AXA Lab Asia is in talks with Shanghai-based Global Risk Exchange (GRE) to develop a blockchain-based solution to let agriculture producers protect against extreme-weather risks, among other solutions.
Erica Li, digital business analyst at AXA Lab in Shanghai, says the partnership with GRE, if it is finalized, will focus on parametric insurance, where claim compensations are automatically triggered by a metric such as weather.
GRE is building a new platform that uses distributed-ledger technology to connect insurance companies and policyholders, with a community of actuaries at the heart of the platform. Customers submit a risk they want to cover onto the platform, and actuaries will design a product for it, which will be put up to bid for insurance companies to service.
Both premiums and claims will be exchanged over the ledger, with smart contracts governing whether policies need to be paid. In the extreme-weather example, data fed into the system from public sources such as rainfall volumes can trigger a farmer’s claim automatically.
From insurer to reinsurer
In addition to participating as a primary insurer on the GRE platform, AXA would like to also reinsure third-party insurance companies that it hopes will also participate.
Frank Desvignes, Shanghai-based founder of AXA Lab Asia, says the project should help lower the costs of insurance. "Blockchain platforms like GRE provide better protection to the underserved," he said.
Blockchain platforms like GRE provide better protection to the underserved
He adds that AXA will participate as both a primary insurer and a reinsurer on the platform, using the partnership to bolster its ambitions to grow in the reinsurance space.
Paul Qi, founder of GRE, says the system works by requiring premiums remain on-chain, rather than going into insurers’ pockets straightaway. Instead, premiums provide a pool from which any claims can be immediately paid out, and insurers claim their premiums once the policy expires.
Therefore this business model caters to short-term, relatively small premium products in the property and casualty side of the industry. But it also opens such customer segments to insurers, which previously would not have been able to offer such products at an affordable rate. He hopes to launch the service by June with weather-based crop insurance for farmers in Southeast Asia.
Advantages of DLT
Using DLT also builds in more predictability to P&C business. Traditional underwriting relies on actuarial studies of credit reports and intangibles such as goodwill. But for high-level catastrophes, “There is no guarantee insurers can pay claims,” Qi said.
But with blockchain technology, both premiums and payouts are locked into the system’s logic of smart contracts. This means customers can be more confident that their claims will be quickly met – at least in the case of deals small enough to give an insurer comfort that it can weather a storm.
“For short-term products, there isn’t enough time for insurance companies to see the return,” Qi said. “Whereas on our platform, insurers can predict their fixed returns assuming the risk event doesn’t happen.” Therefore the platform is suited for short-term P&C policies with easily defined parameters – it wouldn’t work for complex or long-term products, and less well for those requiring much larger payouts.
Blockchain also lowers the cost of insurance products by connecting providers and end customers directly, without relying on agents in the middle, Qi says.
How big is such a market? Although GRE’s original idea was to target weather events for agriculture in Asian countries, it could apply to car insurance – which is the origin of Qi’s career. Qi is also founder of Shanghai-based OK Chexian, an insurtech providing data-led motor insurance.
Transaction velocity is always a concern
Wan Peng, chief risk officer at Global Insurance Ecosystem Alliance (GIEA), a mainland China industry group, says last year China’s car insurance generated Rmb75 billion ($9.87 billion) in premiums. Speaking at the Internet Insurance Summit in Shanghai last month, Wan says there are many customer segments in China that have yet to be explored.
From DLT to crypto
Using DLT also moves insurance into the token economy, giving transactions a crypto-currency element. Qi says GRE has been testing more than 260 types of contracts trading with tokens, to make sure the blockchain can process deals at volume.
“Transaction velocity is always a concern when it comes to blockchain,” Qi said. For now, GRE can process tens of thousands of tokens per second, but Qi says this isn’t enough. “There may be a problem when our traffic increases,” he said, if the platform has to handle tens of millions of token transactions at the same time. GRE continues to develop the technology to handle scalability, he says.
GRE will issue their tokens named “Risk Token” in June, which customers can use to transact on the platform and convert in and out of fiat money.
In the meantime, AXA intends to use the platform to introduce agricultural risk products based on smart contracts, although Erica Li says the company is still assessing which markets to target.
According to GRE’s website, the company is working with consultants from crypto-currency (Coinbase), insurtech (Caike Wallet, JustInCase) and traditional insurance (Cruz Suiza Compania De Seguros and AXA).