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The global natural catastrophe protection gap widened again in 2023, rising 5.2% to US $385 billion in premium equivalent terms, but at the same time Swiss Re reports that there are signs of more protection being available, which over time should see more losses covered by insurance and reinsurance.

Swiss Re’s Institute sigma research team said that the firm’s measure for the global natural catastrophe insurance protection gap widened due to economic growth and inflation last year.

Positively though, “Global protection available increased by 10.1% yoy in 2023, greater than the 6.3% yoy rise in protection needed, resulting in improved resilience, an encouraging underlying trend in risk protection,” the reinsurance company explained.

Adding that, “These growth rates indicate that although there are more, or more expensive, assets to protect, an increasing share of them are covered by insurance.

“This is a positive trend for global resilience if it continues in the long term.”

According to Swiss Re’s analysis, global insurance resilience was stable at 58% in 2023, helped by gains in mortality resilience due to higher life insurance take-up, and in emerging markets’ health resilience as well.

Overall though, the global protection gap across insurance perils reached a new high of US $1.83 trillion in premium equivalent terms in 2023, up by 3.1% in nominal terms from a restated US $1.77 trillion for 2022.

The global protection gap has expanded by 3.6% annually in nominal terms since 2013, Swiss Re said, which roughly matches nominal GDP growth trends.

Natural catastrophe resilience, a measure of how much in economic losses was covered by insurance and reinsurance, rose to 25.7% in 2023.

But Swiss Re noted that a key driver of this was the fact 2023 saw a high proportion of severe convective storm losses, especially in the US, which is a peril and region that is relatively more insured than others.

“The past 10 years have seen improvement in global natural catastrophe insurance resilience. However, the key driver has been a strong rise in advanced markets resilience, which increased to above 38% in 2023 from around 35% in 2013. In emerging markets, resilience is typically still extremely low, and regions are almost entirely unprotected from natural catastrophe risk,” Swiss Re’s sigma team explained.

There is a significant dispersion in how resilient and protected by insurance countries are from natural catastrophe events, with some countries such as France, Denmark and the UK indexing above 80% resilient, but the United States down at 39%, and other countries as low as 5%.

Demonstrating the continued opportunity to deliver more catastrophe risk capital to support the needs of country’s with high protection gaps, the United States had a significant US $119.8 billion nat cat protection gap in 2023, while China had US $59.8 billion of the global total, Japan US $29.6 billion and the Philippines US $19.1 billion.

Swiss Re noted that global crop resilience is an area of opportunity for the insurance and reinsurance market, with a need to strengthen it further and re/insurance able to play a role.

In addition, the research suggests a growing role for innovative risk transfer arrangements such as those using parametric triggers to help in driving global crop protection higher.

While at the same time, more crop reinsurance coverage is also needed to support expansion of programs and to cover more critical global crop production.

On a more cautionary note, Swiss Re also highlighted that rising natural catastrophe and weather insurance losses are driving prices higher, which can have the effect of widening the protection gap further still.

“So far there has been little evidence that a lack of affordability of property catastrophe insurance is jeopardising resilience gains, but it is yet to be seen if this remains so in the future,” the reinsurer said.

Which speaks to the need for more efficient catastrophe risk capital to help in provision of the reinsurance needed to support primary insurers as they adapt to the nat cat reality we see today.

So, while there may be signs that more protection is available today and that is positive for the future, it appears more capital and capacity, as well as use of innovative risk transfer structures, may be required to meaningfully narrow these gaps.

Nat cat gap expands 5.2% to $385bn, but protection more available: Swiss Re was published by: www.Artemis.bm
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Porch Group, the owner of insurer Homeowners of America Insurance Company (HOA) which was impacted by the Vesttoo reinsurance letter of credit (LOC) collateral fraud, has responded to broker Gallagher’s motion to dismiss the legal case Porch had raised, saying it believes the company failed to satisfy the obligations of their contract.

Porch has agreed with the motion to dismiss its complaint against parent Arthur J Gallagher, but persists with its complaint against reinsurance broking arm Gallagher Re.

To recap for you, in May we reported that Porch Group had launched a lawsuit against broker AJG and its Gallagher Re unit, claiming the administration of reinsurance related to a transaction that was impacted by the Vesttoo letter of credit (LOC) collateral fraud had been “grossly mismanaged”.

