Reinsurance is fundamentally a balance sheet business. As a company, we leverage our substantial capital reserves to absorb risks from insurers, thereby minimizing our own capital requirements. Historically, this process has necessitated a significant aggregation of funds within our balance sheets.
In contrast, blockchain represents a burgeoning technology that facilitates decentralized finance. Emerging in the late 2000s with the advent of Bitcoin, it has continually evolved. The introduction of the Ethereum blockchain heralded the era of smart contracts. These innovations have revolutionized the realms of currencies, investments, and loans through decentralization.
Looking ahead, we see blockchain as a transformative tool for the reinsurance sector.
Notably, it is feasible for us to implement smart contracts that encompass:
- The pooling of cedants’ risks,
- Protection through stop-loss retrocession,
- Comprehensive coverage via tokenized Catastrophe (CAT) bonds.
Since smart contracts function as multi-party agreements without legal entity status, they are exempt from certain regulatory frameworks, such as Solvency II. This translates to a lower risk profile on our regulated balance sheets, consequently reducing regulatory capital requirements.
With blockchain technology having reached a significant level of maturity, it is now viable for us to utilize existing tools to facilitate these processes. Our smart contracts might employ a stablecoin pegged to currencies like the USD or EUR, operating on either public or private blockchains. A private blockchain, in particular, can be tailored by us to manage the transmission of claims information to the smart contract.
Such smart contracts could be directly implemented by us for reinsurance protection, leveraging our experience in connecting cedants and risk carriers, akin to brokers’ roles.
Additionally, this model can be employed by our reinsurance groups to consolidate and transfer risks among their entities, as an alternative to a Special Purpose Vehicle (SPV).
Our collective expertise in both insurance and reinsurance markets, coupled with our knowledge of blockchain technology, has enabled us to develop several adaptable models for varying contexts.