Allianz Risk Transfer and Nephila Successfully Pilot Blockchain Technology

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Allianz Risk Transfer and Nephila Capital Limited have successfully piloted the use of Blockchain smart contract technology for transacting a natural catastrophe swap. 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.

“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,” explains Richard Boyd, Bermuda-based 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.”

So-called catastrophe or ‘cat’ swaps and bonds are financial instruments which transfer a specific set of risks, typically natural disaster risks such as hurricanes or typhoons, from an insurer to investors or other insurers utilizing triggers with defined parameters. In the case of a financial cat swap, the insurer pays a third party to assume the financial risk of a defined catastrophe event such as a Florida hurricane in exchange for a payment or series of payments. If the event occurs and meets the pre-defined trigger criteria, the third party is responsible for the pre-agreed financial risk.

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Cat bonds follow a similar approach but with multiple parties assuming the catastrophe exposure through a securitized financial instrument in which the parties invest. If a qualifying cat event occurs, the investors lose all or part of the principal they have invested; if not, they receive interest in the form of a periodic ‘coupon’ payment as well as the return of their principal investment at the bond’s maturity.

Blockchain-based smart contract technology has the potential to facilitate and accelerate the contract management process of such cat swaps and bonds. Each validated contract on the open shared infrastructure contains data and self-executable codes inherent to that contract. When a triggering event occurs which 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.

Blockchain is the technology underlying the bitcoin digital currency but its applications in cryptocurrency, smart contracts and distributed ledgers are being explored throughout the financial services industry. The smart contract technology allows digital execution of contracts with automated and distributed ledgers which are designed to be incorruptible, thus having the potential to significantly reduce the arbitration and validation functions traditionally performed by independent third party institutions such as banks, intermediaries and administrators, auditors and clearing houses.

Wider applications for Blockchain

ART and Nephila have worked with a number of firms to develop the proof of concept and see extensions of this technology having relevance across the insurance industry: for example, 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.

Laura Taylor, Managing Principal at Nephila, adds:

“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.”

“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, who is driving the digital transformation of Allianz Group as Chief Digital Officer. “Blockchain is obviously a fascinating technology and we are starting to explore the use of it in several fields,” says Michael Eitelwein, Head of Disruptive Technology of Allianz Group.

About Richard Kastelein

Founder and publisher of industry publication Blockchain News (EST
2015), a partner at ICO services collective Token.Agency
($750m+ and 90+ ICOs and STOs), director of education company
Blockchain Partners
(Oracle Partner) and ICO event organiser
at leading industry event CryptoFinancing (Europe's first ICO event now
branded Tokenomicon)
– Vancouver native Richard Kastelein is an award-winning publisher,
innovation executive and entrepreneur. He sits on the advisory boards
of some two dozen Blockchain startups and has written over 1500
articles on Blockchain technology and startups at Blockchain News and
has also published pioneering articles on ICOs in Harvard Business Review and Venturebeat.  Irish Tech News put him in the top
10 Token Architects in Europe.

Kastelein has an Ad Honorem - Honorary Ph.D. and is Chair Professor of
Blockchain
at China's first Blockchain University in Nanchang
at the Jiangxi Ahead Institute of Software and Technology. In 2018 he
was invited to and attended University of Oxford's Saïd Business School
for Business Automation 4.0 programme. Chevalier (Knight) - Ordre des
Arts et des Technologies at Crypto Chain University and an Advisory
Board Member of International Decentralized Association Of
Cryptocurrency And Blockchain (IDABC) as well as Advisory Board Member
at U.S. Blockchain Association. Over a half a decade experience judging
and rewarding some 1000+ innovation projects as an EU expert for the
European Commission's SME Instrument programme as a startup assessor
and as a startup judge for the UK government's Innovate UK division.

Kastelein has spoken (keynotes & panels) on Blockchain
technology in Amsterdam, Antwerp, Barcelona, Beijing, Brussels,
Bucharest, Dubai, Eindhoven, Gdansk, Groningen, the Hague, Helsinki,
London (5x), Manchester, Minsk, Nairobi, Nanchang, San Mateo, San
Francisco, Santa Clara (2x), Shanghai, Singapore (3x), Tel
Aviv,  Utrecht, Venice,  Visakhapatnam, Zwolle and
Zurich.  His network is global and extensive.

He is a Canadian (Dutch/Irish/English/Métis) whose writing career has
ranged from the Canadian Native Press (Arctic) to the Caribbean
& Europe. He's written occasionally for Harvard Business
Review, Wired, Venturebeat, The Guardian and Virgin.com, and his work
and ideas have been translated into Dutch, Greek, Polish, German and
French. A journalist by trade, an entrepreneur and adventurer at heart,
Kastelein's professional career has ranged from political publishing to
TV technology, boatbuilding to judging startups, skippering yachts to
marketing and more as he's travelled for nearly 30 years as a Canadian
expatriate living around the world. In his 20s, he sailed around the
world on small yachts and wrote a series of travel articles called,
"The Hitchhiker's Guide to the Seas' travelling by hitching rides on
yachts (1989) in major travel and yachting publications. He currently
lives in Groningen, Netherlands where he's raising three teenage
daughters with his wife and sailing partner, Wieke Beenen.

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