Climate risk entrepreneur Eckert plots hurricane futures IFEX trading in 2023

Reinsurance and climate risk entrepreneur Neil Eckert is aiming to bring back electronically traded hurricane products in time for the 2023 wind season, The Insurer can reveal.

IFEX (Insurance Futures Exchange) products traded between 2008-11 and replicated traditional traded industry loss warranties (ILWs) for US wind based on parametric loss parameters. Traded then on the Chicago Climate Futures Exchange (a CFTC designated contract market and part of Climate Exchange PLC), these contracts provided a derivatives market for live cat pricing and trading.

ICE’s acquisition of the Climate Exchange, combined with the lack of hurricanes and soft market conditions, resulted in the products ultimately being delisted after a few years of traction. But a decade later and market conditions have changed significantly, as has the use of alternative products.

Eckert – who launched the Bermuda “class of 2020” reinsurer Conduit Re in December 2020 – declined to go into details but confirmed his intentions via his climate risk business within IncubEx.

Speaking at the Rendez-Vous, he told this publication: “Yes, it is true IncubEx is planning to relaunch IFEX next year. It does depend still on certain milestones being met but we think IFEX would bring capacity and liquidity to the cat market that is facing a very uncertain 2023.”

The move comes after what has been described as the most challenging mid-year renewal for Southeast US property cat reinsurance in many years, where capacity was unavailable at any price for some buyers.

The capacity crunch was most extreme in Florida, where despite the absence of major hurricane activity reinsurance costs surged after years of losses and a dramatically deteriorating litigation-driven claims environment.

“IFEX would bring capacity and liquidity to the cat market that is facing a very uncertain 2023”

That led to demand for alternative products, including low-attaching state-specific ILWs.

One of the themes of this year’s Rendez-Vous – the first since 2019 – is the challenge faced by the property cat reinsurance market in part because of the sharp contraction of aggregate retro capacity at 1 January. A number of reinsurers have either exited property reinsurance altogether (Axis) or scaled back significantly, although others have come to Monte Carlo indicating a willingness to write more business albeit with a strict eye on exposure limits.

When relaunched, IFEX will be listed on a regulated exchange (subject to regulatory review) and also provide clearing to ensure liquidity and reduction of counterparty risk.

The past 15 years have seen a number of initiatives to electronically trade cat capacity but they have met with limited success due in part to the ready availability of traditional UNL retro capacity (until recently) and static ILWs.

Parametric payout

Loss warranties provide a parametric payout dependent upon a certain insured loss threshold being met for a defined peril, such as a $10bn+ US wind event in a particular year. They can be written as a reinsurance contract or a derivative. An independent loss agency is used to calculate the loss.

Although they don’t provide the same back-to-back risk protection as a UNL reinsurance/retro contract, their simplicity and price transparency has made them a durable segment of the property retro market. Typically, buyers use them to fill gaps when they cannot buy retro or reinsurance cover in the traditional market or via ILS.

The traditional ILW market is dominated by a small number of brokers, including market leader Guy Carpenter. The Marsh McLennan-owned broker claims a 25-35 percent market share and trades from its London desk, run by Barry Law and David “Larry” Rothstein. Other significant market-makers include TigerRisk, with the firm recently strengthening its bench with the notable hire James Troughton from Gallagher Re, while Lockton Re is also active having built out in retro, including the arrival of Bob Bisset.

Brokerage is typically in the 5 percent range and the intermediaries supply pricing sheets with up-to-date indicative pricing for loss perils.

The market is opaque, however, with brokers reluctant to share their pricing knowledge widely. According to AM Best, rates are estimated to be up 40-50 percent in the past year while capacity is also up in the region of 20-25 percent.

Regular sellers of ILW capacity include Arch Re, RenaissanceRe, DE Shaw and Aeolus, together with a small number of Lloyd’s syndicates. However, a successful exchange-traded product would open the potential for much greater liquidity via the capital markets.

In 2021, loss analysis firm Perils estimated around $3bn of European/international cat perils were exchanged via either ILWs or cat bonds. The US risk market, however, is substantially larger and with it the established practice of live cats, which sees loss warranties traded on a particular hurricane before it makes landfall. The overall size of capacity for US/international ILWs is estimated in the region of $3bn-$7bn.

Eckert’s IncubEx creates innovative exchange-traded products and technology solutions, focusing on designing and developing new financial products in global environmental, climate risk and related commodity markets.

In 2021, it acquired the insurtech Insurwave from Shackleton Holdings Limited, a wholly owned EY entity, and it has since been repositioned as a digital data platform for complicated risk placements. It is expected to be further integrated into climate market offerings, including carbon emission markets.

At the time of the Insurwave deal, Eckert commented that insurance and climate risk were now “inextricably linked”.

“The sector will continue to see expanding opportunities as a result of climate change with increasingly complex supply chain risks in the corporate and captive market,” he said.

“Our clients will need solutions to manage their transition to net zero across insurance and financial markets and it is critical that we provide the technology to focus on connecting them with brokers and the markets,” Eckert explained.

The Insurer comment

There have been many false dawns but will 2023 be the year that exchange-traded cat capacity comes alive?