Schroders Capital, the private markets business of Schroders Group, has launched an innovative tokenisation pilot designed to enhance the way insurance-linked securities (ILS) investments are invested and managed. The proof of concept was a collaboration with global reinsurance company, Hannover Re.
The pilot builds on Schroders Group’s commitment to innovation and leadership in digital assets, after having last year joined the Monetary Authority of Singapore’s Project Guardian, and participating in the first-ever GBP Digital Bond issued by the European Investment Bank.
Tokenising reinsurance contracts
The initiative with Hannover Re, which has been tested by Schroders on an internal-only basis, has successfully enabled reinsurance contracts to be tokenised and traded on a public blockchain platform using smart contracts. Each token represents a share in a portfolio of reinsurance contracts, demonstrating how ILS funds may invest via a digital ecosystem in the future.
Tokenising these contracts has, with the consistent oversight of investment professionals, allowed many time-consuming processes to be automated. For example, the pilot group was able to streamline the investment process by automating subscriptions and reducing settlement times.
Furthermore, through the integration of key catastrophe insurance data sources into the smart contracts, payments to the appropriate recipient are automatically triggered if specific natural disasters occur, such as US hurricanes or earthquakes, or European windstorms.
The pilot also demonstrated the potential for an improved client experience, boosting accessibility by allowing tokens to be held in investors’ own digital wallets alongside their other digital investments. The use of a public blockchain has also enhanced transparency, while still allowing appropriate governance and controls to be applied.
Earlier this year, Schroders Capital also announced that its ILS team is now managing over $5bn in funds as client demand continues to grow. The ILS team forms part of Schroders Capital’s Private Debt and Credit Alternatives (PDCA) business which was launched in 2023 and manages over $30bn in assets.
Tokenisation pilot
Mr Stephan Ruoff, co-head of Private Debt and Credit Alternatives, Schroders Capital, said, "The success of this pilot showcases the immense potential for enhancing transparency, streamlining investment processes, and improving client experience in the reinsurance sector. It paves the way for a more interconnected and efficient digital ecosystem, and we are looking forward to exploring broader application to wider investment scenarios and clients.
“This project was the result of more than a year of collaboration between Schroders, Hannover Re, and the i.AM Innovation Lab, under the oversight of the Guernsey Financial Services Commission (GFSC).”
Mr Henning Ludolphs, managing director, Retrocession & Capital Markets, at Hannover Re, said, “This proof of concept was a great opportunity to understand the capabilities of blockchain technology when applied to the reinsurance market. With strong governance and embedded compliance in place, the pilot also showed that the regulatory and operational risks around blockchain are similar to those of other market transactions. While this is an emerging technology, we anticipate more appetite for blockchain-enabled investments in the future, and this pilot prepares us well to evolve our approach to generate further retrocession capacity via a different source.”
Schroders Capital plans to use the findings of this proof of concept to explore further tokenisation opportunities in the reinsurance market. In addition, in late June, the business also unveiled its Generative AI Investment Analyst (GAiiA) platform, designed to speed up the analysis of large volumes of data.
Schroders Capital provides investors with access to a broad range of private market investment opportunities, portfolio building blocks, and customised private market strategies. With $93.7bn of assets under management as of 31 December 2023, Schroders Capital offers a diversified range of investment strategies, including real estate, private equity, secondaries, venture capital, infrastructure, securitised products, and asset-based finance, private debt, insurance-linked securities and BlueOrchard (Impact Specialists).