About the Client:

Our customer is a globally recognized reinsurance group, ranking among the largest worldwide. Insurance-linked securities (ILS) play a pivotal role in their strategic operations, serving as a high-growth area due to their unique market characteristics and investment potential. The customer acts as a key facilitator in the ILS market, helping cedents with catastrophe bond transactions and enabling investors to access reinsurance risk in collateralized form.

Market Context:

Insurance-linked securities provide investors with high-yield debt options that hinge on specific insurance-related events, such as natural catastrophes. Unlike traditional asset classes that correlate with economic or geopolitical conditions, ILS is influenced by natural events, offering a diversified investment vehicle. As this sector anticipates significant growth, efficient and accurate management of collateral related to these securities is critical.

The Challenge:

With an ILS portfolio in the billions, the customer needed an advanced system to ensure meticulous daily valuation and risk management of collateral accounts. Like other companies holding insurance-linked securities (ILS), the firm needs to mark them to market to reflect their current fair value in financial reporting. This is because ILS are financial instruments whose value is tied to the performance of underlying insurance contracts, particularly those related to catastrophic events. Marking to market ensures that the company's balance sheet accurately reflects the value of these assets, considering potential losses or gains due to changes in the market conditions or the occurrence of insured events.

The customer’s existing process, reliant on monthly valuations and a manual, spreadsheet-based process, was insufficient given the increasing complexity of their portfolio. The company faced challenges in efficiently managing semi-liquid assets and dispersed data across various custodians, prompting a need for a robust, automated solution.

The Solution: Broadridge's Technology Implementation

Broadridge addressed these challenges by offering:

1.  Daily Valuation Automation - Replacing manual, monthly assessments with automated daily valuations to provide up-to-date insights and mitigate risk.

2.  Operational Efficiency - Streamlining the collateral monitoring process by integrating data from multiple custodians and automating what were previously labor-intensive tasks.  Notably, all securities are held away by a variety of custodians. Without any work on the part of the customer, Broadridge sourced securities data via an interface and consolidated it for use by the solution on a daily basis.

3.  Pricing and Risk Monitoring – Providing daily prices for the securities in question to drive accurate and regular monitoring of risk versus the value of underlying portfolio securities, and giving the customer the ability to take corrective action quickly if required.

4.  Scalability and Growth Enablement - Supporting the customer’s strategic growth ambitions in the ILS space by ensuring scalable and reliable risk management solutions.

5.  Enhanced Risk Management - Delivering comprehensive dashboards and configurable features to give stakeholders accurate, real-time views of exposures and automated risk management procedures. Additionally, although not currently used by the customer, our Stress Testing Module can assist in simulating scenarios to predict potential risks.

How the Solution Works:

Marketable securities, often pledged as collateral to secure risk, are subject to market forces, leading to frequent price fluctuations. Particularly during periods of volatility, daily pricing of these securities is crucial for accurate portfolio valuation and risk assessment. Obtaining timely and up-to-date valuations, however, can be challenging when securities are held across multiple custodians, as was the case with the customer.

Once the customer declared the securities in question, our solution enabled the automatic retrieval of securities data. The solution’s pricing module provides daily valuations using selected, recognized market sources. The Monitoring Module then evaluates these valuations against predefined ratios set by the customer to ensure the collateral value sufficiently covers the associated risks. Should a valuation breach a predetermined threshold, the system generates an alert, prompting corrective action.

Additionally, the solution facilitates predictive analysis and forecasting through its Stress Testing Module. Users can leverage predefined or custom scenarios to simulate changes in collateral conditions, such as a decline in specific security types. This functionality enables proactive assessment of potential future risks and the formulation of mitigation strategies. The solution’s daily operations maintain accuracy and efficiency by utilizing existing risk values, securities valuations, and ratios.

Implementation Highlights:

• Pioneering implementation of our solution outside North America, marking a significant achievement in the reinsurance sector.
• Our solution’s ability to handle complex data ingestion and provide advanced scenario analysis was crucial in gaining the customer’s confidence.

Within a 12-month engagement period, the customer transitioned to a more sophisticated risk management framework that went live in early 2022.

Outcomes:

The integration of Broadridge’s technology resulted in an enhanced ability for the client to manage its ILS collateral efficiently, reduce manual processes, reduce risk and provide greater transparency across its operations. Our strategic partnership underscores a novel application of our technology within the reinsurance industry, setting a precedent for future initiatives.

Conclusion:

The customer’s collaboration with Broadridge exemplifies how advanced technological solutions can transform complex and heavily manual financial operations, paving the way for growth and improved risk management in the dynamic and evolving landscape of insurance-linked securities.

Learn More:

To learn how our technology enables efficient collateral management, robust risk monitoring, and scalable growth for insurance-linked securities, please contact Goncalo Vicente at goncalo.vicente@broadridge.com.