Blockchain, Reinsurance and Insurance-Linked Securities : Operating Experience Feedback

© Alexandre HASSLER

More than two years ago, LYON RE designed and tested one of the first Blockchain technologic platform specific to Reinsurance & Insurance-Linked Securities needs. Following the success of this Research and Development project, LYON RE published in 2018 a synthetic report (in French) to highlight the key competitive advantages and major drawbacks that Blockchain technology could bring to the Reinsurance industry and Third-Party Capital market. For celebrating ten-year anniversary of Blockchain, LYON RE reminds key takeaways for applying Blockchain to Reinsurance.

Blockchain and Reinsurance Capital Optimization

Basically, Blockchain is a distributed information system which can be designed to process and store all kind of data (financial, risk, weather, event…). By taking into account specificities of Reinsurance business model, Blockchain enables to better track Risks and faster report Losses. As information asymmetry is reduced sharply, both for Underwriting and Claim Management, Reinsurers get a more accurate Risk Selection and a more appropriate Risk Pricing while they save also significant operational costs. Leveraging a more secure, direct and sustainable link between primary Risk and Reinsurance Capital with less friction costs is most likely one of the key revolutions that Blockchain brings to the Insurance and Reinsurance industry.

Blockchain and Liquidity of the Reinsurance Market

Contrary to financial trading for traditional assets, Reinsurance market is significantly less liquid, due to year-to-year operations most of the time, including the Reinsurance renewal year-end process. On the contrary, Blockchain enables to design real-time architecture for performing day-to-day Risk trading and that constitutes a major paradigm shift for the entire Reinsurance industry. Indeed, by enhancing its liquidity both long and short term, it expands the secondary Reinsurance market and promotes the creation of even more complex and even more precise Reinsurance strategies, for instance on very specific period of time or on many emerging Risks like Cyber Risks.

Blockchain for empowering Insurance-Linked Securities (ILS) and Third-Party Capital

One of the main stakes for ILS Funds consists in accessing quickly to new business by pricing Risk efficiently, most likely with less historical information and actuarial tools than traditional Reinsurers. Actually, Blockchain can provide ILS Funds and Third-Party Capital with real-time Risk information, fast trading capacities and augmented Risk Intelligence so that they could price Risks more independently, select Risks dynamically in real-time, report easily their Losses on their own way, and finally be significantly more competitive on the Reinsurance market.

Like many other cutting-edge technologies, a Reinsurance Blockchain must have the capacity to evolve very quickly, particularly while market transformations are occurring and new Risks are massively emerging, and then not be set only for existing processes and current governance systems. Thus, combined with relevant Risk modeling capabilities, Blockchain paves the way to extremely more efficient Reinsurance covers, higher Capital returns and cheaper Insurance products.

Cyber Risks & Extreme Risks

LYON RE is an Insurtech Company specialized in Cyber Risk and Extreme Risk Engineering. By leveraging predictive Risk Modeling capabilities and Data-driven exclusive Actuarial expertise, LYON RE helps the Insurance and Reinsurance Industry, Governments and Corporate Institutions to empower their Risk Intelligence strategy.

Specialty Risk Engineering