ChainThat, a provider of blockchain solutions for the insurance and reinsurance industry, has announced the impending launch of the Bermuda Insurance Exchange, the industry’s first Distributed Ledger Technology (DLT) driven risk and capital exchange.
Expected to go live in July 2019 with a production trial, the Bermuda Insurance Exchange will provide brokers, insurers and reinsurers with access to the capital markets with the use of blockchain.
The new Exchange is designed to enable the transfer of risk and capital between direct insureds, brokers, cedants, and captive insurers and insurance, reinsurance, industry loss warranties (ILWs) and insurance-linked securities (ILS).
ChainThat’s Chief Executive Officer (CEO), David Edwards, said: “We are delighted to be unveiling this exchange that will cut frictional costs and allow brokers, reinsurance and insurance companies access to the capital markets using blockchain. This is an opportunity for Bermuda to establish itself as the most advanced insurance market in the world.”
The Exchange is to be introduced in several stages, the first establishing the framework for a traditional reinsurance market, including placement, accounting, settlement and also claims. The second phase concerns the introduction of new capital, supporting the same processes for ILS. Finally, the firm will introduce the ability to support securities and warranties, ultimately providing trading of these types of instruments.
Rebecca Oliver, Business Development Director at ChainThat, added: “The exchange will enable the existing market participant businesses, brokers and risk carriers, to develop and market new competitive products and extend their distribution reach like never before.
“Cost control and innovation are the two big issues that are being discussed in insurance board rooms around the world. By automating the current operational framework, we believe the Bermuda Insurance Exchange provides the insurance and reinsurance market with the opportunity to both maintain margins while reducing pricing to the insured. In turn, this will increase business performance and global competitiveness.”
In light of the launch of the Bermuda Insurance Exchange, Artemis spoke with ChainThat’s CEO, who explained that while the Exchange provides the ability for new models to be deployed to match risk with the most efficient source of capital, this is not the core driver of the exchange.
“The exchange is able to support new business models and trading relationships, while maintaining the current processes and relationships. The efficiency from the exchange will benefit all, but it will be down to the participants to decide how they may want to democratise risk. Most importantly it allows participants to speed up innovation.
“What is more, as the global markets develop and evolve, it provides the tools for new relationships to established that will eventually, should the market require, democratise access to risks,” said Edwards.
In recent times, ILS has been looking to get closer to the original source of risk in order to increase efficiency and mitigate the impacts of a highly competitive property catastrophe landscape.
Edwards explained that the Exchange will enable the ILS sector to operate within the market as an entity, ultimately improving its access to risk.
“With a digital exchange the need for manual paperwork and reconciliation of accounts is removed, allowing for more real time transparency of risk, which can be provided to ILS funds and their investors.
“In the past, covering risks purely with an ILS structure has not always been the quickest route to placement, but as the platform grows ILS funds will become involved at an earlier stage in the process. But by digitising the risk, the construction of ILS packages becomes more efficient, allowing for new models to be created to provide access to new types of risk in a more effective manner.
“The Bermuda Insurance Exchange will enable ILS to operate within the market as an entity, meaning that ILS can find and trade directly with the right distribution partners and provide access to risk that ILS funds have traditionally been unable to access. In addition, by introducing the regulators to the exchange, the processes and compliance frameworks that are needed to register and manage funds can be digitised, opening up the market to more potential investors,” said Edwards.
Ultimately, said Edwards, the more people that use the Exchange then the more effective it becomes, and as adoption rates increase and more risk is exposed on the Exchange, in turn this will allow for greater access to risk by capital providers.
“As time progresses the exchange will be able to match risk profiles to the correct capital profiles. This process will then be streamlined to allow the risks to define the type of capital they need and for the capital providers to create profiles which can better server the risk needs,” he added.
Currently, ChainThat is developing the administration of ILW as part of the Exchange, and while parametric triggers are certainly interesting, Edwards underlined some difficulties with such a structure as a result of the legal implications of utilisation.
“We will support the parametric triggers built into contracts, but there will always be a manual input to the smart contract to ensure legal compliance. By having a manual input for parametric triggers, mistakes are avoided that could have been made by external digital systems that are acting as the source of truth for triggers,” he said.
To conclude, Edwards provided some insight as to why ChainThat selected Bermuda as the home for the Exchange.
“Bermuda’s reputation for innovation, its sophisticated business environment and its progressive regulatory framework makes it the prime location for the new exchange. As we engaged with the Bermuda community during the early stages of development, we found that the ability to make decisions and effectively work with competitors for the greater good of the insurance market was second-to-none.
“Bermuda offers a fully-formed community market place of brokers, insurers, reinsurers, captives and fund managers that all want to innovate and can effectively deploy and adopt new technology solutions. A head of Bermuda broking firm put it very well when I discussed this with them: “Bermuda is an Island and the insurance community knows that a rising tide, like the exchange, lifts all the boats.”