Global re/insurers to build blockchain retrocession proof-of-concept

Global insurance and reinsurance players Aegon, Allianz, Munich Re, Swiss Re and Zurich have teamed up to collaborate on developing and proving the use of blockchain distributed ledger technology and smart contracts within the industry, beginning with a retrocession proof of concept.

As the re/insurance industry focus on insurance and reinsurance technology (Insurtech) developments increases, some of the largest companies in the market are choosing to collaborate in order to develop methods for risk transfer that enable inter-company retrocession.

Aegon, Allianz, Munich Re, Swiss Re and Zurich have launched the Blockchain Insurance Industry Initiative (B3i) through which they aim to develop “faster, more convenient and secure services” using blockchain technology and to prove the technologies viability for the industry.

Efficiency is the key again here, as it is with most Insurtech developments, with this group aiming to discover whether blockchain technology can “streamline paper work and reconciliations for (re-) insurance contracts and accelerate information and money flows, while greatly improving auditability.”

Blockchain technology can only reach its full potential if it can be “implemented in a consistent and compatible way, based on minimum standards to exchange data and transactions,” the group of re/insurers explain.

Hence this group, operating as B3i, have agreed to use anonymised transaction information and anonymised quantitative data to develop a proof-of-concept for inter-group retrocessions using Blockchain technology.

By proving this concept the group hope to show that blockchain “can be used to develop standards and processes for industry-wide usage and to catalyze efficiency gains in the insurance industry.”

Harald Rosenberger, Head of Innovation at Munich Re commented; “Blockchain technology shows most of its potential only, if its applied in a network of peers. Therefore we see a huge benefit for the insurance industry in doing this together in the Blockchain Insurance Industry Initiative B3i. With B3i we are in the position to explore and shape the future use of Blockchain and to set the necessary standards for a true digitalization of insurance.”

“We are thrilled that Allianz is investigating emerging technologies such as Blockchain together with other key insurance industry players,” added Christof Mascher, Chief Operating Officer of Allianz Group. “This initiative, enabling alternative operating models based on the Blockchain technology, can help us increase transparency and efficiency and deliver a better experience to our customer.”

The group says that the Blockchain Insurance Industry Initiative B3i aims to help insurers and reinsurers better understand the applicability of the blockchain in the insurance market, providing a platform through which the sector can “exchange insights regarding Blockchain and potentially other technologies, use case experiments and research information.”

The goal is to develop market-wide solutions that enable more efficient risk transfer and operation of insurance or reinsurance strategies, across the entire insurance value chain.

In order to develop cutting edge insurance transaction technology the industry will require common standards and procedures, B3i believes. As a result the Blockchain Insurance Industry Initiative B3i is open to other insurers and reinsurers who may like to join and the initiatives goal is to “assess how Blockchain technology can be established as a viable tool for the insurance industry in general and for insurance clients in particular.”

This is encouraging news, both for the traditional insurance and reinsurance sector and for insurance-linked securities (ILS) markets. More efficient risk transfer processes will benefit the sector’s cost-of-capital and ultimately the consumer.

It’s interesting that inter-company retrocession has been chosen as the use-case, as it is clearly an industry risk transfer process that could be made more efficient. It’s also a process that could be used to transfer risk to the capital markets, or whichever is the most suitable source of capacity for that risk.

It is to be hoped that initiatives such as B3i have learned from past technology standard setting attempts, such as the many flavors of financial XML, in order to develop Insurtech systems that are cross-market compatible and not result in many different customisations as companies adopt new technologies.

It’s vital that transparency and openness are embraced in the development of systems and standards which seek to gain industry-wide adoption. They need to be inclusive and not be created for the benefit of a few large players and hence also need to be agnostic as to market or capacity plugging into these trades.

It’s also important that the industry does not simply try to recreate the risk transfer paradigm we see today using technology. The opportunity exists now to think about transitioning to a new paradigm for risk transfer and insurance protection, so a forward-thinking approach to Insurtech is advised.

As the industry embraces blockchain and other Insurtech initiatives the opportunity to increase the efficiency of risk transfer and lower the cost of risk capital is clear. For the traditional re/insurance market its required, to help them navigate the evolution of the insurance risk transfer market and for the capital markets these efforts will provide new opportunities to put capital to work in an increasingly friction-less manner.