Insurance giant subsidiary, Allianz Risk Transfer AG (ART) and Nephila Capital, the world’s largest reinsurance risk investors, reportedly have managed to use blockchain-based smart contracts to conduct a natural catastrophe swap in a pilot test, indicating that processing and settlement can be significantly fast-tracked and simplified between insurers using blockchain technology.
Catastrophe swaps or “cat swaps” and bonds transfer a specific set of risks, including natural disaster risks like hurricanes or typhoons, from one insurer to other insurers or investors.
These are instruments traded in the market which allow insurers to avoid potential losses. In a cat swap, the insurer pays a third party to assume the financial risk of a defined major natural disaster in exchange of a payment or series of payments.
In a statement released by Allianz, automating the time process for payment transactions between insurers and investors can now be reduced to as low as a few hours from weeks or months after a disaster, thanks to smart contract based on blockchain technology.
Allianz and Nephila further announced that the successful test run demonstrated transaction processing and settlement between insurers and investors can be “significantly accelerated and simplified” by blockchain-based smart contracts.
The test also pointed to other benefits including better tradability of cat bonds and also opened up opportunities to apply the technology in other insurance transactions.
Richard Boyd, Allianz Risk Transfer Chief Underwriter, commented: “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.”
“By replacing the human interventions which are currently embedded throughout the entire risk transfer process, 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,” he added.
Allianz Risk Transfer and Nephila have worked with various firms to develop the proof of concept and extensions of this technology. These companies see blockchain technology having relevance across the insurance trade.
Optimizing payment process used in international fronting for captive insurers, in which numerous stages are required for transferring premiums from a corporation to its own subsidiary, is one example.
In recent months, large insurance firms have taken interest and started to investigate blockchain technology and its opportunities to improve services. The successful pilot test made by Allianz and Nephila is just the latest of these activities.
One of the largest accounting firms, PwC, announced earlier that they will support the research of the application of blockchain technologies in the area of insurance.
Insurance provider John Hancock also declared collaboration with ConsenSys Enterprise on proofs-of-concept using blockchain and BlockApps.