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Allianz Risk Transfer, Nephila Capital successfully pilot blockchain for Cat swap


June 14, 2017   by Canadian Underwriter


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Allianz Risk Transfer AG (ART) and Nephila Capital Limited report successfully piloting the use of blockchain smart contract technology for transacting a natural catastrophe swap, an approach they suggest offers benefits for this and other types of insurance transactions.

The pilot – one of several test applications Allianz Group’s disruptive technologies division has undertaken to explore future blockchain opportunities – makes clear that smart contract technology facilitates and accelerates the triggering process of Cat swaps and bonds, notes a statement Wednesday from ART, the centre of competence for alternative risk transfer business within Allianz Group.

Cat swaps and bonds are financial instruments that transfer a specific set of risks, typically natural disaster risks like hurricanes or typhoons, from an insurer to investors or other insurers using triggers with defined parameters, the statement explains.

With a financial Cat swap, if an event occurs and meets the pre-defined trigger criteria, the third party paid by the insurer is responsible for the pre-agreed financial risk.

Cat bonds follow a similar approach, but with multiple parties assuming the catastrophe exposure through a securitized financial instrument in which the parties invest.

When a triggering event occurs that meets the agreed conditions, “the blockchain smart contract picks up the predefined data sources of all participants, and then automatically activates and determines payouts to or from contract parties,” ART explains.

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“The test run not only demonstrates that transactional processing and settlement between insurers and investors could be significantly accelerated and simplified by blockchain-based contracts, but also points to other benefits such as increased tradability of Cat bonds and wider opportunities to apply this technology in other insurance transactions,” ART reports.

It adds that blockchain-based smart contract technology has the potential to facilitate and accelerate the contract management process for these swaps and bonds.

Richard Boyd, Bermuda-based chief underwriting officer of ART, says that using blockchain technology would mean “less manual processing, authentication and verification through intermediaries is required to confirm the legitimacy of payments/transactions to and from the investors.”

That being the case, “frictional delays and the risks of human error are completely removed – with a radical effect on the speed and efficiency of the process and, in the case of bonds, on the tradability of such securities,” Boyd emphasizes.

“We believe technology will drive the future of insurance,” comments Laura Taylor, managing principal at Nephila Capital, an investment manager specializing in reinsurance and weather risk.

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Globally, the financial services industry is currently exploring blockchain applications in cryptocurrency, smart contracts and distributed ledgers.

Because smart contract technology allows for digital execution of contracts with automated and distributed ledgers, designed to be incorruptible, the potential exists to significantly reduce the arbitration and validation functions traditionally performed by third-party institutions like banks, intermediaries and administrators, auditors and clearing houses.

Nephila Capital is pleased to extend its “long-standing strategic partnership with ART to use of the blockchain,” Taylor reports.

ART and Nephila Capital have worked with several firms to develop the proof of concept and see extensions of the technology being relevance across insurance, the statement notes.

One such example can be seen “in optimizing the payment processes involved in international fronting for captive insurers, where multiple process steps are involved in transferring premium from a corporate to its own subsidiary,” it adds.

“In our journey to become more digital, blockchain promises to help us create more transparent, more convenient and faster services for our customers,” Solmaz Altin, chief digital officer for Allianz Group, comments in the statement.