It's a time of transition for Tom Johansmeyer and that's always a good moment to reflect on achievements. The well-known and respected member of the insurance community has played a major part in helping to develop the global risk transfer markets.
Since 2016 he has been leading the team at Verisk PCS, a provider of industry loss estimates and indexes used to gauge the severity of natural and man-made catastrophes, and determine whether payouts are due from reinsurance and retrocession deals.
Departing PCS in May, Johansmeyer's next role is at risk strategy and reinsurance broker, Inver Re as global head of index products, where his ambition is to "take the index market to a new place".
He certainly achieved that at PCS, taking a business focused on the US and Canada into new territories in Turkey, Japan, Asia-Pacific and Latin American, and expanding it into specialty lines such as marine, aviation and cyber.
The process has involved treading a delicate balance between innovation and responding to customer demand.
"We do seek to lead, but that doesn't work when the market's not on board. We were probably three or four years too early on cyber, in terms of monetisation and adoption. We worked hard for little upside initially, but we captured the ransomware losses and the Not Petya attack," he says.
The opposite happened in Japan, where a client came to PCS saying "we need you to do something" after Typhoon Jebi reduced the industry loss warranty (ILW) market from $1bn in limit outstanding to practically zero.
"Within the first year of operation, PCS Japan helped restore about $700m-800m of that," Johansmeyer says. "That's the sort of runaway success you love but you can't count on."
The discussion about which trigger to use for risk transfer deals – an indemnity basis, an industry loss index or parametric – has persisted since the early days of the market.
Public catastrophe bonds – where the data is most transparent – show most cedents continue to choose an indemnity rather than an industry loss or parametric trigger. While the indemnity approach seeks to minimise basis risk (i.e. the risk the payout may not precisely match the loss incurred), it can create additional headaches for cedants and less certainty for cat bond investors.
"A decade ago everyone was rushing to do indemnity, and you'd always hear that 'the days of the index were done'," he says. That changed when reinsurance markets began to harden after 2017's unprecedented wildfires and the triplet of hurricanes Harvey, Irma and Maria in North America.
"There was a large cadre of folks who had developed an aversion to basis risk, simply because they didn't have to contemplate anything beyond the structures they had. They had to get up to speed and understand what was becoming one of the most important forms of risk transfer in the market," Johansmeyer says.
Basing deals on triggers such as ultimate net loss (UNL) creates a lot of work compared with an industry loss index, and the trade-off of basis risk or reporting agent risk in an ILW against the ongoing cost of a UNL transaction is worth it in some circumstances, he argues.
"In cyber, why on earth would you do a UNL where you've got long notice periods, presumed difficulty with notification, disputes over cedant advantage and event definition terms... [If you're writing] a high attaching event cover, do an ILW. If you're doing something that's not supposed to get touched, you're saving yourself a ton of analytical time, resource and frictional costs," he says.
Another concern that emerged after Irma was loss creep. Investors found their capital was trapped in cat bonds as reported losses were continually rising to near or beyond the threshold for payouts. Industry loss indexes were afflicted, but Johansmeyer reports 39 months after the event, the PCS index was settled. "In the UNL market, it's still going. The loss creep is worse outside index," he says.
The passion Johansmeyer brings to his job is echoed elsewhere in his life. Having completed an undergraduate degree in philosophy and history, and an MBA in accounting earlier in his life, he has just finished an MA in global diplomacy at SOAS on the drivers of post-disaster civil unrest. Johansmeyer has also embarked on a PhD at the University of Kent on the role of the cyber insurance protection gap in state level economic security.
He now takes that drive to Inver Re. "I've got a set of skills and expertise that I can use to help bring in better wording discipline, savvier risk transfer and better understanding of alternatives. What I'd really like to do is help the market develop a more robust index environment.
"Some of the capital sources coming in will continue to have a clear preference for index and buyers may have a kind of ebbing and flowing access to UNL. But I think that index will remain an important force in the market for quite a while."
