A catastrophe swap software platform based on the blockchain is ready for use, according to the developer of the technology which featured in the pilot catastrophe swap undertaken between Allianz and Nephila Capital recently, Symbiont.
Symbiont has developed a “smart contracts platform for institutional uses of blockchain technology” one of the first of which was the ground-breaking catastrophe swap transaction between insurance giant Allianz and reinsurance and ILS investment manager Nephila Capital.
In terms of insurance technology (or Insurtech), this is the disruptive end of the spectrum, where technology and software can enable capital to be more closely connected with insurance or reinsurance risks.
By effecting a catastrophe swap transaction, Symbiont’s platform has laid the groundwork for what could be digital securitisation of catastrophe linked assets in years to come.
Symbiont explains that it is the only smart contracts platform with the capability to provide such service to the insurance, reinsurance and ILS fund industry. It’s also flexible and could have use-cases across the insurance and reinsurance markets, beyond the cat swap arena.
In fact the blockchain catastrophe swap platform is ready for use, with some caveats and so Artemis wanted to find out more and spoke to Caitlin Long, Symbiont’s President & Chairman.
Long explained that Symbiont’s catastrophe swap solution is ready to use; “Our catastrophe swap platform is built and ready to use from a technology perspective — i.e., the multi-node, cryptographically secure smart contract platform. Insurance companies would only need to have smart contracts written to configure for their specific ILWs or other instruments.
“As with any new software going into its production phase, we expect customers to test it extensively and run it in parallel with existing IT systems before switching to any new system. One aspect of our technology of which we’re particularly proud is that it can store all transaction documentation on the ledger and maintain version history.”
While the catastrophe swap demo on Symbiont’s blockchain platform utilised an industry-loss trigger, so effectively representing a transaction similar to an ILW, Long explained that the platform could also be utilised with a parametric trigger.
“The trigger could be swapped out for any parameter to which the parties would agree. That’s a simple task from a technology perspective — it just means changing the data feed referenced by the smart contract. Parties would need to agree, of course, and feel comfortable with the reliability of the data provider — and agree to a backup plan if the data provider stops providing data (just as they do today),” Long said.
This could open up all kinds of interesting use-cases for the catastrophe swap platform. With insurtech and the blockchain able to effect the transactions and smart contracts provide the policy, the efficiency that could be gained by embracing such a system could be significant.
That could actually make this type of blockchain technology platform suitable for weather risk hedging, weather index type of insurance, micro-insurance which is parametric in nature, as well as the much larger transactions undertaken between insurance, reinsurance and insurance-linked securities (ILS) companies.
This is why insurtech is an exciting prospect for the re/insurance and ILS industries. It is not just beneficial for the very large players and high-value transactions, the efficiency it can add to the risk transfer process could also be hugely beneficial for smaller companies and those offering microinsurance type policies.
The potential to narrow the protection gap, particularly for weather and catastrophe risk coverage, in developing economies is also clear. And when you begin to layer other technologies over the top, such as machine learning to provide functions such as diversification of portfolios or pools of risk, the prospects become exciting very quickly.
Symbiont has also been working with investors in mind, as its smart contract technology behind the catastrophe swap platform can transform insurance risk into a security, thus making it simpler for investors to consume.
Long explained; “Symbiont issued our own company’s securities on our platform in August 2015. We are also in active discussions with insurers and reinsurers about using our technology to create and distribute a range of ILS – in fact “Smart Securities” is a registered trademark of Symbiont. The state of Delaware is recording its public archives on our platform as well.”
These types of initiatives could significantly open up the ILS investment market in years to come, democratising access to insurance risk as an asset class and adding all-important transparency into the process at the same time.
Again, as blockchain technology advances and other technologies are leveraged alongside it, companies like Symbiont could become robo-advisers for an asset class in insurance risk, securitising risk and transferring it to investors based on their needs and diversification requirements.
We’re a way off these concepts coming to fruition, but the fact that this platform is ready for use is an important step along the way.
If you’re a reinsurance industry CEO wondering how insurtech will impact your business, looking to start-ups like Symbiont (and Ledger Investing which we covered the other day) are leading the way when it comes to creating technology that could drive the next generation reinsurance, catastrophe risk transfer and insurance linked investment industry.
Symbiont is seeking to raise awareness of its technology and what it could mean for the catastrophe risk underwriting, trading and ILS fund market, by holding a webinar demonstration of its blockchain catastrophe swap technology, contact [email protected] including your name, company name, title and contact information to request registration.
Allianz’s CFO recently said that the insurer believes that blockchain catastrophe risk trading could “add a nice additional profit line,” showing that even one of the world’s largest re/insurance companies is fully aware of the potential of this technology and insurtech in general.
Marc Andreessen, a founding partner at leading venture capital firm Andreessen Horowitz, once said that “software is eating the world.” Is software set to eat the insurance and reinsurance industry? While it may not be consumed whole, it is certainly going to be transformed by it.
The influence of insurance-linked securities (ILS), financial engineering technology and efficient capital has been transforming re/insurance, now insurtech looks set to take that transformation to another level.
As we discussed in an article yesterday, in the future as these trends shake-out and the marketplace evolves, it “may look very different to the pieces of the reinsurance business model we see today.”
The fact that insurtech start-ups are targeting ways to efficiently transfer insurance risk to the capital markets using high-technology should raise alarm bells among traditional players. It’s clear that software start-ups have noted the efficient model that ILS provides and is now working hard to extend those efficiency gains.
Interesting times ahead.