Vesttoo harnesses the power of AI for data-driven management of longevity risk.
Israel-based start-up Vesttoo has developed a set of data-driven risk management solutions for the insurance markets, using AI to allow insurers and pension funds to transfer risk to the capital markets. A key component of the company’s approach includes “longevity risk”, and Vesttoo works closely with pensions, insurers and reinsurers to hedge their risks using the capital markets.
Longevity.Technology: With global life expectancies rising steadily, the issue of longevity risk is becoming increasingly more significant. As life expectancies exceed expectations and pricing assumptions, insurance companies and pension funds are being faced with greater-than-anticipated cash flow needs. We caught up with Vesttoo co-founder and CEO Yaniv Bertele to find out how his company is helping address this challenge.
“The longer people live, the more liabilities those pension schemes and annuity providers need to set aside to account for increased annuities over time,” says Bertele. “The second aspect is the long term care policies that people are buying from their insurance providers, who want to be sure that they have enough cash in that deposit to pay their long-term care needs.”
Pension schemes, insurance providers and long term care providers are being left behind, Bertele says, as they haven’t saved any more than what regulators encouraged them to do.
“There are hundreds of trillions of dollars retained on the balance sheet for those companies, which are increasing on a day-by-day basis as longevity increases.”
“The reinsurers who typically cover this type of risk don’t have any more than one trillion dollars on their combined books, so that means there are hundreds of trillions of US dollars of unhedged or unmanaged liabilities out there that are directly exposed to longevity risk.”
And it’s not just people living longer that creates challenges for insurers. In January this year, Vesttoo published its US mortality model and excess mortality risk forecast for the upcoming years, looking at the impact of COVID-19. The model showed an increase of between 10-20% in mortality rates in 2020 in comparison with average historical rates, with the risk of elevated mortality to continue in the upcoming years.
“Our data clearly demonstrates the extent of COVID-19’s devastating effects on mortality, and the likelihood that this trend will persist in the years to come,” says Bertele. “The insurance industry as a whole has to brace for the years to come by adjusting risk models and capital strategy to combat COVID-19 era stress.”
Capital markets hungry for longevity risk
The capital markets have long been looked at as a way to provide capital or hedge on longevity risk. Bertele says the markets like this type of risk because it’s almost unlimited in terms of capacity and also has very low correlation to the capital markets – maintaining its stability independently.
“The problem with this funding gap is that the capital markets and insurance markets speak two different languages.”
“The capital markets want to understand the risk, they want to understand the probability of loss, and the insurance market speaks about actuarial tools when you speak about projections and best estimates.”
And that’s where Vesttoo comes in. Founded in 2018, the company has developed a “capital relief solution” that uses AI to build tailor-made risk transfer programmes with proven low basis risk for any portfolio size and annuity type.
“We bridge between those two worlds,” explains Bertele. “As an insurer or a pension scheme that is exposed to longevity risk, based on the data that we get from that portfolio, Vesttoo can assess and project the risk using an independent, objective process. And then you have the capital markets, which we tap into by embedding this risk into a financial instrument, allowing them to hedge the risk, provide the capital, and get premiums for that hedge.”
Creating this bridge isn’t a trivial matter and the company leverages advanced AI technologies that allow it to process the liabilities and build projections extremely quickly.
“An average transaction would normally take months and years to construct, but we are minutes away from structuring a deal, assuming we have all the data we need on the table,” says Bertele.
“Utilising objective artificial intelligence tools, we can project risk in an accurate manner that hasn’t been done by anyone before.”
“But most importantly, we can do the transaction very quickly and very smoothly.”
“We come in as a one stop shop provider. We take the investor and the insurer hand in hand from the start – understanding the risk, structuring it, building the financial instrument and then eventually placing it with the capital markets.”
To date, most of Vesttoo’s business is conducted in the US and UK, but the company is planning for expansion this year.
“We are in the process of extending our work towards Japan and China and broadly tapping into the European markets by the end of 2021,” says Bertele. “We would like to be strongly established in the US and Europe through partnerships with large reinsurers and reinsurance brokers, and large capital markets players, such as banks and private equities that have an interest in buying into longevity and excess mortality transactions.”
Vesttoo is funded by a mix of venture capital and angel investors, including Longevity Tech Fund.
“We will be engaging in an additional fundraising round – probably in the first half of 2021,” says Bertele. “It will be significantly larger and incorporate strategic entities to broaden our footprint and the strategical operations that we have.”
