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Island start-up setting up risk exchange

A new company that will allow investors to buy and sell insurance risks much as they do stocks is planning to launch in Bermuda in the next few months.

Extraordinary Re has developed a platform run by Nasdaq for the trading of insurance liabilities, with the intention of giving investors access to a broad range of different risks.

The trading platform will be embedded within a Bermudian reinsurance company, which will underwrite the risks that attract capital market investors.

Will Dove, Extraordinary Re's chairman and chief executive officer, said in an interview: “We have established the company in Bermuda and we're in the process of recruiting a team.

“We're in discussions with the Bermuda Monetary Authority on licensing the reinsurer.”

Pending approval from the regulator, he said he hoped Extraordinary Re would be up and running in time for January 1 next year.

Mr Dove said the company was building “a new type of reinsurance company” that had an enormous potential market.

“We think it could be huge over time,” Mr Dove said. “You look at the ILS market that's already worth about $100 billion and there's a lot of room to grow. We may be looking at more than $200 billion over the next five years.

“Extraordinary Re can help to facilitate this growth by giving the capital market access to different types of risk and by bringing more transparency and liquidity to the marketplace.”

Mr Dove said he expected the business to add to its staff over the coming years as it expands.

The CEO has some 30 years' experience of the property and casualty insurance and reinsurance industry, some of it in the Bermuda market with companies including Centre Re and Ace Ltd, now known as Chubb. While at Ace, Mr Dove was involved with the team that created the company's first ILS issue in 2007.

Among the company's advisers is a well-known figure on the island, Bob Deutsch, the founding CEO of Ironshore.

The expertise behind the company has encouraged Silicon Valley financing from venture capital firms including Plug and Play and Golden Angels Investors.

Extraordinary Re took a huge step forward in March this year when it announced the signing of an agreement to work with exchange operator Nasdaq, a deal that will enable the start-up to deploy its patented liquid insurance contract risk allocation platform.

Insurance liabilities will effectively be chopped up into components that are sold by the reinsurer to institutional and other sophisticated investors — much like a company sells shares to the public in an initial public offering, Mr Dove said.

Investors will be able to pick and choose pieces of varying types of risk and build a portfolio.

The idea has many similarities to insurance-linked securities like catastrophe bonds, a market that has flourished with Bermuda at its epicentre. One key difference is liquidity.

The Extraordinary Re platform will enable investors to buy and sell insurance liabilities tied to various types of risk on a day-to-day basis. They might, for example, trim their California earthquake exposure and add to their aviation risk, just as an asset manager might rotate stock holdings between sectors.

Mr Dove believes that this ease of putting capital in and pulling it out will unlock the great potential for more convergence between the capital and reinsurance markets, gaining access to many more investors than the limited group prepared to tie up their capital on a longer-term basis in today's range of ILS products.

The company will offer a marketplace in which prospective investors can examine submissions to determine their interest in matching their capital to them.

ILS have been most successful in providing property-catastrophe risks and Mr Dove believes that Extraordinary Re's early investors will also be inclined to seek exposure to shorter-tail lines, such as aviation, flood and energy.

However, over time investors will have the opportunity to diversify their risk portfolios with other lines, including longer-tail risks, and Extraordinary Re will be equipped to enable that, he said.

Insurtech is being taken increasingly seriously by traditional players facing a squeeze on profit margins from soft pricing, stubbornly low interest rates and the growing competition from alternative capital. With many of the tech-based solutions for the industry focused on areas like data analytics and distribution, Mr Dove argues that Extraordinary Re stands out among the start-ups.

“We are unique in that we are focused on the heart of the insurance process itself, how insurance risk gets allocated to capital,” Mr Dove said.

“We have designed our platform to be able to handle any type of risk and we'll have to focus on the risks that our investors want to match their capital with.”

Extraordinary Re will expose the insurance marketplace to a larger pool of capital and the trading will create a more dynamic risk pricing mechanism, Mr Dove added. In addition, he said the data generated by the platform's transactions would be of great value to carriers, brokers and investors.

Trading risk: Will Dove, chairman and CEO of Extraordinary Re

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Published September 21, 2018 at 9:00 am (Updated September 21, 2018 at 1:08 am)

Island start-up setting up risk exchange

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