Captives as a profit centre part 3: a platform solution based on blockchain technology
Two articles in Captive International January 2018 described the development of the Buyer’s Club 1.0 towards the insurance industry of the 21st century. The cost structure and the generally prevailing insurance portfolio were examined, and it was determined that both are no longer truly in step with the times.
The second article was based on research results from the BlockART Institute. As part of a qualitative study, captive owners from Germany and the US were surveyed regarding their companies’ current risk portfolios, as well as regarding administrative and regulatory developments.
The analysis indicated that the risk portfolio has changed significantly in the past few decades and that the risks jeopardising the existence of companies have undergone a change. Businesses are now more concerned about climate change, recruitment issues, innovation failures, market downturns and the emergence of mega corporations than they are about traditional risks such as liability, fire and shipping damages.
In particular, the supply chain is very often identified as a bottleneck on the way to success. Upon enquiry, what is meant here is not just the pure interruption of the supply chain, but also the dependence on the quality and innovation capacity of existing suppliers. It emerged that companies see themselves as faced with the following overarching challenges:
- Lack of capacity: Due to cumulative risk, the captive owner is increasingly being denied reinsurance capacity via the reinsurer.
- Long coverage processes: Digitisation has not yet arrived in the industry and it is a relatively complex process to obtain coverage, such that it is not obtained in a timely manner.
- High administrative costs and brokerage: Insurance still costs a relatively large amount of money. Although we have had a soft market for years, the loss reserves are disproportionate to the administrative costs.
The insurance market is no longer in step with the times. The benefits of digitisation are not being fully exploited. Processes need to be streamlined and at the same time updated wordings for existence-jeopardising risks must be developed.
On the basis of these findings, the BlockART Institute has come up with the concept of a platform solution: Ryskex. The objective of the platform is to illustrate the symbiosis of alternative risk transfer solutions and new technologies such as blockchain, which have the following advantages for the industrial insurance sector:
- Elimination of administrative costs and high brokerage;
- Premium reduction via transparent bidding processes;
- No limitation of the insurance sum, because it is not linked to reinsurer conditions;
- The highest level of security is ensured by blockchain technology;
- Tailor-made coverage that includes non-insurable risks with an innovative risk hedging process; and
- The possibility for captive owners to act as insurers in the market and also to cover risks of other market participants (the captive becomes a profit centre).
A German company in the energy industry is seeking risk protection for the development of a seesaw engine. The sum insured amounts to €12.5 million. You can see the bidding process depicted in Figure 1. The slots will be “auctioned” one at a time, and the risk taker with the lowest premium will win the bid. The underlying wording is the same for all participants and is provided by the consortium leader.
Traditionally, risk-underwriting companies are primary insurers. However, the idea here is that captive owners also bid on the risk and provide coverage. Due to the prevailing expertise—for example, because the parent company itself is active in the energy sector, or the company issuing the invitation to bid is a supplier—there can be a realistic estimate of the probability of default in relation to the premium.
Once the €12.5 million has been successfully underwritten, a smart contract will be triggered and the contracting parties will be informed accordingly, on the one hand the policyholder of the coverage that was provided and by whom, and on the other hand the risk taker about the generated premium amount and the extent of the provided insurance coverage.
In event of damage, the consortium leader is responsible for validation of the claim and will inform the parties regarding the outcome, also via the platform. If the damage has occurred in accordance with the wording and if there is a settlement, this will also be undertaken via blockchain and the money will be transferred to the wallet of the policyholder.
For a live demonstration of the platform or for collaboration in the field of research, contact us at: email@example.com
Marcus Schmalbach is head of BlockART Institute which is doing research in the field of blockchain and alternative risk transfer. He can be contacted at: firstname.lastname@example.org