Schroders Capital recently partnered with reinsurer Hannover Re to tokenize a portfolio of reinsurance contracts on a public blockchain as part of a proof of concept. There is a wide range of insurance linked securities (ILS), but one of the simplest types is catastrophe bonds. Cat bonds are used to offload risks of weather events to a wider range of investors. Otherwise a spate of bad weather events could wipe out the reinsurance sector.
Given there’s an emphasis on the tokenization of alternative investments, the ILS sector fits neatly into that category. It is currently a popular investment amongst hedge funds given historically high yields on cat bonds. And Schroders Capital is an originator of ILS, managing $5 billion in funds as part of the $94 billion private markets business.
Schroders emphasized that the company tested the proof of concept on an internal-only basis. The trial involved tokenizing a portfolio of reinsurance contracts with each token representing a share in the portfolio, and the tokens tradable on public blockchain.
Tokenization enables automated subscription and reduces the settlement times. It’s also possible to integrate catastrophe data with smart contacts, to trigger payout events when a natural disaster occurs, such as a hurricane. Clients can hold the tokens in their digital wallets alongside other digital assets, plus the use of public blockchain enhances transparency.
“The success of this pilot showcases the immense potential for enhancing transparency, streamlining investment processes and improving client experience in the reinsurance sector,” said Stephan Ruoff, Co-Head of Private Debt and Credit Alternatives, Schroders Capital. “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.”
i.AM Innovation Lab also participated in the trial with oversight from the Guernsey Financial Services Commission (GFSC).
Tokenization track records
Surprisingly, ILS was one of the early assets to be tokenized. More than six years ago, we first wrote about a cat bond on a blockchain issued by Solidum Re. In that case, settlement was a key driver as blockchain enabled Solidum Re to sidestep the need to use Euroclear.
Meanwhile, Schroders is also a participant in fund tokenization trials alongside fund distribution firm Calastone as part of Singapore’s Project Guardian. Additionally, it was an investor in the European Investment Bank’s first GBP digital bond.
Arguably Hannover Re has more blockchain experience, but some of it is less recent. Alongside many global reinsurers and carriers, it was a founding shareholder of B3i, the blockchain insurance consortium, which has since shuttered. It also participated in a Chinese consortium and was part of the DAO for a Lemonade Foundation parametric insurance product.
