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Technology

New Nasdaq Risk Modelling Solution Serves Catastrophe Risk Management and Analysis Challenges in the Insurance Industry and Beyond

The insurance industry is at a pivotal point of transformation, ripe for innovation. Matthew Jones, Head of Catastrophe Risk Products, discusses @Nasdaq's upgraded service, Nasdaq Risk Modelling for Catastrophes, and the future ahead in the industry.

Nasdaq’s Market Technology business is the B2B commercial technology organization responsible for delivering technology and services across the capital markets transaction lifecycle, to investment banks, brokers, marketplaces, clearinghouses, central securities depositories and regulators. Increasingly, Nasdaq is serving organizations outside of the capital markets - like the insurance industry. Today Nasdaq announced its upgraded service, Nasdaq Risk Modelling for Catastrophes, which enables insurers, reinsurers, brokers and corporates to unlock access to a broad range of best-of-breed catastrophe risk models from a number of providers through a single service, increasing ease of model accessibility and strengthening risk management programs. While currently focused on natural catastrophes, with models spanning earthquakes, hurricanes, floods and a number of other perils, Nasdaq aims to roll out the service more broadly to cover other insurance-related risks in the future.

Matthew Jones

We sat down with Matthew Jones, Head of Catastrophe Risk Products, to discuss the announcement and the future ahead in an industry dealing with climate change and increasingly more unpredictable peril-related events.

What trends are you seeing from a technology perspective in the insurance industry?

While technology has disrupted almost every major industry over the last 30 years, including financial services, historically, the insurance sub-sector has been slower to change.  Many firms have legacy systems that use proprietary technology unable to cope with modern demands - the onslaught of structured and unstructured data, increasing regulatory scrutiny and snowballing requests from customers - none of which can be addressed due to the high cost of running legacy technology, and slim budgets for innovation. The costs of doing business in this environment are high, and without change, firms in the insurance industry will have a hard time to keep up with the pace of demands being placed on them by clients, partners, regulators and other participants in their ecosystems.

Encouragingly, however, there are signs of innovation becoming more widespread. Advancements in InsurTech and translation of FinTech capabilities to the insurance sector are reducing the market barriers and making it easier than ever before for re/insurers to adopt new technologies and enter new markets. The existence of the Oasis Loss Modelling Framework (Oasis LMF), for example, is driving a massive amount of positive change by providing a single open source framework that developers and risk modellers can write to, offering market participants increased harmonization across the industry. We are very supportive of the Oasis LMF: in 2018 we led a project to establish a suitable input format for Oasis (the Open Exposure Data (OED) format), in 2019 we participated in an Oasis-led project (part of the 3rd cohort of the Lloyd’s Lab programme) to define a future Oasis output format (the Open Results Data (ORD)). More recently Nasdaq developers have participated in workshops and fed into the Oasis open source framework to benefit the entire community.  The Oasis LMF has matured substantially since its inception with the latest version offering new levels of performance, scalability and enhanced functionality such as support for a wider range of models, flexible reporting output and broader modelling for financial structures.

How are catastrophe risk management practices changing?

From a risk management perspective, we are also seeing firms becoming more open to moving away from incumbent vendors and taking on more of a ‘best of breed’ strategy to ensure that they are using the most qualified models available for each specific peril. In the past, before the Oasis LMF and our Risk Modelling solution were available, the insurance industry has traditionally leveraged a couple of major incumbent vendors for catastrophe risk modelling, with proprietary technology and platforms requiring heavy on premise installations. This has made it difficult for other vendors to make headway and for firms to implement a multi-model strategy. In this type of set up, it was a headache and distraction for customers to implement models from several different providers, and manage the operational burden associated with multiple vendor relationships, contracts, implementations and integrations. That is where the Nasdaq Risk Modelling service, in combination with Oasis LMF and our 9 model providers, really shines. We want to encourage the incredible innovation in catastrophe risk management we see from a lot of risk modelling vendors, many from the academic world, and make their models, data and analytics easily available to the industry to help improve risk management.

Great segue. Let’s talk about the genesis of the new Nasdaq Risk Modelling service.

Nasdaq Risk Modelling is not a completely new solution. It is a technology – formerly known as ModEx - that was acquired by Nasdaq in 2019. The technology was established in 2017 and was developed because of the pain points I mentioned above. We realized that insurers and re-insurers could benefit from an ecosystem partnership style of approach, where through a single platform (us), they could subscribe to the model providers of their choosing, contract and pay a single provider but still get the benefits of diversifying their risk management programs through the ability to use multiple models, layer them side by side and conduct more robust analyses.  We currently have 9 clients using the service, including Guy Carpenter, Renaissance Re and Chubb. Through our transition into Nasdaq, we have been able to advance our product offering moving it into a cloud environment, releasing a new interface, allowing automation via REST APIs, increasing the robustness, and support of the offering and focusing expansion efforts to help scale our ability to distribute this service globally.

What is different to your approach for catastrophe risk modelling?

The biggest thing for us is that we provide a truly independent catastrophe risk modelling service that brings the insurance industry choices that were not in reach before. As I mentioned, instead of being locked-in with a single vendor, we unlock access to a broad array of specialized risk models, hazard data and analytics provided by multiple model vendors in a single, fully-managed platform.  We currently have 9 model providers on our platform: Ambiental, ARA, CATRisk Solutions, COMBUS, CoreLogic, Fathom, Impact Forecasting, JBA Risk Management and Risk Frontiers. We can also offer hazard data from many of the above vendors and UCL, and analytics via TigerEye. We expect this list of model vendors and other eco-system partners to increase this year. Through the platform, we cover peak industry perils such as US hurricane, US earthquake, Japan earthquake and European windstorm. We also cover perils where the model coverage has historically been under-served such as flood (globally) and earthquake in Africa and the Middle-East. In addition we have a wide range of Australia peril models from multiple providers. Our model coverage will continue to increase and we see future opportunity to expand our service into other underserved areas.

We believe that the Nasdaq Risk Modelling for Catastrophes (NRMC) approach is truly unique and one that will help the insurance industry capitalize on technology disruption, rather than being disrupted by it.

Insurance is not capital markets. Why is Nasdaq investing so heavily in this space?

We believe there is tremendous opportunity to leverage capital markets technology principles – high-volume, high-speed messaging, complex data management, robust risk management and oversight, and excellence in fair price discovery and asset transfer – to disrupt the insurance industry in a positive way and accelerate its transformation to a more innovative, forward-thinking sector.

In 2018, we launched our ‘New Markets’ initiative, focused on extending our core competencies in market technology (which we provide to 120+ marketplaces in all corners of the globe), data and analytics to disrupt other industries, like insurance, where we already see positive indications of innovation.  While we were already supporting trading in insurance-linked securities at the Bermuda Stock Exchange, there was a tremendous opportunity for Nasdaq in the acquisition of Cinnober, and thus ModEx, to move further into the insurance sector by bringing innovation and more efficient business models to re-insurers, insurers and brokers. As mentioned, the costs of doing business in this environment are high, and without change, firms in the insurance industry face the genuine possibility of their operations and growth projections being compromised by legacy systems that can no longer meet the increasing demands of regulators and clients. The situation is compounded by further complexity in today’s world while we are dealing with more peril-related risks. We believe we are in a great position to help companies pursue their technology transformation while better identifying, mitigating and managing their risks by leveraging a broader, deeper set of best-of breed models to strengthen risk management.

Overall, we are undoubtedly approaching a pivotal moment in the insurance industry, which is ripe for change. We are excited to drive innovation in this field and truly believe that our technology capabilities and expertise can play a critical role in the transformation of such an important space.

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