Prior to that case being launched, Porch had already entered into settlements related to the Vesttoo fraud with a number of parties, as it had been one of the cedents most affected by the collateral turning out to be forged.

The Vesttoo fraud saw the use of reinsurance collateral promises from the insurtech, backed by fraudulent letters of credit (LOC) that turned out to have been forged, lacking substance and had no real backing from capital providers and the investors supposedly behind them are thought to be non-existent.

As a result, cedents such as Porch have in some cases turned to the reinsurance broker’s behind deals that involved Vesttoo, as they looked to secure financial compensation for the damages incurred due to the fraud.

Porch has already agreed a $30 million strategic arrangement with Aon, that included releasing all claims related to the Vesttoo fraud that it had against the broker, and it filed a separate and ongoing lawsuit against China Construction Bank.

As we later reported, Gallagher responded to the lawsuit and complaint made by Porch, urging the Texas court, where the lawsuit was filed, to dismiss the petition “in its entirety and with prejudice.”

Gallagher noted that AJG was not a party to the reinsurance contract in question, which Porch has now agreed to in dropping the parent from the lawsuit.

But the reinsurance broker also claimed Porch’s lawsuit failed to state a claim, and fell “well short of the plausibility threshold,” while stating that reinsurance contract language backs up Gallagher, not the plaintiff.

Gallagher Re was not obliged to seek evidence that China Construction Bank, the bank named on the fraudulent letter of credit, had agreed to assume the risk related to the funding of the reinsurance agreement, the broker stated.

Which Porch has now responded to.

Porch said, in objecting to Gallagher’s motion to dismiss the case, that, “Gallagher failed to satisfy its most basic obligations under the parties’ contract. After Gallagher collected millions of dollars in fees from HOA and assured HOA that it had reinsurance backed by a valid letter of credit for over $200 million, HOA discovered the purported reinsurance was completely illusory.

“In breach of multiple contractual obligations, Gallagher had failed to verify— or conduct any reasonable due diligence into—the validity of the letter of credit. For years, it had ignored red flags suggesting something was amiss. As a result, Gallagher was apparently clueless as to the truth: that there was no money to back up the reinsurance policy. Put differently, there was no reinsurance at all.”

Urging the court to deny Gallagher’s motion to dismiss in full, Porch said that its subsidiary HOA had adequately stated three breaches of contract by the reinsurance broker.

The first being that Gallagher Re failed to obtain written confirmation from China Construction Bank (CCB), as an “assuming reinsurer,” of its agreement to assume the reinsurance risk in question, breaching section 5 of the contract between the parties.

The second alleged breach is of section 11 of that contract, where Porch claims Gallagher violated its duties as a reinsurance broker under Texas common law and the Texas Insurance Code, notwithstanding its obligation to “[c]omply with U.S.” law and “any other applicable economic . . . laws.”

Porch also claims a breach of contract section 13, which required Gallagher to provide reinsurance servicing duties, including administering all reserve funding. But Porch states that, “Far from administering the reserve funding for HOA’s reinsurance in a customarily diligent manner, Gallagher assured HOA it could allow $25 million of HOA’s money to leave its segregated reinsurance account because there was a valid letter of credit in place to fully fund the account—when there was no letter of credit at all.”

Porch goes on to say that, even if there were a basis for “Gallagher’s self-serving interpretations of these provisions,” that “the only conclusion the Court could then draw would be that the contract’s language is ambiguous and the parties’ intent must be determined by a factfinder.”

A separate argument made by Gallagher, that the case should be dismissed because the source of the fraud Vesttoo and the bank named on forged letters of credit, China Construction Bank, are necessary parties to it “fails at the starting gate.”

Porch claims that this is a breach of contract case, between it and Gallagher and that Vesttoo and CCB were not parties to that contract.

“It is Gallagher—not any third parties—who earned millions of dollars from a contract that it serially breached,” Porch asserts.

Gallagher had also said that, without the joining of these other parties to the lawsuit, Porch could feasibly “double” the recoveries the plaintiff receives, if its legal actions were successful.

On that and the fact the company has other legal action ongoing, against CCB in a New York court and its participation in Vesttoo’s bankruptcy case, Porch states that, “Gallagher will not incur any obligations as a result of the Vesttoo bankruptcy case or the suit against CCB in S.D.N.Y.; it is not a party to either and its contractual obligations to HOA feature nowhere in those cases. Nor is there is any risk that Porch will earn a double recovery. Should Porch recover damages in other proceedings that it seeks to recover from Gallagher prior to entry of judgment in this case, it would simply reduce HOA’s recoverable damages here.”

