This Week in Fintech ending 21 February 2020

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This weekly summary from our 5 experts, brings you insights based on their experience as investors, entrepreneurs & executives.

Ilias Hatzis started his first company, an internet search engine, during the dot-com era & now focusses on crypto.

Efi Pylarinou worked for top tier Wall Street firms and is now a top global Fintech influencer.

Jessica Ellerm is CEO of Zuper Superannuation & previously worked for a top Fintech startup, Tyro.

Patrick Kelahan is a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners.

Sheldon Freedman is a Fintech Lawyer at Hassans International Law Firm

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Your Editor is Bernard Lunn. He is also the CEO of Daily Fintech and author of The Blockchain Economy.

Monday Ilias Hatzis @iliashatzis our Greece-based crypto entrepreneur (Founder & CEO at Mercato Blockchain Corporation AG and Weekly Columnist at Daily Fintech) wrote Bitcoin price surges. Is Coronavirus behind it?

The Coronavirus is negatively already affecting several global industries and should the disruption continue, we could see the impact reach all the way to the end of 2020. One of them, electronics and tech are already feeling the impact of the coronavirus. With Bitcoin’s scheduled halving in May, Chinese miner manufacturers have seen a rise in demand for new equipment. The world’s largest manufacturers of mining equipment are based in China (Bitmain, Canaan, MicroBT, and InnoSilicon) and all of them face delays in production and delivery. The price of Bitcoin and cryptocurrencies have increased whenever investors start to panic. 

Editor note: Ilias analyses the complex interactions between Coronavirus and  the price of Bitcoin.

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Tuesday Efi Pylarinou @efipm our Swiss-based Fintech Adviser,  founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019 wrote `NonTransparent ETFs` one step forward and two steps backward

The `NonTransparent ETF` wrapper caught my attention recently, while reviewing WealthManagement news and trends. What kind of innovative investment vehicle would choose in our times, this kind of name?

In late January this year, the SEC approved a new ETF wrapper and several companies will be able to launch active ETFs or license the wrapper to asset managers. T. Rowe had first applied for SEC approval to launch actively managed ETFs (what is now called `NonTransparent ETFs`) as early as 2013.

Editor note: Efi looks at how the very strangely branded non-transparent ETFs work and why they are bad news for investors.

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Wednesday Jessica Ellerm @jessicaellerm, our Australia-based Fintech entrepreneur and thought leader specializing in Small Business and the Gig Economy & CEO/Co-Founder of Zuper, a new superannuation startup in Australia wrote Small Business Fintech is levelling the cost of capital playing field

Today, Jessica is taking a break. This post is by Bernard Lunn, CEO of Daily Fintech and author of The Blockchain Economy.

We saw the potential in the Small Business Fintech megatrend, which we described as “big enough to drive a truck through” back in 2015 and Jessica Ellerm started our regular weekly column 4 years ago in February 2016 (when it was seen as a niche within a niche).By 2020, Small Business Fintech has become mainstream and is scaling fast. Today we reflect on the growth of this market. 

Editor note: The second order implications of this leveling of the playing field are profound.

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Thursday Patrick Kelahan @insuranceeleph1, our US based Insurtech expert (a CX, engineering & insurance professional, working with Insurers, Attorneys & Owners who also serves the insurance and Fintech world as the ‘Insurance Elephant’) wrote Flood insurance- where the rising tide has NOT raised all ships

The problem is known, the data lakes related to the problem are deep, there are huge costs associated with it and plenty of human suffering.   Whole sectors of predictive data businesses have grown to better understand what is behind it, options abound in an attempt to mitigate its effects.  Governments around the globe spend billions in preparation for and response to the events.

So why isn’t flooding, flood damage mitigation, flood damage repair costs/financing, and flood insurance availability less of a global problem?

Editor note: Pat looks at two possible approaches to the problem of flood insurance as well as showing the huge second order impact of a big coverage gap.

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Friday Sheldon Freedman @sf10002, a Fintech Lawyer at Hassans International Law Firm wrote: Security Token news for Week ending 21 February 2020

Editor note: This weekly snapshot is the news that matters for busy senior people in the Security Token market.

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Flood insurance- where the rising tide has NOT raised all ships

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The problem is known, the data lakes related to the problem are deep, there are huge costs associated with it and plenty of human suffering.   Whole sectors of predictive data businesses have grown to better understand what is behind it, options abound in an attempt to mitigate its effects.  Governments around the globe spend billions in preparation for and response to the events.

So why isn’t flooding, flood damage mitigation, flood damage repair costs/financing, and flood insurance availability less of a global problem?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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The breadth of the problem

Aon indicates global economic losses due to flooding between 2011-19 exceeded $600 billion US, with only $111 billion insured, an amount that surely does not include all infrastructure and productivity losses, or loss of life.  A $500 billion cumulative coverage gap; surely things have improved during the nine-year period, yes?  No.  The latest three-year period indicates a coverage gap of 84% of flood losses, worse than the cumulative 81% during the decade.

