London-based company city3k has launched an online marketplace it says will transform the global reinsurance industry.
Named Debt Exchange, the site will have particular relevance to the Asian region, according to David James, managing director for Asia.
Debt Exchange has seen trading volume of between $250 and $300 million on a global basis since it first launched the platform in Europe and is looking to target 1-2% of Asia's risk exposure in the first 12 months, growing to 10-20% in the following 24 months.
Companies exposed to reinsurance debt risks, and those keen to take these on, can trade using a service that city3k says aims to "electronically address the information void and privacy issues with regards to exposed insurance related debt risk faced by companies." Launched in Singapore in April, the exchange focuses on insurance related risk.
The economic environment of the region since 1997 has contributed to Asia having more than its fair share of global debt problems, and with this trend still on the increase, James says that setting up operations in Singapore was an obvious decision. And as the city-state is the hub for the traditional re-insurance business in Asia (ex-Japan), this was the place the company chose to base its efforts to transform the way the industry works.
City3k say that Debt Exchange will have significant cost and time saving implications both for active companies pursuing unpaid premiums or claims, and for companies in "run-off" struggling to collect claims from reinsurers. Insurance-related debt trading has traditionally relied on a face-to-face information channel. But Debt Exchange now allows registered users to post requests for help and assistance with the potential pooling of advice, experience and contacts with others in the same position.
Another possible kind of trade is breaking down the traditional barriers between the insurance and capital markets as banks are selling distressed debt to insurance companies looking to decrease their payouts.
By way of example, say Bank of America is holding Company A's paper with a face value of $12 million, but the company has defaulted so the bank is willing to offload its holdings for $1 million. If that offer is posted on Debt Exchange an insurance company might consider buying it because it has insurance cover of $15 million on the company.
Now when Company A makes a claim for that amount, the insurance company can net off its exposure against claims, reducing its payout by the face value of the debt – that is, $12 million -- for an investment of only $1 million.
The numbers of these kinds of transactions should continue to grow, says James, exacerbated not only by the number of distressed companies in Asia and other parts of the world, but also the new Basel accord that encourage banks to hold good credit and dispose of bad.
James says city3k will be launching further e-commerce initiatives for the reinsurance industry over the coming months.
