Blockchain cat bond could add additional profit: Allianz CFO

by Artemis on August 9, 2016

Insurance technology, or insurtech, initiatives are being discussed at the highest levels of the world’s largest insurance and reinsurance firms, as they attempt to get to grips with what the disruptive efficiency of technology will mean for their businesses.

Even the CFO of the world’s largest insurance firm Allianz, Dr. Dieter Wemmer, has considered the implications of a proof of concept initiative that the insurer Allianz Risk Transfer (ART) team entered into with ILS fund manager Nephila Capital.

Allianz Risk Transfer (ART) and the world’s largest catastrophe and weather insurance linked investment manager Nephila Capital recently completed the first blockchain based catastrophe swap transaction, which we understand to have been a private reinsurance swap utilising a private blockchain.

As proof’s of concept go in the insurtech world this is pretty ground breaking, especially when you consider where the blockhain and smart contracts is being put to work in insurtech.

Few insurtech start-ups have truly recognised the opportunity to create more wholesale disruption to the risk-to-capital value chain in insurance and reinsurance, but Allianz and Nephila recognised the efficiency that technology could add to existing risk transfer transaction processes that the pair already enter into.

At the time the proof of concept was announced, hailed as the first natural catastrophe risk trade to leverage the blockchain, Allianz’s press release explained that it would like to see the technology being used for smoother facilitation and accelerated triggering for catastrophe swaps and bonds.

You might think that the implementation of cutting edge financial technology in order to facilitate a catastrophe risk trade, would perhaps be so far off a major insurance company CFO’s radar as to not be worth commenting on.

But, clearly Allianz is ensuring that there is engagement at the highest levels in its insurtech initiatives, with Dr. Dieter Wemmer quite prepared to discuss the blockchain catastrophe swap during the insurers latest earnings call with analysts.

When asked what advantages he thought the blockchain catastrophe risk trading initiative might bring to Allianz, Wemmer said that it was an “interesting test to implement.”

“Will it create huge volumes of new business? I think it is a bit too early to say,” Wemmer continued, adding “But I think it shows that we’re in all categories clearly running at the forefront of technology and it shows the positioning of our company.”

That’s important. Even for the very largest insurers it is imperative to demonstrate that they have grasped the importance of new technologies, such as the blockchain, and what they might mean for the future of the insurance and reinsurance industry.

Through the Allianz Risk Transfer unit, the insurer is already disrupting the value chain with the help of Nephila Capital, supporting much of its work and assisting other third-party capital providers as well, as they seek to access risk closer to the source or utilise a large balance-sheet to back their ILS and collateralised reinsurance transactions.

The future for insurers like Allianz will see them needing to support the shortening of the risk-to-capital value chain, ensuring they can earn income from facilitation, support and innovative ways to access risk both for themselves and for others.

Insurtech and initiatives such as this blockchain proof of concept are therefore key, as they promise to enable efficient capital to access risk, structure, transact, transfer and invest in it even more efficiently than before.

Bringing together efficiency capital with efficiency technology is therefore something that Allianz should be facilitating (perhaps owning) as if it does not grasp the opportunity to do this, others will both from inside and outside the insurance and reinsurance industry.

Wemmer also sees this initiative as something that could be incrementally profitable, in future, saying “I assume it will add a nice additional profit line.”

Being first to market with a technology platform that enables insurance risk to be efficiently connected with capital, provided by ILS fund managers like Nephila or directly from capital market investors, is perhaps the holy grail in insurtech and where the serious disruption could occur. Positioning itself firmly in this space is a very smart move for an incumbent like Allianz.

However, even if it does add a nice profit, the scale of the Allianz global business means that additional revenues from catastrophe bonds, blockchain catastrophe swaps or any other ILS related insurtech ventures, will only be an incremental addition to profit, or through efficiency a reduction in expenses.

“Cat bonds is not yet such a huge business that it can, even with the best technology, change our overall operating costs,” Wemmer explained.

At the end of the day, while profit is key and innovation in insurance technology has to pay off ultimately, there is an element of being first to market with a proof of concept such as this that will help both Allianz and Nephila.

Even if the pair only ever used this technology between themselves. If it reduces cost, the time to transact, transaction friction, the need for intermediation and more efficiently matches the capital and risk than was previously possible, then the blockchain proof of concept will add significant value.

Also read:

Nephila & Allianz work on blockchain catastrophe risk trading.

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