Allianz to use blockchain for catastrophe swaps

Rage Comment : Catastrophe bonds or swaps are different from traditional financial instruments and are a way of risk transfer. Allianz Risk Transfer said that the existing catastrophe bond operation process is slow and is greatly affected by human factors. The blockchain's smart contracts have automatic execution and good security, so it announced a partnership with Nephila to test the application of blockchain in the catastrophe bond business. The head of blockchain technology at Allianz Group also said that it has explored blockchain technology in many fields.

Translation: Annie_Xu

Allianz Risk Transfer (ART) and Nephila Capital Ltd. have collaborated to test catastrophe swaps using blockchain technology, demonstrating the potential of blockchain smart contracts to accelerate transaction settlement for insurance companies.

The test shows that blockchain smart contracts could also be used for other insurance and investment transactions.

Catastrophe bonds and swaps

Catastrophe bonds and swaps transfer specific risks from one insurance company to another or to investors, including natural disaster risks such as typhoons and hurricanes.

In a catastrophe swap, the insurance company pays a premium to a third party in exchange for a return in order to protect against the financial risk of a specific major disaster. Once the predetermined situation occurs, the third party bears the financial risk.

In a catastrophe swap, multiple parties assume catastrophe risk through the securitized financial instruments they invest in. Once a predetermined event occurs, investors will bear part or all of the loss; if nothing happens, investors will receive installment returns and can get back all their investments after the bond matures.

Blockchain brings benefits

Blockchain's smart contract technology can support and accelerate the contract management process of catastrophe bonds and swaps. All valid contracts in the public and shared infrastructure have their own data and self-executing code.

Once a qualifying trigger event occurs, the blockchain smart contract evaluates the participants’ data sources to determine and activate payments to the contracting parties.

Richard Boyd, chief insurance officer at Allianz, said blockchain technology could improve the reliability, speed and control of catastrophe bonds and swaps by reducing the manual work, verification and auditing required by middlemen to determine the legitimacy of investor transactions and payments.

Richard Boyd

"By replacing manual operations that exist throughout the entire process, delays and the risk of human error can be avoided. This will greatly improve the speed and efficiency of the entire process and increase the tradability of bonds."

Smart contract technology uses distributed ledgers to execute contracts, which can reduce reliance on third-party verification and arbitration, including banks, middlemen, regulators, auditors, and clearing houses.

Benefits for future insurance

Allianz and Nephila are working with a number of companies to develop proofs of concept that they believe are relevant to the insurance industry, such as captive insurance companies using blockchain to optimize international payment processes and simplify premium transfers between corporates and subsidiaries.

Nephila General Manager Laura Taylor said:

Laura Taylor

"We believe that blockchain will be beneficial to the future of the insurance industry. Therefore, we have made a lot of investments and are very pleased to reach a long-term blockchain strategic cooperation with Allianz."

Solmaz Altin, chief digital officer at Allianz Group, said blockchain technology could help create more convenient, transparent and responsive customer services.

Michael Eitelwein, head of blockchain technology at Allianz, said:

"Blockchain is a very attractive technology and we are beginning to explore its applications in several areas."

ART (Allianz Risk Transfer AG) is the center of Allianz Group's non-traditional risk transfer business, providing customized insurance, reinsurance and non-traditional risk management solutions for enterprises. It belongs to Allianz Global Corporate & Specialty SE. It has subsidiaries in London, UK, New York, USA, Amsterdam, Netherlands, Zurich, Switzerland, Bermuda and Dubai.

Nephila Capital Ltd. is an investment management company specializing in weather and reinsurance risks. The company is headquartered in Bermuda and has branches in London, UK, San Francisco and Nashville, USA.