For these reasons, Porch says the court should deny Gallagher’s motion to dismiss the case in full.

The complexity of the Vesttoo legal proceedings remains evident and the costs to all sides involved continue to mount.

Still, no sign of any criminal proceedings have emerged in relation to the significant loss of value across multiple parties in the reinsurance chain due to the fraud. Nor have any other legal cases been launched, that we know of, against other parties or facilitators to the Vesttoo-linked reinsurance transactions in question.

These cases look set to run and the courts have a challenging job ahead of them. And, as we’ve said multiple times, it remains to be seen how successful legal actions will be, when the damages and financial costs incurred due to the letter of credit (LOC) fraud have spread so widely and blame is not easily assigned, outside of to the fraudsters themselves.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.

Porch rejects Gallagher’s motion to dismiss Vesttoo reinsurance deal complaint was published by: www.Artemis.bm
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Oxbridge Re Ltd., the Cayman Islands based reinsurance company, has announced the successful raising of $2.88 million for its sidecar structure through EpsilonCat Re tokenized reinsurance securities issued by its subsidiary SurancePlus Inc.

Oxbridge Re launched Web3 subsidiary SurancePlus in 2022, with a plan to issue tokenized reinsurance securities using the Avalanche blockchain.

Those tokenized reinsurance securities effectively provide funding to support the firm’s collateralized reinsurance sidecar vehicle Oxbridge Re NS.

The reinsurer raised $2.4 million through the sale of the first series of digital or tokenized reinsurance securities, which were named DeltaCat Re last year.

That $2.4 million of capital was used to support collateralized reinsurance contracts, underwritten via its sidecar structure, Oxbridge Re NS.

The company later reported that the DeltaCat Re series of tokenized reinsurance sidecar securities realised a 49% return for the investors backing them, surpassing both initial and updated expectations.

Earlier this year, the company announced it was beginning its second reinsurance sidecar capital raise through the sale of up to $10 million of EpsilonCat Re tokenized reinsurance securities.

Now, Oxbridge Re has reported raising $2.88 million for the EpsilonCat Re tokenized reinsurance securities issuance, so a little below its projection.

SurancePlus Inc., the digital securities subsidiary of Oxbridge, has completed a private placement of 287,705 Participation Shares represented by the digital tokens, EpsilonCat Re, under a 3-year Participation Share Investment Contract to raise this roughly $2.88 million.

For this latest set of digital reinsurance securities, Oxbridge Re said that the targeted return will be 42%.

The company said the strong 49% return from the previous DeltaCat Re issuance “underscores the potential of digital innovations in reinsurance and sets a positive precedent for future offerings like the EpsilonCat Re token.”

The EpsilonCat Re Tokens were sold to accredited investors in the United States under Rule 506(c) of Regulation D and to non-US investors pursuant to Regulation S of the US Securities Act 1933, as amended.

In addition today, Oxbridge Re announced that subsidiary SurancePlus has signed a partnership agreement with digital asset management specialist Zoniqx, who itself has announced a partnership with Ripple and PwC as part of their Tokenization & Digital Assets Scale program.

“This collaboration aims to further expand the footprint of SurancePlus as it revolutionizes the reinsurance industry by leveraging blockchain technology to tokenize reinsurance contracts and facilitate their deployment on blockchain ecosystems,” the company explained.

Jay Madhu, President and CEO of Oxbridge Re, said, “Last year, SurancePlus incorporated digital innovations and Web3 insights, democratizing access to reinsurance as an alternative investment. We believe we were the first publicly traded company to raise capital for catastrophe reinsurance risks through the sale of tokenized reinsurance securities.

“Building on that success, we are delighted to have partnered with Zoniqx and we believe their state-of-the-art tokenization and digital asset lifecycle management offerings will also further enhance our RWA Tokenization and Web-3 capabilities. We have also closed our 2024 EpsilonCat Re offering and are targeting returns of approximately 42%’’.

