Digital reform for re/insurance


Digital reform for re/insurance

Marcus Schmalbach, founder and CEO, Ryskex

Is the re/insurance sector ready for Industry 4.0? Marcus Schmalbach, Ryskex, asked the question and provided some answers for Baden-Baden Today.

“Digital solutions and marketplaces are no longer pure theories, but have arrived in the market.”

Market studies by the BlockART Institute prove that the classic insurance market, with its classic solution models, is reaching its limits. The insurance approach is to settle individual risks and the amount of loss incurred.

There is a fire, the loss adjuster comes, there are various rounds of negotiations and at the end of the day the amount of the loss is settled. Today, however, quantifying the ‘true value’ is not as straightforward. Reputation, intellectual property and innovation are crucial elements of a company’s stock market value.

In the event of a cyber attack, is the damage really repaired when malware if removed and the IT system is back up and running again? The answer a risk manager at a Fortune 500 company based in Germany gave me was a resounding “no”. He went on: “Clients need a cyber solution that can account for the impact on their business, and not just the damage itself. However, solutions of this nature are missing because insurers rely on old models and approaches, and newer risks cannot be properly calculated and verified.”

Thinking along traditional insurance lines is no longer possible due to the complexity of today’s world and the myriad of emergent risks. The customer does not need damage coverage; instead, they require impact coverage. Such requirements can be met with artificial intelligence (AI) and blockchain technology.

These technological developments form the basis for the innovative risk transfer market of tomorrow. AI makes it possible to rely on metrics in risk management. A parametric risk transfer is based on an independent parameter or index that correlates with a client’s losses.

Parametric solutions are fast and efficient and this is especially true with regard to products that are currently difficult to insure. The combination of blockchain with parametric triggers helps in revealing possible solutions.

For emerging risks such as cyber, parametric triggers and the blockchain can reveal interesting solutions for policyholders and risk-takers. For example, Stuart Quick, unit lead of the AXIS Cyber Insurance Center of Excellence, sees in this approach a driver for the future.

“The AXIS Cyber Insurance Centre of Excellence has enjoyed developing a cyber cover solution with Ryskex, and we are looking forward to continuing our work with them in developing parametric solutions,” he said.

As a sandbox for piloting this new solution and to ensure that it meets regulatory requirements, a Digital Transformation of Captive Industry was launched in the number one US onshore captive insurance domicile Vermont in 2019. Commissioner of the Department of Financial Regulation, Michael Pieciak, stated: “Vermont has always looked to foster innovation in our financial markets, and in particular the captive insurance industry.

“New technologies such as blockchain have the potential to improve outcomes which will ultimately better serve the consumer and make business more efficient.”

PCYCO is the world’s first blockchain-based parametric cyber cover solution and has its origins in the Lloyd’s Lab. In cooperation with experts from well-known syndicates, and clients of the London marketplace, a revolutionary product was developed: a trigger-based model for parametric solutions.

Lengthy negotiations are a thing of the past, as only the selection and number of triggers, or the respective payout amount, have to be negotiated with the help of a platform.

Each policyholder can individually negotiate its ‘trigger chain’ and the corresponding compensation amount with the risk-takers. The result is a tailor-made solution for the policyholder. With this solution, it is no longer the claim that is insured, but the true impact on the policyholder’s balance sheet.

In order to exclude moral hazard risks on the part of both parties, independent external sources are agreed, and serve as a basis for settlement in the event of a claim. If source reports a claim, a short proof-check for correctness is carried out and the payment of the agreed sum is immediately initiated via the blockchain and the compensation amount is transferred. The traditional claim adjustment process becomes obsolete.

This innovative approach enables non-insurance experts to act as risk-takers. Similar to the investment in a company share, institutional investors can offer risks and expand their investment portfolio. Digital solutions and marketplaces are no longer pure theories, but have arrived in the market.

Traditional market participants should therefore not ask themselves whether they are ready, but how they can turn these emerging models and undertakings into allies.

Marcus Schmalbach is the founder and CEO of Ryskex and the academic head of BlockART institute. He can be contacted at:

Baden-Baden 2019, Ryskex, Insurance, Reinsurance, Marcus Schmalbach, Europe

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