With discussions abound on the future forms blockchain solutions will take and the effects they will have, we take a closer look at the Bermuda Insurance Exchange, a blockchain-enabled risk and capital exchange set to launch in July
Discussions around blockchain and the potential ‘disruption’ that it could cause the captive market in the future have been a mainstay of captive conferences for so long that it is sometimes easy to forget that blockchain-based solutions for the market are more than just future plans and projections.
Real life, ready to go solutions are beginning to pop up across the captive market.
One such solution is the Bermuda Insurance Exchange, a distributed ledger technology (DLT)-enabled risk and capital exchange that is set to launch in Bermuda later this year.
DLT is a database that is consensually shared and syncronised between multiple sites, institutions or geographies, which has no central administrator and works on a peer-to-peer network. It ensures that every party’s copy of the information is in exactly the same state and that every change is recorded and traceable, meaning data can always be trusted and verified.
The Bermuda Insurance Exchange
The Bermuda Insurance Exchange will allow broker, reinsurance, and insurance companies access to the capital markets using blockchain and allow the transfer of risk and capital between direct insureds, brokers, cedants and captive insurers, and insurance, reinsurance, industry loss warranties and insurance-linked securities (ILS).
It’s creators, London-based startup ChainThat, suggest that it could provide a “technology-driven insurance ecosystem” that utilises DLT and smart contracts for placing, accounting, settlement and claims, ensures regulatory and tax compliance, and can be governed directly by its participants.
The nature of the platform and its base in DLT technology means that data is 100 percent secure and accurate, with each counterpart retaining full and entire ownership of their own data.
According to ChainThat, the exchange will also greatly reduce the administrative costs of conducting business. The startup estimates it could reduce “frictional administration costs by up to 30 percent for every party in the distribution chain”.
ChainThat adds that it expects “this will dramatically improve expense ratios because the efficiency is realised in insurers own administration costs but also in distributors where such costs form part of the brokerage and distribution charges”.
David Edwards, CEO of ChainThat, explains that the reduction of expense ratios is an early target for the new platform.
“It is very much initially focused on the expense ratios,” he explains, “driving those down so that we can reduce the insurance gap that is out there at the moment.”
He continues: “The idea of the exchange is to match risk to capital. What we don’t want to do is dictate the business model. We don’t want to say here’s how the future is going to look and here is how your business has to change.”
“What we wanted to do was give them the platform to support the current processes the way that insurance, reinsurance and ILS are done, and the administration behind those. So, it is like a trading platform that supports all of the back office processes.”
According to Edwards, blockchain, DLT and smart contracts are the only technologies that fit the business model of insurance today.
He says: “Previously, we’ve always been trying to make technology fit into the business model of insurance and, fundamentally, it hasn’t worked because we always put ownership in a central service–usually, someone owns the service and other people don’t. DLT is, in effect, a peer to peer solution. It is just those parties involved that own it.”
Origins
ChainThat was formed in 2015 with the aim of building new technology enabled insurance industry.
One that would have improved market access, speed, innovation and data quality, matched with reduced cost. They began by building a DLT platform, which they believed could revolutionise the London Market.
“I thought we’d solved London’s problem,” explains Edwards, whose background is primarily in designing systems for the London insurance markets. We had built a decentralised placement platform that could revolutionise the London market, but they just weren’t interested at the time.
“I always thought London would have been a great place to start, but the rate of change there means it is exceptionally slow at adopting new technologies.”
So the company decided to continue to explore other avenues of creating value across the insurance value chain. It developed proof of concepts for a number of large organisations and took a multi million investment from global insurance consulting, managed services, and insurtech company Xceedance in 2017.
Community spirit
Work began on the platform for the current project, the Bermuda Insurance Exchange, six months ago. Edwards visited Bermuda midway through 2018 to meet with brokers, insurers, reinsurers, and captives to try to understand how the domicile worked. These meetings persuaded him that it was the right place to launch the platform.
“They gave us the idea that our platform could work in a marketplace like Bermuda,” he says. “We don’t want to create a global solution in which we have to take into account every country’s regulations. By creating a marketplace within a domicile like Bermuda, you can then make sure that you get regulation and compliance built in from the ground up rather than trying to tackle everything in one go.”
One of the things that sold Bermuda to Edwards and ChainThat was the way the community there functions. He expands: “The fact that it is an island has a huge impact on the way the community functions. We know we have to collaborate to compete, which is a hard thing to do, but the way the island is set up they have a very close knit community which seems to work better together.”
Important too are the regulators and the government, who Edwards notes are “very friendly”.
