By FINTECH Books Contributor, Tamer Ayasli
Distributed ledger technologies have the potential to unlock tremendous value within the traditional markets for collateralised reinsurance and insurance linked securities (ILS) benefiting both reinsurance protection sellers and buyers. ILS’s are securitised insurance risks sold by insurance companies through brokers to investors.
They serve as a cost efficient way to protect insurance company capital. The market for ILS is expected to double to a volume of $87.3 billion by the year 2019. We estimate the value unlocked through the adoption of blockchain technologies to amount to approximately 20% of the total market size , representing the fees currently paid to intermediaries such as reinsurance brokers, agents and legal fees.
In current collateralised reinsurance markets there is a need for trusted agents to manage the risk transfer from insurance companies to investors and to manage the required collateral provided by same investors to cover for claims reserves in order to secure the risk transfer to investors.
Since neither the insurance companies nor the investors trust each other, a reinsurance company would traditionally act as the trusted agent would act as“the trusted intermediary ”fronting on behalf of investors satisfying the insurance companies’compliance and solvency requirements.
The transaction flows in a distributed ledger enabled ILS contract would be realised based on algorithms executing the transfer of value exchange upon the fulfilment of agreed rules as per a conventional reinsurance contracts coded into the smart contract, replacing the reinsurance company (trusted agent).
The crucial point here is the value transfer would be take place through smart contracts without the intervention of any of the parties with vested interests in the transactions (i.e. investors, insurance companies) with the pre determined insurance loss claims indices are fed into the smart contracts triggering the claims payments for each of the risk layers insured by investors.