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Allianz Trails Blockchain Tech for Catastrophic Swap Instruments

Last Updated October 1, 2020 1:19 PM
Lester Coleman
Last Updated October 1, 2020 1:19 PM

Allianz Risk Transfer and Nephila Capital Ltd. have used blockchain smart contract technology to conduct a natural catastrophe swap in a pilot test, demonstrating that processing and settlement can be accelerated between insurers using blockchain-based smart contracts.

The test indicates blockchain-based contracts can also be applied to other insurance and investment transactions.

Cat Bonds And Swaps

Catastrophe (“cat”) bonds and swaps transfer a specific set of risks, including natural disaster risks like typhoons and hurricanes, from an insurer to other insurers or investors.

In a cat swap, the insurer pays a third party to assume the financial risk of a defined catastrophic event in exchange for a payment or series of payments. Should an event occurs that meets the defined criteria, the third party is responsible for the financial risk.

In a cat bond, multiple parties assume the catastrophe exposure through a securitized financial instrument that the parties invest in. Should a qualifying event occur, the investors lose all or part of their invested principal; if not, they receive interest through a periodic “coupon” payment in addition to the return of their principal investment when the bond matures.

Blockchain Brings Benefits

Blockchain-based smart contract technology can support and accelerate the contract management process of cat bonds and swaps. Each valid contract on the open, shared infrastructure has data and self-executable codes that are inherent to the contract.

When a triggering event occurs that meets the conditions, the blockchain smart contract accesses the participants’ data sources, then determines and activates payouts to or from contract parties.

Richard Boyd, the chief underwriting officer of Allianz Risk Transfer, said blockchain technology would improve audibility, reliability and speed of cat bonds and swaps since there would be less manual authentication, verification and processing through intermediaries to confirm the legitimacy of transactions among the investors.

“By replacing the human interventions which are currently embedded throughout the entire risk transfer process, 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,” he said.

Smart contract technology enables digital execution of contracts with distributed ledgers designed to be incorruptible, bringing the potential to reduce the validation and arbitration functions that independent third party institutions such as banks, intermediaries, administrators, auditors and clearing houses traditionally perform.

Future Benefits For Insurance

Allianz Risk Transfer and Nephila have worked with various firms to develop the proof of concept. The companies see blockchain technology having relevance across the insurance industry. One example is optimizing payment processes used in international fronting for captive insurers, in which multiple steps are required for transferring premiums from a corporation to its own subsidiary.

“We believe technology will drive the future of insurance,” said Laura Taylor, managing principal at Nephila. “We have invested a great deal accordingly and are pleased to extend our long-standing strategic partnership with ART (Allianz Risk Transfer) to use of the blockchain.”

Solmaz Altin, chief digital officer at Allianz Group, said blockchain technology will help create more convenient, transparent and faster services for customers.

“Blockchain is obviously a fascinating technology and we are starting to explore the use of it in several fields,” added Michael Eitelwein, the head of disruptive technology at Allianz Group.

Allianz Risk Transfer AG (ART) is the center of the Allianz Group’s alternative risk transfer business. ART offers tailor-made insurance, reinsurance and non-traditional risk management solutions to financial and industrial clients. The company is owned by Allianz Global Corporate & Specialty SE. ART operates through affiliated companies in London, New York, Amsterdam, Zurich, Bermuda and Dubai.

Nephila Capital Ltd. is an investment manager that specializes in weather and reinsurance risk. The company is based in Bermuda and has offices in London, San Francisco and Nashville.

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