Schroders Capital & Hannover Re collaborate on tokenised ILS pilot

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Schroders Capital, the private markets business of Schroders Group and manager of around $5 billion of insurance-linked securities (ILS) assets, has collaborated with German reinsurance firm Hannover Re on a pilot tokenisation project, designed to enhance the way ILS assets are invested and managed.

schroders-hannover-tokenised-ilsWorking alongside Hannover Re, the initiative has been tested by Schroders on an internal-only basis and successfully enabled reinsurance contracts to be tokenised and traded on a public blockchain platform using smart contracts.

Each token represents a share in a portfolio of reinsurance contracts, which the asset manager says shows how ILS funds may invest via a digitalised investment infrastructure and eco-system in the future.

The process of tokenising these reinsurance or ILS contracts has, with the consistent oversight of investment professionals, allowed a number of time-consuming processes to be automated, Schroders noted.

As an example, the pilot group could streamline the investment process by automating subscriptions and reducing settlement times as well.

In addition, by integrating key catastrophe insurance data sources into the smart contracts, Schroders said that payments to the appropriate recipient could be automatically triggered, if qualifying natural disaster events occurred, such as US hurricanes or earthquakes, or European windstorms.

This is one of the areas that smart contracts and so-called oracles can come into their own, in the automated use of verified data to trigger or activate contracts. These are most readily applicable to parametric structures, including industry-loss triggers, but there is also relevance for indemnity, as verified proof of ultimate net loss could be a data point that would apply to a smart contract and checked against pre-defined attachment and exhaustion points. In this case we’re told industry-loss indices were used for this pilot.

Stephan Ruoff, Co-Head of Private Debt and Credit Alternatives, Schroders Capital, commented, “The success of this pilot showcases the immense potential for enhancing transparency, streamlining investment processes and improving client experience in the reinsurance sector. It paves the way for a more interconnected and efficient digital ecosystem, and we are looking forward to exploring the broader application to wider investment scenarios and clients.”

Henning Ludolphs, Managing Director Retrocession & Capital Markets, Hannover Re, added, “This proof of concept was a great opportunity to understand the capabilities of blockchain technology when applied to the reinsurance market. With strong governance and embedded compliance in place, the pilot also showed that the regulatory and operational risks around blockchain are similar to those of other market transactions. While this is an emerging technology, we anticipate more appetite for blockchain-enabled investments in the future, and this pilot prepares us well to evolve our approach to generate further retrocession capacity via a different source.”

Schroders Capital also said that the tokenised ILS pilot project demonstrated the possibility of an improved client experience, enhancing accessibility of ILS assets by allowing tokens to be held in investors’ own digital wallets alongside their other digital investments.

As well, the fact the pilot used a public blockchain has also enhanced transparency, while still allowing appropriate governance and controls to be applied, with every step having consistent oversight from investment professionals.

This tokenised ILS pilot project builds on Schroders Group’s commitment to innovation and leadership in digital assets, having joined the Monetary Authority of Singapore’s Project Guardian last year, and participating in the first ever GBP Digital Bond issued by the European Investment Bank.

This tokenised ILS project was a result of over one year of collaboration between Schroders, Hannover Re and the i.AM Innovation Lab, under the oversight of the Guernsey Financial Services Commission (GFSC).

Schroders Capital also said that it will use the findings of this proof of concept to explore further tokenisation opportunities in the reinsurance market.

It’s great to see such large names behind an innovative project like this, as the digitalisation of risk, capital and data flows in insurance-linked securities (ILS) is something we’ve been passionate about for a couple of decades now.

Back in 2016 we wrote about the potential for use of blockchain technology, including oracles and smart contracts for digitalised contracts and automated payouts.

We explained then in 2018 that more use-cases were likely to emerge, as blockchain, or smart contract technology matured and the insurance-linked securities (ILS) market become more comfortable with it.

There was a pilot blockchain catastrophe risk trading initiative by Nephila and Allianz in 2016, and as long ago as 2017 the first issuance and secondary private cat bond trade occurred on a blockchain as well.

It’s taken a long time to get greater institutional acceptance, but tokenisation and the digitalisation of financial and physical assets, using smart contracts and blockchain tech, is now gaining much broader recognition.

It’s great to see institutional names like Schroders and reinsurance names like Hannover Re pushing forward the innovation envelope, as efficiency and transparency, as well as improved user experience, can only help to enhance the ILS markets ability to grow and provide improved services and more responsive risk transfer.

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