A division of German insurance giant Allianz Group AG has successfully tested blockchain technology for transacting in so-called “cat” bonds, which allow insurers to package off the risk of natural catastrophes, such as hurricanes and earthquakes, and sell them to investors.
Allianz Risk Transfer (ART) announced Wednesday it has successfully piloted the use of blockchain technology for transacting a cat swap, along with Bermuda-based Nephila Capital Ltd., an investment manager specializing in reinsurance and weather risk.
“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,” the companies say.
The financial industry, regulators, and policymakers, are both exploring the possible use of the distributed ledger technology, also known as blockchain technology, as a way to carry out all sorts of financial transactions more safely and efficiently.
In this case, ART and Nephila say that blockchain-based contract technology “has the potential to facilitate and accelerate the contract management process” of cat swaps and bonds. So that when a qualifying triggering event, such as a natural disaster, occurs, “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.”
“Blockchain technology would increase reliability, auditability and speed for both cat swaps and bonds as less manual processing, authentication and verification through intermediaries is required to confirm the legitimacy of payments/transactions to and from the investors,” says Richard Boyd, chief underwriting officer of ART. “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.”
The firms say that they foresee applications of the technology across the insurance industry. “We believe technology will drive the future of insurance. We have invested a great deal accordingly and are pleased to extend our long-standing strategic partnership with ART to use of the blockchain,” adds Laura Taylor, managing principal at Nephila.
“In our journey to become more digital, Blockchain promises to help us create more transparent, more convenient and faster services for our customers,” says Solmaz Altin, chief digital officer at Allianz Group.