How Insurance-Linked Assets Offer Uncorrelated, Diversified Investments

When Vesttoo CEO Yaniv Bertele co-founded the Israeli-based insurtech firm in 2018, he was confronted with a global reinsurance market that hadn’t changed much since 1842, when Cologne Re was launched as the first professional reinsurance company.

“The industry hasn’t been disrupted in the 200 years since it was established,” Bertele says. “It’s very centralized and inaccessible to many insurance companies, as well as to a wide range of investors that would otherwise be interested in investing in this area, such as institutional investors, banks, family offices, high-net-worth individuals and retail investors.”

Risk had mainly been redistributed within the insurance industry, and investors needed to have industry relationships to access this part of the market. Some risk has been transferred to the capital markets since the early days of companies like Cologne Re and Swiss Re, but only to a very limited extent. 

“Insurers don’t have a common language with the capital markets or an intermediary to bridge this gap, and this is where Vesttoo comes in,” says Bertele.

Providing access to a new uncorrelated asset class

Vesttoo specializes in tech-enabled securitization of both life and property and casualty (P&C) insurance liabilities. Through its marketplace platform, it provides the broader capital markets with access to stable, predictable returns from an asset class that is uncorrelated to macroeconomic or market trends.

Vesttoo is leading the growth in this alternative asset class by providing multiple entry points for investors through a variety of low-volatility reinsurance products that cover non-catastrophe, “high-frequency, low-severity” insurance liabilities. These assets include Vesttoo’s Insurance-Linked Program (ILP); the company’s non-catastrophe investment fund; rated notes covering low-volatility P&C liabilities; credit-linked notes; and ETNs down the line, catering to a wide range of investor types.

The firm’s supply customers are insurers, reinsurers, brokers and others who seek flexible, data-driven solutions and increased capacity from capital market investors. On the demand side, Vesttoo helps asset managers fuel their hunger for uncorrelated, diversified assets that provide higher returns than traditional fixed income.

Significant room for growth

Between 2008 and 2020, alternative capital increased 410% globally from $19 billion to over $100 billion, providing insurers greater opportunities to cede more liabilities to the capital markets. But this is just a fraction of the $400 trillion market, and only 1/25th of Apple’s market cap. There is significant room for growth, particularly for a new marketplace such as Vesttoo’s, which gives investors access to reinsurance products for the first time through a seamless digital process.

“This asset class has been almost inaccessible to institutional investors until now,” Bertele says. “And now, with the current instability of the markets, these assets can function as a diversifying stabilizer.”

Revolutionizing the reinsurance industry

Vesttoo uses a proprietary AI-based technology platform to facilitate risk transfer of life and P&C insurance liabilities between insurance companies and institutional investors, providing a growing flow of capacity for insurers while facilitating insurance-linked investments for asset managers. As the first independent platform to provide institutional investors direct access to this type of alternative investment, the firm handles every aspect of the deal, from objective risk assessment and expected loss projections to the structuring and monitoring of the transaction.

Insurance-linked assets provide a way for insurance companies to transfer a portion of their risk and premiums to the capital markets, which allows investors to participate in the reinsurance market. This emerging asset class gained traction in 1992 after Hurricane Andrew, which cost the reinsurance industry an estimated $15.5 billion.

Catastrophe bonds have dominated the insurance-linked securities (ILS) space, but higher than expected losses and volatility have cooled investor appetite. Non-catastrophe offerings from the life and P&C sectors are increasingly attractive to investors seeking highly predictable, uncorrelated returns. Today’s technology can more accurately model these risks, using the large amounts of data associated with these high-frequency, low-severity insurance liabilities such as motor liabilities, D&O, general liabilities and more.

Vesttoo entered the reinsurance industry after using AI technology to create an objective and accurate process to model the various liabilities that could be used to create assets investors could buy. Before settling on the reinsurance industry, the firm looked at multiple markets with funding gaps, including commodities, energy and real estate.

“It was clear to us that the most burning need was in the reinsurance space,” says Bertele. “The market is huge: It’s estimated that hundreds of trillions of dollars of liabilities could be hedged to reinsurance capacity.” Bertele says that he wants Vesttoo to become “an eBay or Amazon Marketplace or a stock exchange for the reinsurance industry.”

A transformational, tech-enabled, democratized marketplace

Bertele believes that Vesttoo’s marketplace can transform both the reinsurance industry and the capital markets. The firm’s technologies provide the transparency required by rating agencies to offer ratings for its products. Vesttoo’s technology is fortifying an industry that a recent McKinsey report declared must “develop new businesses for the digital age,” as well as creating new capital market tools.

Vesttoo has announced the launch of the first ratings for notes covering non-catastrophe specialty P&C insurance. The ratings are like a Google Translate function that translates insurance liabilities into something the broader capital markets can understand.

“Our products are going to be a stabilizing force, democratizing this whole asset class as investors diversify away from market risk and create financial stability in volatile conditions,” Bertele says.