Blockchain-based smart contract technology has the potential to facilitate and accelerate the contract management process of such cat swaps and bonds. Each validated contract on the open shared infrastructure contains data and self-executable codes inherent to that contract. When a triggering event occurs which meets the agreed conditions, the blockchain smart contract picks up the predefined data sources of all participants, and then automatically activates and determines payouts to or from contract parties.
“Blockchain technology would increase reliability, auditability and speed for both cat swaps and bonds as less manual processing, authentication and verification through intermediaries is required to confirm the legitimacy of payments/transactions to and from the investors,” explains Richard Boyd, Bermuda-based Chief Underwriting Officer of ART. “By replacing the human interventions which are currently embedded throughout the entire risk transfer process, frictional delays and the risks of human error are completely removed – with a radical effect on the speed and efficiency of the process and, in the case of bonds, on the tradability of such securities.”
Blockchain is the technology underlying the bitcoin digital currency but its applications in cryptocurrency, smart contracts and distributed ledgers are being explored throughout the financial services industry. The smart contract technology allows digital execution of contracts with automated and distributed ledgers which are designed to be incorruptible, thus having the potential to significantly reduce the arbitration and validation functions traditionally performed by independent third party institutions such as banks, intermediaries and administrators, auditors and clearing houses.