Smart Swaps: Allianz Pilots Blockchain Enabled Smart Contracts For Nat Cat Swaps

Fei Zhang needed help. As part of the Disruptive Technologies team at Allianz Group, Zhang oversees a blockchain lab in Munich. His mission is to explore use cases for the technology, implement proofs of concept and promote blockchain’s adoption by the broader company.

“Blockchain can fundamentally transform the whole business of doing contracts, including financial services contracts,” Zhang, head of blockchain for Allianz Group, said. “That’s where we see the strategic value of it.”
But first he had to prove it actually worked.

So a year ago, Zhang reached out to all of the operating entities within the Allianz Group and asked whether any were interested in testing out blockchain technology within their own business.

Allianz Risk Transfer didn’t hesitate to raise its hand. Intrigued by the potential efficiency gains blockchain might provide, the Bermuda based business volunteered to participate.

“At a very practical level, blockchain is about efficiency,” Richard Boyd, chief underwriting officer of Allianz Risk Transfer (ART), said. “Insurance companies have very established and staid practices in terms of operational setup and how things are managed operationally. What we see blockchain doing is ripping up the playbook and starting again.”

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Boyd’s company saw that firsthand after working with Zhang’s team.

In June, ART and Allianz Group announced they, along with partner Nephila Capital, had successfully piloted the use of blockchain smart contract technology for transacting a natural catastrophe swap. The test run, they said, proved that blockchain based smart contracts could simplify and accelerate transactional processing and settlements between insurers and investors.

“The biggest surprise,” Boyd said, “was that it was very easy.”

Smart contracts are fully digital contracts that can be self executing and self enforcing. Terms of the contract are written in computer code and shared via a distributed ledger. When a triggering event occurs, the smart contract automatically activates and determines the payouts between parties.

Allianz said natural catastrophe swaps were the perfect product for a blockchain enabled contract because they utilize triggers with defined parameters. In a catastrophe swap, an insurer transfers specific disaster risks to a third party, typically investors or another insurer. If an event occurs and meets the predefined trigger criteria, the third party is responsible for the agreed upon financial risk.

“The thinking there was: If we could take an insurance contract, what is one of the most objectively measured contracts we could find?” Boyd said. “With your motor policy, it isn’t completely objective what the payouts may be and the events that might trigger it. Whereas a hurricane of a certain magnitude we can all agree on. There’s public data that can be used to trigger the contract. We did it in a swap form, which is a derivative contract, instead of an insurance contract. For that reason, it was one where we could fully automate the contract.

“It still remains to be seen whether you can fully automate a true insurance contract, where there’s the concept of indemnity and claims adjusting. But this contract is very straightforward a certain magnitude of hurricane and a loss is triggered on the contract. That’s why we chose it.”

The blockchain platform allows previously segregated systems for information flow of the contract, accounting, payments, etc. to be merged into one source with consistent transaction logs.

“You can mingle all of these things the contract, the payment into one single distributed system that each involved party has a copy of,” Zhang said.

The end result is that reliability and efficiency are increased while the number of human touches in a transaction is decreased.

“If you think that every time a premium is collected and every time a claim is paid, someone on both sides of that transaction has to reconcile that number, agree to it, submit payment to a bank, which then has to submit that payment to one side and then the payment needs to be reconciled on the other side all of those should happen automatically with a smart contract,” Boyd said. “So it’s the number of human touches in a transaction that we’re looking to significantly reduce.

“In theory it should make things quicker. You pay a claim or a premium, and it doesn’t sit around in some intermediary ether somewhere. That kind of thing is where the efficiency comes.”

Increased efficiency also could lead to greater customer satisfaction.

“Improving the user experience is exactly what we want with this technology,” Zhang said. “It is a technology that enables us to deliver a better customer experience.”

With the nat cat swap proof of concept complete, Allianz is turning its attention to additional use cases, Zhang said. One of the most promising, he and Boyd said, is the use of blockchain for the fronting business of captives.

“When you have an international fronting program for a large corporation that is in 100 countries, and each one of those is trying to pay its premium and ultimately arrive at a captive, but it needs a chain of insurance company intermediaries and banks in the middle to move the cash … you’re multiplying the number of human touches by hundreds or thousands and creating significant inefficiency,” Boyd said. “The idea that all of that could be encoded and automated is hugely compelling from a customer point of view.”

LAB LEADER: Fei Zhang, the head of blockchain for Allianz Group in Munich, teamed with Allianz Risk Transfer and Nephila Capital to successfully pilot the use of blockchain enabled smart contracts for transacting natural catastrophe swaps. Zhang says blockchain can “fundamentally transform” contracts.

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Kate Smith is a senior associate editor. She can be reached at
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