Co-Founder and CBO of Zoniqx, Sanjeev Birari, added, “This collaboration with Oxbridge Re and SurancePlus marks a significant milestone in advancing RWA tokenization. By leveraging our state-of-the-art TALM system and the DyCIST protocol, we are showcasing the reliability and versatility of our asset-agnostic technology in the reinsurance industry. Partnering with a listed NASDAQ company like Oxbridge Re speaks volumes about the robustness of our solutions. This partnership enhances transparency, security, and efficiency in the tokenization of reinsurance securities, validating our vision and unlocking new opportunities for investors. We’re thrilled to bridge traditional finance with digital ecosystems, reshaping the future of digital asset management and driving accessibility in financial markets.”

As we recently reported, a new ILS focused investment manager named Members Capital Management Ltd. is launching with a mission to (re)diversify sources of reinsurance capital using digital and tokenized assets.

The strategy of leveraging digital asset technology and architecture to facilitate fractionalised investments into reinsurance-linked securities is gaining traction, it seems.

It is an intriguing way to both modernise the matching of capital with insurance risk and also tap into differentiated sources of funding for ILS strategies.

Finally, as we had also reported earlier this year, Oxbridge Re announced that it is considering “strategic alternatives” for the business, including a potential sale or merger, various capital actions, or even spinning out its tokenized reinsurance investments unit.

View details of many reinsurance sidecar transactions in our directory.

Oxbridge Re raises $2.88m for EpsilonCat Re tokenized reinsurance sidecar securities was published by: www.Artemis.bm
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A new Bermuda-based asset manager has emerged named Members Capital Management Limited with well-known insurance-linked securities (ILS) industry executive Ben Fox in the Chief Investment Officer role and a mission to (re)diversify sources of reinsurance capital using digital and tokenized assets.

Members Capital Management Limited has been licensed and is authorised and regulated by the Bermuda Monetary Authority and seeks to “provide greater access to institutional-grade investment opportunities while meeting the needs of a prosperous future,” the firm’s LinkedIn page states.

Lloyd Wahed, an executive with a record of scaling regulated asset managers, fintech companies, and digital asset enterprises is Members Capital CEO, Co-Founder & Managing Partner.

Wahed has a background in fintech and a range of digital asset venture companies and has also been an advisor at Nayms, a fully-regulated marketplace for on-chain insurance that provides cover for digital asset-related risk, leveraging blockchain and smart contract technologies to deliver a platform for the trading of digital insurance-linked securities (ILS).

Patrick Barrett is COO and also a Co-Founder at Members Capital Management, coming with a track record in cross-border deal-making, business growth, and investor solutions, with a Partner level legal background, as well as venture and fintech investing.

Ben Fox, most recently Head of Strategy and Risk at Hiscox ILS, but also with a background that includes ILS investing at Ontario Teachers’​ Pension Plan and working as a financial specialist with a focus on catastrophe bonds, ILS and disaster risk financing at the World Bank, has taken the Chief Investment Officer (CIO) role at this startup asset manager.

Jeremy Williams, a compliance and security expert with a background in the AML and financial crime functions of HSBC Global Banking and Danske Bank, and as the global head of KYC at Wise (formerly Transferwise), is Members Capital Management’s Head of Compliance.

The goal of Members Capital Management, according to the firm’s new website, is to “unlock new sources of capital by bridging digital and tokenized assets into reinsurance.”

The aim is to deliver attractive risk-adjusted returns that are uncorrelated, as is the mandate of ILS and reinsurance capital investment managers, with a focus on diversified sources of return, generated via effective risk modelling and allocation strategies.

The firm will target well-understood, well-priced, and well-structured areas of the ILS market, the company says, to provide access to institutional-grade investment opportunities “while meeting the needs of a prosperous future.”

The technology and on-chain focus is clear, with partnerships established with digital asset specialist Coinbase, insurance manager and fiduciary service provider Apex Group, and Nayms, the aforementioned on-chain risk transfer market specialist.

Strategic details beyond the initial marketing materials that have become available are not currently known, but we understand an official launch is coming soon and look forward to understanding more on the new venture.

Breaking ground in ILS with the use of digital asset technology and infrastructure, as well perhaps as capital currently stored in digital assets, has often been discussed in our coverage over the years.

But a concerted effort to leverage these techniques to offer diversifying ILS and reinsurance investment opportunities has yet to emerge, to-date, so this will be an interesting new venture to follow.

Members Capital emerges to (re)diversify ILS capital with Ben Fox as CIO was published by: www.Artemis.bm
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Schroders Capital, the private markets business of Schroders Group and manager of around $5 billion of insurance-linked securities (ILS) assets, has collaborated with German reinsurance firm Hannover Re on a pilot tokenisation project, designed to enhance the way ILS assets are invested and managed.

