Footprint: solving the challenge of trapped capital
A new type of reinsurance contract developed by Resolute Global Partners in partnership with Gallagher Re and Karen Clark & Company (KCC) can solve a number of problems that have vexed the reinsurance industry, including trapped capital in the insurance-linked securities (ILS) space—and it is already receiving strong interest from reinsurance brokers and their clients alike.
That is according to Tom Libassi (pictured), co-founder and managing partner of Resolute Global, who said that the new contract, called Footprint, could have important implications for the ILS sector specifically.
“Footprint offers several important benefits for the ILS sector: specifically, it puts an end to trapped capital (automatic commutation); removes the risk of non-modelled perils and social and economic inflation by ‘locking-in’ exposure at the beginning of the contract; ensures that the interests of alternative capital providers and insurance clients are directly aligned; and provides for more accurate pricing,” Libassi explains.
He says there has been significant interest from reinsurance brokers and their clients since Footprint’s launch in April—and its scope could widen.
“While the first Footprint transaction is focused on severe convective storms, we anticipate applying it to additional property perils including wildfires, wind, and earthquakes. The product’s scope is currently limited to property-cat sectors only,” Libassi says.
The development of Footprint
Footprint can be used for any type of catastrophic event, from severe convective storms and wildfires to hurricanes and earthquakes.
The first Footprint transaction was focused on severe convective storms, which are some of the most common and damaging natural catastrophes in the US. These storms, which can include tornadoes, hail, and high winds, have become among the costliest perils for insurance companies. As a result, insurance companies are demanding more coverage while reinsurers are limiting supply, a dynamic that highlights Footprint’s value in the market.
Footprint’s innovative structure solves a number of problems which, Resolute claims, have vexed the reinsurance industry since 2017. These include trapped capital, extended settlement times, economic inflation, social inflation, non-modelled risks, and pricing uncertainty.
The product’s benefits, Resolute says, include rapid claim settlement (within 30 days of an event); automatic commutation (within 30 days of contract maturity); and fixed exposure risk. Unlike other products such as parametric triggers, industry loss warranties and cat bonds, this approach provides a more accurate assessment of storm losses than is currently available, giving insurance companies cost-effective coverage and critical liquidity post-event, while also offering investors a more efficient way to access the property reinsurance market and earn attractive returns.
Footprint’s process works as follows: an insurance company submits its exposure file, which is then fixed at the inception of the contract. In the event of a covered event, KCC will overlay the intensity footprints on the insurance company’s fixed exposure profile and determine the company’s ultimate loss. The loss, as determined by the model, is paid to the insurance company within 30 days.
The contract is automatically commuted within 30 days of maturity, allowing investors to receive their original investment plus any profits, or less any losses, immediately.
Right solution, right time
Libassi explains that Footprint provides investors and insurance companies with substantial improvements in structure, terms and pricing compared to current products. “Our belief in the positive impact that Footprint could have is based on its ability to solve a number of problems the industry has been grappling with,” he says.
“These include trapped capital, extended settlement times, economic inflation, social inflation, non-modelled risks, and pricing uncertainty. Compared with products with other structures such as industry loss warranties and cat bonds, Footprint provides a more accurate assessment of client-specific storm losses within days of an event. It gives insurance companies cost-effective coverage and critical liquidity post-event while giving investors an efficient way to access the property reinsurance market and achieve attractive returns.”
He adds that its development has come at a good time for investors. “Footprint gives investors the opportunity to capitalise on the current attractive rate environment—freed from the problems the industry has been grappling with over the past several years. Given the much-improved structure, terms, and pricing that Footprint provides to insurance companies and investors compared with other contracts, we believe this product has the potential to transform the reinsurance industry.”
This transaction, and its future applications, are enabled by KCC’s advanced catastrophe modelling technology. For severe convective storms, the KCC model ingests more than 30 gigabytes of atmospheric data from satellites, global weather models, and radar each day, which are used in complex scientific algorithms to create high-resolution hail and wind intensity footprints. These footprints are then superimposed on a portfolio of properties to estimate the resulting losses.
Speaking to the product’s first transaction, Karen Clark, CEO of KCC, said: “Severe convective storm losses dominate weather-related property claims in the US, and KCC has invested substantial resources to develop the most advanced and accurate models.
“We’re thrilled to be working with Resolute Global to bring to the market this innovative transaction providing substantial cover for severe convective storm losses along with a transparent, timely, and highly efficient way for investors to access the market.”
Doug May, president, Gallagher Re North America, said: “We are pleased to have advised Resolute Global on this innovative reinsurance contract. In this challenging marketplace, we believe this new product will help expand the sources of capacity for our clients.”