Allianz and Nephila successfully piloted blockchain technology for catastrophe swap

Insurance provider Allianz Risk Transfer AG (ART) and Nephila Capital Limited (Nephila) announced on Wednesday that they have “successfully piloted the use of blockchain smart contract technology for transacting a natural catastrophe swap.”

Founded in June 1997, the Zurich-based ART is a wholly-owned subsidiary of Allianz Global Corporate & Specialty SE(AGCS), one of the world’s leading insurers for corporate and Specialty risks. Registered in Munich, Germany, AGCS SE is a wholly owned subsidiary of Allianz SE.

The Allianz Group reported having 85 million retail and corporate clients in more than 70 countries in the financial year 2015, employing over 142,000 employees worldwide.

Allianz SE Share Price 16th June 2016

The Group’s total revenue was 125.2 billion euros and operating profit was 10.7 billion euros in that time period. ART offers tailor-made insurance, reinsurance, and other non-traditional risk management solutions.

The type of blockchain used in this pilot was not revealed. “We can’t go into details of the pilot but we have examined various specifications of block chain configuration for this proof of concept,” Richard Boyd, Bermuda-based Chief Underwriting Officer of ART told BraveNewCoin.

“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.”

• Richard Boyd, ART Chief Underwriting Officer, Bermuda

ART helps the Group’s decision-making regarding the issuance of cat bonds and works closely with Allianz Reinsurance (Allianz Re), the Group’s reinsurance arm, to discuss alternative ways to access reinsurance risk. The Group has been active in the cat bond market since 2007. “Insurers like Allianz have regional peak catastrophe exposures such as hurricanes or earthquakes in Europe and the US and traditionally pass on some of these risks to the reinsurance market,” statedCEO of Allianz Re, Amer Ahmed. “The risk can be passed on to investors via a cat bond,” he explained.

“Allianz uses cat bonds as an alternative and supplement to traditional catastrophe reinsurance.[…]Cat bonds typically provide cover on a multi-year basis and are collateralized, thus they provide some stability and mitigate counterparty credit risk exposure.”

-Amer Ahmed, Allianz Re CEO

Catastrophe insurance products known as ‘cat swaps’ and ‘cat bonds’ are financial instruments that transfer specific risks, such as natural disasters like hurricanes or typhoons, from insurers to investors.

To make a cat swap, an investor is paid by the insurer to assume the financial risk of a specific catastrophic event. The payment can be a one-time lump of cash or a series of payments, but if the catastrophe occurs, meeting the predetermined criteria, the investor is responsible for the amount of the cat swap payout.

Cat bonds, on the other hand, have multiple parties assuming the catastrophe exposure. Following a qualifying cat event, the investors lose all or part of the principal they have invested. However, in the absence of a qualifying cat event, they receive interest payment as well as the return of their principal investment at the bond’s maturity.

Smart contracts combined with blockchain technology together have the ability to greatly improve the process of handling the paperwork side of cat swaps and bonds. “By replacing the human interventions which are currently embedded throughout the entire risk transfer process,” Boyd explained, “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.”

ART’s plan is to remake each cat swap and bond a smart contract, complete with self-executing code and validate these contracts at the point of sale on an open blockchain that contains many such contracts, shared for the whole industry to use.

When a catastrophe occurs that meets the agreed criteria, the smart contract is waiting with a list of predefined data sources for all participants, automatically activating to determine payouts to and from the various parties named in each contract.

“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 press release

Although the test was run by ART and Nephila, the network they created for testing included a number of other firms that they work with, in order to develop a full proof-of-concept model. Included firms all had relevance across the greater insurance industry, according to ART.

With approximately $9.5 billion assets under management of as of April 1, 2016, Nephila is a leading investment manager specializing in reinsurance and weather risk. Founded in 1998, the Bermuda-based firm has over 100 employees globally.

“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.”
— – Laura Taylor, Nephila Managing Principal

According to IBTimes, Allianz partneredwith smart securities platform Symbiont on this project. However, “the references to symbiant involvement in this pilot are not endorsed by Allianz,” Boyd said, adding that “ we can confirm that we worked with a number of block chain specialist firms to explore this application of the technology.”

Symbiont is a smart securities platform that allows institutions and investors to issue, manage, trade, clear, settle and transfer a wide range of financial instruments on custom, decentralized, and distributed peer-to-peer financial networks, cryptographically securing them in the process.

The well-funded startup was already working on overhauling the syndicated loans market among other types of smart securities,  although this is the first report of Symbiont working with insurance products.

ART is not the only subsidiary investigating blockchain solutions for insurance business. In December 2015, Allianz France, a major provider of insurance and financial services in the French retail and commercial markets and a subsidiary of Allianz SE, picked a blockchain startup, Everledger, as one of six Winter Batch #1 winners of its Accélérateur Allianz (Allianz accelerator). Everledger uses blockchain technology to fight against fraud, focusing on diamonds.

“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, Allianz Group Chief Digital Officer

In an independent report by Deloitte titled ‘Blockchain applications in insurance,’ the company outlined how blockchain technology can help insurance companies. Blockchains can help insurers streamline premium and claim payments and “blockchain-based smart contracts could provide customers and insurers with the means to manage claims in a transparent, responsive and irrefutable manner,” the firm states. Citing that the insurance industry is facing "ever-tighter regulation and a growing threat from fraud,” Deloitte asserted that smart contracts would enforce and validate claims such as triggering payments automatically when certain conditions are met.

“Blockchain technologies could support the significant digital transformation underway in the industry [insurance] because much of this transformation relies on data.”

• Deloitte

Following the pilot, ART and Nephila’s blockchain experiment is being taken to the next phase and more partners are being sought in the industry. “ART and Nephila have been exploring the feasibility and advantages of blockchain to determine whether this would be a viable option in practice,” Boyd explained to BraveNewCoin. “After the successful test pilot we will now develop a more detailed business case also involving other financial partners.”