acute issues facing the insurance industry in today’s volatile economic environment, providing stability and capital in the midst of the covid- pandemic. Vesttoo has developed advanced technologies for data-driven risk management, translating actuarial risk to financial risk through the capital markets. It specializes in risk modeling and alternative risk transfer for the Life and P&C markets, providing insurers with a low-cost strategic risk management solution for immediate capital relief and liability hedging. As a one-stop-shop solution provider, Vesttoo handles every aspect from the deal, using its proprietary AI- and Machine Learning stochastic algorithms, creating highly accurate risk models and forecasts
Seamlessly connecting insurers and investors
Vesttoo has already executed its first deals this year and has dozens of other deals in the pipeline, covering hundreds of millions of insurance risk. Vesttoo has been accepted to IBM’s Alpha Zone accelerator, as well as the Citigroup accelerator, with overwhelming positive feedback from industry leaders. Vesttoo is now in the midst of building the first insurance risk transfer marketplace for P&C and longevity-linked insurance assets, to seamlessly connect insurers and investors, creating a world where insurance and capital markets are fused and globally accessible.
How it works
The process starts with insurers, pension schemes and reinsurers working with Vesttoo to decide on the characteristics of the portfolio requiring risk management, as well as collecting the relevant raw data. Vesttoo’s proprietary engine then cleans the data and structures the risk model, creating the financial structure and portfolio customized hedge indemnity index. The next step is for Vesttoo to structure and price the deal, providing an end-to-end solution to the cedent with the entire deal ready to be executed. Vesttoo then develops a customized hedge indemnity index, that mimics and monitors the pool performance with full transparency to the underlying asset data; followed by Vesttoo placing the deal through an extended investor network via capital markets and investment bankers. The indemnity index is managed on Vesttoo’s secure platform with their indemnity index-based operating system.
Investors and capital market investors are provided with continuous updates on expected payments, basis risk analysis and effect of deal on capital requirements.
Machine Learning and AI-based proprietary stochastic risk algorithms create accurate risk profile
As part of their approach, Vesttoo creates claim tranches, that greatly increase the risk model accuracy. Working bottom up on a pool of policies, claim tranches are grouped, according to specific policy cohorts, made up of similar policyholder ages and portfolio characteristics, which greatly improves the accuracy of the risk models.
In addition to this, Vesttoo’s algorithms enable the creation of accurate portfolio-specific liability indices, along with attachment and exhaustion points, thus creating robust and reliable forecasts. These forecasts can be used to predict the portfolio’s future performance, limit tail risk and allow for reduced deal maturity and lower pricing.
Bridging the funding gap
The added value of Vesttoo’s solution starts with the ability to provide hedge- or risk transfer to almost any sort of insurance risk, whether attended or not attended to by traditional reinsurers, for both the short and the long tail. They’ve created a true, affordable alternative to any type of instrument, that has been used to date, to hedge or transfer those risks. Vesttoo opens up an immense capacity from the capital markets to long-tail and short-tail risks. They’ve created a bridge over the funding gap with a flexible, affordable and quick time-to-market instrument. On top of that, Vesttoo enables the cedent to take an active, strategic approach towards their risk management. Working together with Vesttoo, they can help select the right portfolio, the right layer, the right attachment or exhaustion points that the insurance needs, both in terms of collateral, regulatory compliance and pricing.
Who is Vesttoo?
Vesttoo is a revolutionary hedging and reinsurance platform based in Tel Aviv, Israel, founded in 2018 by Alon Lifshitz, Yaniv Bertele, and Ben Zickel. They sought to find a strategic solution for the lack of comprehensive reinsurance and risk transfer in the insurance markets. Today, Vesttoo’s goal is to utilize advanced technologies to provide insurers and pension providers with data-driven risk management, using the capital markets to hedge liabilities and transfer risk.
Vesttoo is backed by a very experienced Advisory Board from the global and regulatory insurance space, executive financial experts, executives from various global business areas and specialists from the academic world.
Vesttoo is currently engaged in an A funding round, having passed the seed stage. Its algorithms are functioning and have been applied to numerous deals – the team is currently working on a scaling mechanism. Vesttoo’s investors include prominent VC Funds, as well as private angel investors.
”Our vision is to create a world where insurance and alternative capital are fused and globally accessible”. Yaniv Bertele, Co-Founder and CEO, Vesttoo