Working alongside Hannover Re, the initiative has been tested by Schroders on an internal-only basis and successfully enabled reinsurance contracts to be tokenised and traded on a public blockchain platform using smart contracts.

Each token represents a share in a portfolio of reinsurance contracts, which the asset manager says shows how ILS funds may invest via a digitalised investment infrastructure and eco-system in the future.

The process of tokenising these reinsurance or ILS contracts has, with the consistent oversight of investment professionals, allowed a number of time-consuming processes to be automated, Schroders noted.

As an example, the pilot group could streamline the investment process by automating subscriptions and reducing settlement times as well.

In addition, by integrating key catastrophe insurance data sources into the smart contracts, Schroders said that payments to the appropriate recipient could be automatically triggered, if qualifying natural disaster events occurred, such as US hurricanes or earthquakes, or European windstorms.

This is one of the areas that smart contracts and so-called oracles can come into their own, in the automated use of verified data to trigger or activate contracts. These are most readily applicable to parametric structures, including industry-loss triggers, but there is also relevance for indemnity, as verified proof of ultimate net loss could be a data point that would apply to a smart contract and checked against pre-defined attachment and exhaustion points. In this case we’re told industry-loss indices were used for this pilot.

Stephan Ruoff, Co-Head of Private Debt and Credit Alternatives, Schroders Capital, commented, “The success of this pilot showcases the immense potential for enhancing transparency, streamlining investment processes and improving client experience in the reinsurance sector. It paves the way for a more interconnected and efficient digital ecosystem, and we are looking forward to exploring the broader application to wider investment scenarios and clients.”

Henning Ludolphs, Managing Director Retrocession & Capital Markets, Hannover Re, added, “This proof of concept was a great opportunity to understand the capabilities of blockchain technology when applied to the reinsurance market. With strong governance and embedded compliance in place, the pilot also showed that the regulatory and operational risks around blockchain are similar to those of other market transactions. While this is an emerging technology, we anticipate more appetite for blockchain-enabled investments in the future, and this pilot prepares us well to evolve our approach to generate further retrocession capacity via a different source.”

Schroders Capital also said that the tokenised ILS pilot project demonstrated the possibility of an improved client experience, enhancing accessibility of ILS assets by allowing tokens to be held in investors’ own digital wallets alongside their other digital investments.

As well, the fact the pilot used a public blockchain has also enhanced transparency, while still allowing appropriate governance and controls to be applied, with every step having consistent oversight from investment professionals.

This tokenised ILS pilot project builds on Schroders Group’s commitment to innovation and leadership in digital assets, having joined the Monetary Authority of Singapore’s Project Guardian last year, and participating in the first ever GBP Digital Bond issued by the European Investment Bank.

This tokenised ILS project was a result of over one year of collaboration between Schroders, Hannover Re and the i.AM Innovation Lab, under the oversight of the Guernsey Financial Services Commission (GFSC).

Schroders Capital also said that it will use the findings of this proof of concept to explore further tokenisation opportunities in the reinsurance market.

It’s great to see such large names behind an innovative project like this, as the digitalisation of risk, capital and data flows in insurance-linked securities (ILS) is something we’ve been passionate about for a couple of decades now.

Back in 2016 we wrote about the potential for use of blockchain technology, including oracles and smart contracts for digitalised contracts and automated payouts.

We explained then in 2018 that more use-cases were likely to emerge, as blockchain, or smart contract technology matured and the insurance-linked securities (ILS) market become more comfortable with it.

There was a pilot blockchain catastrophe risk trading initiative by Nephila and Allianz in 2016, and as long ago as 2017 the first issuance and secondary private cat bond trade occurred on a blockchain as well.

It’s taken a long time to get greater institutional acceptance, but tokenisation and the digitalisation of financial and physical assets, using smart contracts and blockchain tech, is now gaining much broader recognition.

It’s great to see institutional names like Schroders and reinsurance names like Hannover Re pushing forward the innovation envelope, as efficiency and transparency, as well as improved user experience, can only help to enhance the ILS markets ability to grow and provide improved services and more responsive risk transfer.

Schroders Capital & Hannover Re collaborate on tokenised ILS pilot was published by: www.Artemis.bm
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