Marketcore inventive methods again named in a CRS report…
for “facilitat[ing] valuations for complex risk transfers”
In November 2012, at an annual meeting of the National Association of Insurance Commissioners, Center for Insurance Policy Research (NAIC/CIRP), regulators and stakeholder groups with an interest in catastrophe risk financing explored new standards for transparency, compliance, and accountability with respect to two kinds of large scale disasters: environmental (i.e., catastrophe risk) and financial (i.e., residential mortgage back securitization). One speaker at the meeting, David M. Rowe, concluded that in order to efficiently transfer risk to capital markets via the issuance of financial instruments, two obstacles must be overcome: (1) a computer system challenge that involves data storage, communication issues, and computer processing analytics and (2) finding ways to make risk exchanges and transaction platforms more efficient.74 Eric Nordman, director of Research for the NAIC, and coordinator of the study released at the 2012 NAIC/CIRP meeting, suggested that the two risk management challenges identified by David M. Rowe could be addressed through regulatory changes in the way insurance companies invest in certain financial instruments, including residential mortgage-backed securities.75
During the NAIC/CIRP panel discussion, Michael Erlanger, managing principal of Marketcore, a company that developed an electronic system architecture for aggregating risk elements in a way that facilitates valuations for complex risk transfers, stated that legislation introduced in previous Congresses, the Homeowners Defense Act,76 had, among other things, called for a change in regulatory structures that deliver consistent micro-to-macro risk-detailing views in near real time, assuring transparency in the market for catastrophe risk, including flood risk. He pointed out that the act called for the creation of a National Catastrophe Risk Consortium to (1) encourage data capture that leads to catastrophe risk differentiation and (2) expand the ability of private-sector financial and capital market firms and state residual property insurance pools to underwrite and bear the risk of an extreme event, such as a catastrophic flood event.
The Consortium, Erlanger stated, could, in theory, establish a holistic risk assessment framework that results in ever more granular market information induced by financial and strategic incentives for risk disclosure by all market participants. The standardized “granular risk data” at the contract level could be aggregated and the risk transferred via the Consortium’s electronic platform to investors in the capital markets. This structure arguably would induce transparency, provide market liquidity for catastrophe risk financing, and track all changes in the underlying contracts (e.g., flood policies) in real time.
[Excerpted from page 30]73 P.L. 112-141; Sect. 100232(b).
74 See, Comments of David M. Rowe, President, David M. Rowe Risk Advisory, before the NAIC/CIRP Luncheon Panel on Financing Home Ownership, November 30, 2012, located at: http://www.marketcore.com/media/Marketcore-David_Rowe-Press_Release.pdf
75 See Eric Nordman, Financing Home Ownership: Origins and Evolution of Mortgage Securitization – Public Policy, Financial Innovations and Crises, located at: http://www.naic.org/documents/cipr_120812_white_paper_financing_home_ownership.pdf
76 H.R. 2555 (111th Congress): Homeowners’ Defense Act of 2010.
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