Allianz Risk Transfer AG (ART) and Nephila Capital Limited (Nephila) have successfully piloted the use of blockchain smart contract technology for transacting a natural catastrophe swap. The test demonstrates that transactional processing and settlement between insurers and investors can be significantly accelerated and simplified by blockchain-based contracts. It also points to other benefits such as increased tradability of cat bonds and wider opportunities to apply this technology in other insurance transactions. Richard Boyd, Bermuda-based Chief Underwriting Officer of ART, said:
"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."
Blockchain-based smart contract technology has the potential to facilitate and accelerate the contract management process of cat swaps and bonds. Each validated contract on the open shared infrastructure contains data and self-executable codes inherent to that contract. When a triggering event occurs which meets the agreed conditions, the blockchain smart contract picks up the predefined data sources of all participants, and then automatically activates and determines payouts to or from contract parties.
Blockchain is the technology underlying the bitcoin digital currency but its applications in cryptocurrency, smart contracts and distributed ledgers are being explored throughout the financial services industry. The smart contract technology allows digital execution of contracts with automated and distributed ledgers which are designed to be incorruptible, thus having the potential to significantly reduce the arbitration and validation functions traditionally performed by independent third party institutions such as banks, intermediaries and administrators, auditors and clearing houses.
Michael Eitelwein, Head of Disruptive Technology of Allianz Group, calls blockchain a "fascinating technology" and said the company is starting to explore the use of it in several fields. Solmaz Altin, who is driving the digital transformation of Allianz Group as Chief Digital Officer, added: "In our journey to become more digital, blockchain promises to help us create more transparent, more convenient and faster services for our customers."
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