In this article we look at a blockchain solution that provides real-time transparency into reinsurer/insurer exposure, as well as a market to lend/sell/buy risk to increase or decrease exposure by region.
This solution was motivated by large reinsurance losses from black swan events such as the Suez Canal blockage. We are also motivated by the fact that the acceleration of climate change increases the frequency of natural disaster occurrence.
NFT stands for non-fungible token backed with blockchain technology. Non-fungible means each token is unique. Each NFT represents a unique non-divisible asset either physical or digital. Though in popular media NFT’s are usually representative of art or video game digital items, we are specifically looking at the insurance use case of exposure detection and risk transfer today. The NFT standard is just one token-based standard of many. It is also important to understand that it is not a currency.
The main benefit of NFTs is the blockchain backing. This means that once an organization deploys a NFT solution to a blockchain it inherits the best features of blockchain: decentralization, security, immutability, and anti-forgery. In addition to the NFT standard ERC-721, there is another standard ERC-809 which enables NFTs to be lent out or borrowed.
Blockchain is a ‘trustless’ technology because it isn’t controlled by any individual user or specific group of users. Trustless means many insurers could safely pool resources with each other in a shared blockchain application without any risk or need to trust one another.
In actuality we use an extension of the NFT standard to make them semi-fungible tokens (SFT) to represent the liability of an insurance policy. Semi-fungible means each token/policy liability is unique, but divisible to parts that allow for shared ownership of liability. Shared ownership is important because many policies have multiple subscribers in the form of re-insurers and insurers. Figure 1 below has a visual breakdown of each token type.
In particular having an asset which can be lent, sold and divided enables the transfer of risk between two or more parties in a secondary blockchain based market..
If your authorized seller/agent/broker is able to issue a token with each policy: issue, change and renewal and equipped with automatic exposure detection, you will be notified as your exposure for a particular coverage or product exceeds predetermined thresholds.
So more concretely let’s say you use the Awywi Insurance as a Service Platform, Awywi can alert Insurers or reinsurers if you are over-exposed s in a specific area for fire, flood, earthquake or other risk. Upon receiving this information portions of the policy liability can be sold off or traded using semi-fungible tokens on a blockchain. See figure 2 below for an infographic showing the policy liability transfer process.
Eventually, as the technology is adopted by more parties, the risk transfer system can automatically follow predetermined rules of transfer between insurers and reinsurers. This will facilitate fully automated claims processing and payments for parametric insurance, and partially automated for non-parametric insurance.
Using this blockchain backed exposure system will enable real time exposure understanding and a secondary market to transfer or adjust risk portfolios. Stay tuned for our next article in which we detail how we extend this solution to provide real-time proof of insurance.