Smaller, But More Black Swans
DeFi insurance coming, pushing a pandemic bond and Aeolus' politics (not performance) pays off
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Mother nature isn’t cooperating as insurers struggle with the COVID-19 pandemic.
Natural catastrophe losses from severe summer storms have upended the profitability of several US insurers and its mostly the carriers, and not the reinsurers, that will be picking up the tab.
According Fitch Ratings, more catastrophe losses will land on the balance sheets of carriers than any other third quarter period in the last decade. The rating agency explains that’s because to loss events were too small to breach the reinsurance layer of their capital structure but are able deplete their catastrophe budgets. According to Fitch:
These losses are exclusive of substantial losses incurred in 1H2020 related to the coronavirus pandemic, which are likely to increase further over the remainder of the year. This accumulation of losses is expected to exceed many individual company catastrophe budgets and further pressure full-year 2020 earnings.
An example of the more frequent and damaging catastrophic events is the derecho storm that struck Iowa in August. On Friday the National Oceanic and Atmospheric Agency reported that storm alone caused $7.5 billion damage, making it the second largest loss event (behind Hurricane Laura) and the the single biggest thunderstorm loss in U.S. history.
According to the NOAA:
This derecho caused widespread damage to millions of acres of corn and soybean crops across central Iowa. There was also severe damage to homes, businesses and vehicles particularly in Cedar Rapids, Iowa. In addition, there were 15 tornadoes across northeastern Illinois several affecting the Chicago metropolitan area.
“DeFi” Insurance Is the New Crypto Hotness
A nascent decentralized finance (DeFi) movement is rising out of the crypto currency community and has the insurance industry in its crosshairs.
Over the past several months new DeFi insurance products have entered the market, with names like Nexus Mutual, Mercurity Fintech Holding and SAFE Token. These players often act like traditional captive or mutual insurer, covering risks within their own crypto projects. But unlike captives, they forgo a fronting carrier from the insurance industry.
The entire decentralized finance movement is based off a mistrust of traditional players, and DeFi insurance is no different. According to the “whitepaper” laying out Nexus Mutual’s Smart Contract coverage:
The insurance industry has developed over time from a community-based model to an adversarial one where large institutions dominate. It is also inefficient in many areas leading to large frictional costs being borne by customers. Blockchain technology allows individuals to efficiently transact directly with each other and therefore enables the core insurance entity to be replaced.
Practically, this means DeFi insurers limit their risks to trading issues and security vulnerabilities while also limiting coverage triggers.
According to industry publication Crypto Briefing:
According to the project’s GitBook, so-called “Smart Contract Cover“ would provide users an extra level of safety for events like the DAO hack in 2016. The definition is quite firm about which events would trigger a payout, too. A payout isn’t triggered by a phishing attack or problems created by network congestion, for instance. Likewise, oracles, miners, and entities external to the smart contract are not covered.
Traditional insurers and reinsurers have been attempting to penetrate the cryptocurrency market, with Lloyd’s of London announcing an insurance product to cover online wallets earlier this year.
Risk Reads
Pushing the Pandemic Cat Bond Play
Even if capital market investors fail to purchase a significant portion of the $1.150 trillion of the contemplated PCAT bonds, any portion they purchase would contribute, pro tanto, to reducing the government’s share of risk in controlling pandemic-related harm. That could help, for example, to facilitate Chubb’s proposed public-private insurance partnership
Catastrophe Bonds, Pandemics, and Risk Securitization, Duke University School of Law
Catastrophe Insurer Aeolus Benefits From Singer’s Politics While Returns Lag
Documents show that the Aeolus fund has had a negative 6.7 percent return for the past three years, compared to a 10.7 percent return for the S&P 500 stock market index. The Intercept could not determine Elliott’s exact performance, but it has performed about 5 to 5.5 percent annually for the past eight years, according to documents from the state of New Jersey, compared to 10.24 percent for the S&P 500 over the same time period.
As Paul Singer Donated Million to Republican Governors Association, Public Funds Flowed Into His Hedge Funds, The Intercept
Colorado Wildfire Builds On An Already Record Year
The Colorado blazes also come amid the worst wildfire season on record in California, where well over 4.1 million acres have gone up in flames, destroying more than 9,000 structures and killing 31. The acreage burned this year is more than twice the area in the state’s previous record-worst fire season, in 2018. This year’s fires include that state’s largest, the August Complex, the state’s first “gigafire” on record, at more than 1 million acres in size.
Colorado wildfire erupts amid deepening drought, forcing evacuations in Boulder County, Washington Post