He adds: “The regulators seem to be very helpful with their initiatives as well, you’ve got the Bermuda Monetary Authority, the innovation hub and the sandbox, and it is also very forward thinking in terms of digital asset regulations.”
What does this mean for captives?
But what does this new DLT-based risk platform mean for captive insurance? Well, in the ‘Beyond Ideas’ brochure, which provides information on the exchange, ChainThat suggest there will be a range of benefits for the captive market. Firstly, the DLT technology will eliminate manual administration costs that are duplicated across the insurance chain, as the exchange provides a common record for all parties. This should reduce frictional costs, meaning captives could expect lower premiums, in comparison to insuring through any other market.
Additionally, it may lead to new specialist captive products. According to ChainThat, the more risk put through a captive by a parent company, the more it can reduce its total cost of insurance, and the more its captive can become a profit generating entity. Therefore, as the Bermuda Insurance Exchange facilitates easier and faster trading it will accelerate the development of new products that will enable captives to access previously unavailable classes of business”.
Edwards notes that there are further benefits, he says: “We are looking at how we can work with the regulators to make the registration more efficient. To make it a lot more straightforward to actually register new captives.”
He adds that it will offer a more efficient way to manage captives, including premiums and claims.
“It doesn’t matter whether they are using a captive manager or are doing it themselves,” says Edwards, “this will give them access to different capital to try and find, based on their company profile, what type of capital is going to be best for them, open up those options and try and remove that barrier for captives.”
“It is not going to cost captives a lot to do this and it is going to be a much more efficient way to find the right sort of capital. It will also manage the claims process, which can be quite labourious in some cases, providing claims process capability for the captive.”
The production trial
The current plan is for the Bermuda Insurance Exchange to go live on a production trial in July this year, beginning at first with a focus on reinsurance.
Edwards explains: “The idea is that we are starting with reinsurance, because of the market in Bermuda, and will then open it up further and bring on new modules. Initially our targets will be cedants, brokers and reinsurers, but we will then be opening it up to special purpose vehicles, ILS fronts, capital markets, and captive insurers.”
The target for the production trial is to run for six months at low cost, beginning with a group of between five and 20 participants, to allow for each participant to build its internal business cases.
Interest has been “very positive” so far, according to Edwards, who was in Bermuda recently to give a live demonstration of the platform to around 60 people, including insurers, reinsurers, brokers, capital providers, regulators, and the Bermuda premier and finance minister. He says that the live demonstration proved that “this is not just another idea that is out there”.
“This is real and ready to go.”
The focus for ChainThat over the next six to eight months is Bermuda and getting the exchange to work in the way the market wants it to work. Edwards is optimistic about a potential domino effect in the jurisdiction.
“There is a limited number of participants in Bermuda,” he says, “but I think as soon as a couple of them use it and get the efficiency it will make it very easy to integrate and get on board with this platform and everyone can start to come on board and form that marketplace.”
Hubs
Further expansion is planned in terms of services, including the addition of modelling and sanction checking services. Following success in Bermuda, Edwards indicates that the plan is for geographic expansion and potentially the creation of other exchanges.
He explains: “We will definitely be looking at how we expand it further, perhaps into the North American market. Looking at how we can make it more efficient for the managing general agents and the retail brokers out in Florida to access. Try and make it easier for this marketplace to be accessed globally, so, people can come into it.”
“Singapore is probably the next most likely place we’d go to, though we are still yet to confirm that. We see marketplaces evolving as hubs, so we might have a hub in London, in Bermuda, in Singapore, in Dubai, and then we can figure out how to transfer risk between those hubs in a legal and compliant way going forward.”
“The long term vision is to take it to a place where, in 10 to 20 years time, we have risk profiles and capital profiles, and this platform gives a way to match the risk to the right kind of capital in the most efficient way.”
A real solution
ChainThat believes a byproduct of the increased efficiency and value that the exchange will offer the market is that it will make it more conducive to innovation.
Edwards says: “People want to bring new products to the market at the moment, but when you have a 30 percent expense ratio it is quite hard to get these new products and make them profitable.”
“If we drive that expense ratio down we can start to bring new products into the market, which will hopefully help to speed up that innovation cycle.”
Edwards is confident that the exchange has all the characteristics to succeed, more than anything because in an insurance market full of projections about blockchain solutions, ChainThat are offering something real and tangible.
“It has received a great response because it is real,” he notes, “we have always built first before we talk about a solution to someone. Build it first and then take it out to them.”
“Obviously there are more iterations when we get feedback, but when they actually see it they understand that it is real and see how quickly these processes can be done.”
