Blockchain: Betting on Bermuda

In March insurtech company ChainThat announced that it was betting on Bermuda, with the planned launch of a blockchain-powered risk and capital exchange on the Island to connect re/insurance companies and brokers to the capital markets.

The Bermuda Insurance Exchange is to go live with a production trial in July 2019. It allows the transfer of risk and capital between direct insureds, brokers, cedants and captive insurers and insurance, reinsurance, industry loss warranties (ILW) and insurance-linked securities (ILS).

According to Dave Edwards, chief executive officer of ChainThat, when the company was launched three-and-a-half years ago it looked at blockchain, distributed ledger technology (DLT) and smart contracts and saw that it now has the technology that matches the business model of how insurance, reinsurance and brokers all interact with each other.

This set it apart, as historically insurtech companies had tried to make the technology fit the business model, with centralised services or point ownership on one party to manage some kind of infrastructure.

“The idea behind the Bermuda exchange is all about initially removing frictional costs from the marketplace, in effect focusing on the expense ratio first. It’s about reducing those frictional costs and then providing a platform so that the market can then evolve, but not us dictating it,” says Edwards.

“We’re not here to create new business models, but to provide a platform for the participants who can then decide how they want the business models to work in the future.

“We’re starting with insurance and reinsurance in Bermuda, and we’re looking at the placement of contracts (direct, facultative and treaty), the accounting between the parties, getting into an agreed settlement position and managing the claims process against those contracts. All of this is linked together via the DLT smart contracts.”

Why Bermuda?

Why start with Bermuda and not a larger insurance centre such as London? According to Edwards, the company hosted an event on Bermuda with Xceedance, its investor and strategic partner, in June 2018 which was its first foray into Bermuda to try and understand how the market there works.

Edwards has been returning to the Island every month since then and speaking to market participants there, as well as the regulators and the Bermuda Business Development Agency (BDA).

“Bermuda has a great history of product innovation, such as ILS, cat bonds and so on. There’s also the way they interact with each other—it’s such a small island, there’s the community and the corporate responsibility for the Island that creates a network and a community who want to get things done, and get them done quickly,” he says.

Edwards points out that as this exchange will be a collaborative effort—one company isn’t enough, it needs multiple parties—the way that Bermuda operates means it offers a much more effective way to do this. Had ChainThat tried to do this as a global solution from day one, in trying to do the whole world together the company would have encountered regulatory issues and compliance in multiple jurisdictions.

“Using Bermuda as a hub, a lot of capital and business are going through there already. ChainThat can work with the regulators to create its exchange as an initial hub,” says Edwards.

“ChainThat’s vision is that there would be other exchanges to connect into it beyond that: one in Bermuda, one in London, one in Singapore, and so on. Dealing with the whole world would be quite hard, so initially we will be building these hubs. We think this is the most sensible solution to get these solutions working and to get people to realise the benefits.

“Over the years we started with placement, moving into settlements and claims, facility management and capacity management for managing general agents (MGAs) as well,” he says. “We always thought that London would be the ideal place to adopt something like this, where there is quite a large marketplace, but the pace of change in London seems to be very slow, and I think they have other priorities at the moment.

“The different hubs will move at different speeds; we think Bermuda will move extremely fast on this, compared with London. There isn’t an electronic market in Bermuda yet, so it’s a greenfield player, while London has a lot of legacy risks which makes doing something new and more efficient a lot harder for them.”

Edwards says that initially ChainThat’s exchange will be looking at property, then adding casualty and other lines of business, creating the first step of what it plans to build. The second step will be to look at starting to support the other types of capital that are out there, starting off with traditional capital and then moving on to ILW and ILS administration, and then further down the line looking at the digitisation of assets, so in effect tokenisation.

ChainThat could then make these securities tokenised assets and move them into trading in secondary markets as a part of its longer-term vision of what’s going to happen.

The long-term plan

Edwards admits that this long-term vision is ambitious, but what he wants to start with is a ‘let’s do things better than we do today’ approach. He describes this in terms of supporting the current reinsurance processes as they are today but digitising the data and reducing those frictional costs and reconciliation between the parties of the trade—not changing the business model in any way to start with.

However, Edwards adds, once ChainThat has shown the market how it can do what it does today in a much more efficient manner, then it can move on to think about the potential opportunities to evolve this much further.

“It’s going to be the market’s direction that takes us there, as opposed to our saying ‘this is the way to go as risk and capital are going to be matched in the future’, there may be some kind of blind auction to be seen then, or any other types of methods,” he says.

“The idea is that the market can help define risk, but we need to be digital and connected to be able to get those efficiencies, so we need to create a new ecosystem to allow us to access the market and be faster and more efficient.

“Everyone sees the same source of truth—it’s going to be safer and more secure and hopefully because of that we can speed up the innovation cycles, reducing those frictional costs and having a better business insight so we can focus more on the areas where they add value to the insurance value chain, as opposed to the back office processes, which no-one should really be making a competitive advantage for themselves.”

Looking back at the short term, Edwards concedes that ChainThat has to deal with all the current hype about blockchain and DLTs.

“Many large consortiums are producing good marketing, but that the market has yet to see anything tangible in terms of results and savings.

“When we approach the people we’d like to see as a part of this exchange we can say they’d be able to save 30 percent off their expense ratio, but they have to be able to see that for themselves,” says Edwards.

“Instead of its being a paper exercise, what we’re trying to do in the short term is to set up a production trial in July, where the participants can come on board.

“Then we can put live products through this platform and build their business case should they wish to continue after that production trial. What we want is for them to be able to build their own internal business case to see the benefits of using this in the long term.”

Dave Edwards is chief executive officer of ChainThat. He can be contacted at: david@chainthat.com