NEW YORK (Reuters) - Large investors looking to diversify beyond stocks and traditional fixed income will soon be able to trade assets tied to insurance liabilities covering potentially everything from hurricanes to floods and even cyber attacks.
Extraordinary Re, a startup focused on the reinsurance industry, plans to launch a new trading platform run by exchange operator Nasdaq Inc (NDAQ.O) this summer that will let institutional investors buy and sell exposure to insurance risk, the company said on Thursday.
The privately backed company will create new products for the $90 billion insurance-linked securities (ILS) market and make it easier to participate in, Extraordinary Re Chief Executive Officer Will Dove said in an interview
The ILS market developed over the past couple of decades as a way for insurance companies to pass some of their risk associated with natural disasters - usually hurricanes and earthquakes - on to investors by issuing catastrophe bonds, or CAT bonds. If no catastrophe hits, the bonds pay out a percentage of the premiums by way of coupons. But if a disaster does occur, the insurance company can use the funds to pay claims to its policy holders.
Extraordinary Re will let insurance companies create “liquid insurance contracts” that will allow institutional investors to buy and sell shares of insurance liabilities on the cloud-based exchange built and operated by Nasdaq.
Investors will be able to create portfolios of liabilities on the platform using combinations of contracts, giving them a share of the insurance premiums, but also exposing them to potential losses if the underlying policies are triggered.
“These are very different from a CAT bond because they are really a share of a liability that can be reallocated between investors on the Extraordinary Re platform,” Dove said.
“They don’t have a coupon, they don’t have a final maturity date, rather they represent a participation in a reinsurance contract and that innovation is what allows us to be able to handle really any type of insurance and reinsurance risk,” he said.
Part of the reason for the rapid growth of the insurance-linked securities market has been its lack of correlation to other markets, Dove said. When stocks and many other asset classes tanked during the financial crisis, CAT bonds were unaffected because they are triggered by natural disasters.
With its new contracts on Extraordinary Re will offer even more diversification, he said.
Reporting by John McCrank; Editing by Cynthia Osterman