Our thesis was that InsurTech works through a 3 layer stack:
On Monday we interviewed somebody in Zurich who helped us see that it is really a 4-layer stack.
Most people understand layers 1 and 2. This is where you interact as a customer. The agents are being replaced by digital automation. This is the simple comparison and matching function that Fintech is ideally suited for. The question is how you build value before the Internet giants (GAFA and BAT) move in?
Therefore, the limelight has been on P2P Insurance and whether that is a game-changer. For a debate on that subject, please go to this thread on the Fintech Genome.
Sitting down to talk with Joe Taussig in Zurich on Monday brought out the possibility that the disruption is in Catastrophe Bonds aka Cat Bonds. Indeed, this interview made me revise the 3 layer stack thesis. It really is a 4 layer stack, with the Capital Markets as layer 4.
Joe Taussig is the founder of MultiStrat Holdings.
Lots of people understand layers 1 and 2. A few people understand layer 3. Only a really small number of people properly understand the intersection between layer 3 and layer 4.
Joe Taussig is one of those few people. .
It was an honor to talk to Joe. Talking to the smartest people in the market is one of the privileges of what we do at Daily Fintech.
How MultiStrat Holdings works
Their customers are Hedge Funds. Hedge Funds have an asset liability mismatch problem. Investors in Hedge Funds want liquidity, yet Hedge Funds invest in assets that have long term liabilities and place bets that may take a while to pay off. Getting redemption demands is a problem for Hedge Funds.
Joe Taussig saw how Warren Buffet used Reinsurance and then Insurance (Geico) to get a low cost of capital and permanent capital (there is no redemption demand in equity) and used that knowledge to offer a service to Hedge Funds. Without going into the mechanics of how they do this (check this video if interested) suffice to say it involves using Reinsurance and Insurance.
Redrawing the stack with 4 layers
Below Reinsurance in the stack are the Capital Markets. This takes one back to the early history of Insurance when Lloyds “names” were individual investors who got great returns in return for offering unlimited liability.
That worked great…until a catastrophe happened. From this were born Cat Bonds (Catastrophe Bonds) and Insurance Linked Securities (ILS). In layman’s terms a catastrophe is an event that statistical modelling did not predict properly – think fierce weather, cyber attacks, terrorism etc. We have touched upon this subject here. In this post we looked at how Blockchain is being used for Catastrophe Swaps.
As seen from the Insurance layer of the stack, MultiStrat Holdings is using the deep resources of the capital markets to lay off the risk of these events. Seen from the capital markets layer of the stack, MultiStrat Holdings is offering permanent capital.
The Reinsurers are well capitalised, but are nothing compared to the deep pools of the capital markets. Savvy investors know there is no such thing as bad risk, just mis-priced risk. So capital markets offer deep capital pools and risk pricing.
Understanding Insurance as a 4-layer stack is key to understanding how and when disruption will hit this huge business.
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