Innovation’s Data Analysis Effects

Much has changed in flood risk prediction since the early 1970’s when public flood programs were introduced (e.g., National Flood Insurance Program in the US).  At that time and until recently efforts expended in determining flood risk for a subject area were through elevation mapping devised from physical surveys of respective areas.  These elevation determinations in conjunction with hydrologic data were the default tool.  Problem was that there were few if any insurance carriers that would write flood cover without subsidy from an area’s federal government. In fact, in some jurisdictions (like the US) flood cover could only be written within a government program.  Too much risk of a regional Probable Maximum Loss event, actuarial premiums would have been prohibitive, adverse selection would be the driver of the coverage chase, etc.  As such government programs were the default option, and even at that participation was low.  In the US an overall participation rate in flood insurance even as late as 2017 was less than 15% of properties.

There have been remarkable advances in mining and analyzing data to identify a property’s relative flood risk, and the probability of a significant flood event, some examples being:

  • FloodIQ.com, a product of tech innovator First Street Foundation allows the user to input an address within the US and obtain an idea of rising water’s effects
  • Previsico , not only has developed tech do assess probability of flooding in the UK, but includes live modeling during flood events and includes warning capabilities
  • FloodMapp , before, during, and after services- modeling, dynamic prediction and flood damage quantification for claims
  • Hazard Hub , has risk modeling data that in addition to NFIP flood maps model surge and even tsunami risk by property address
  • https://floodscores.com/ – provider of property specific flood risk info (thanks Sam Green)
  • https://www.floodinsuranceguru.com/- included this resource due to the firm’s unique approach to mastering flood tech methodology and applying that knowledge to risk assessment through flood maps.
  • Leveraging social media for warnings- Sri Lanka has had success notifying more remote villages of impending storms/flood potential. Penetration of smart devices provides a warning platform.  Other chronic flood regions like Bangladesh are beginning to see the need of tech warnings due to recent flood events.

Funding risk management

The extensive flood protection gap suggests that private funding of flood risk has been just a small part of overall flood insurance.  The US market has primarily had NFIP response (or ex post government/emergency funds to account for the coverage gap)- a US government flood insurance market that has continuously functioned as a deficit program due to subsidized rates, significant adverse selection/moral hazard issues, being seen more as a constituent response vehicle than an insurance scheme by congress, being administratively under-funded, and not being a mandatory participation plan so the volume of participants is too low to be self-sustaining.

Properties in flood-prone areas within the UK market of late have benefited from the Flood Re program where UK insurance carriers contribute to the flood insurance plan (as do property owners).  Without belaboring the functioning of the plan (take a look at the website) one can say it’s as much an effective hybrid industry/government/property owner plan as found anywhere.  Its plan is to function as is for a few decades then convert to a fully private plan.

In most countries the largest volume of response is in the form of government emergency finds, particularly for cleanup, infrastructure repairs, and immediate populace support.  While significant, these government responses are inefficient at best and typically delayed by legislative inaction. 

Where there is much optimism for funding is in the capital markets- catastrophe bonds and insurance linked securities (ILS).  Per the data found at artemis.bm, ILS and funds held for flood risk are a small portion of the more than $40 billion US held in the reinsurance/ILS market.  There is plenty of capital in the market, however, and the appetite for returns over those of typical financial market vehicles is building interest in ILS.  The complexity of reinsurance/ILS deals is increasing, as is the level of apportioning tranches of risk across hedging deals.  The key is that as private flood insurance becomes more available the need and interest in alternate risk financing will grow.  An 80+% coverage gap for a peril that is becoming increasingly more frequent, in combination with the trillions of dollars of property at flood risk will find ways to attract capital markets’ involvement, and as data availability and granularity increases the pricing of the vehicles will become even more sophisticated. 

Flood insurance going forward

A problem not considered often in the flood peril aftermath is that flooding affects not only individual property owners, but everyone within a flooded region.  Even the elevated property that is not flooded is affected; its residents are prevented from venturing out, cannot not shop at a flooded store, are unable to get municipal services due to closures, etc. And- the cost of government responses in the absence of insurance are borne by all within a community.  The other factor that is often overlooked?  Insurance proceeds ‘jump start’ recoveries with funds for local businesses; lack of widespread flood insurance cover leads to much less money on the street after an event.

Consider flood insurance penetration within the US- less than 15% of all property owners hold flood cover, and most who do keep it due to mortgagee requirements.  A recent article shared by RJ Lehman of the R Street Institute about the Mississippi flooding occurring as this article is written reinforces that most property owners will be left without a financial backstop for flood recovery (by the way- in the US an article like that is written after every flood or hurricane, the only copy that seems to change is the name of the city/town and the number of policies in force.)  The recovery will come without insurance- slowly, funded piecemeal until finally government funding will be made available.

Is it time for regional parametric programs funded by taxes and made available immediately after a trigger event?  Seems a really good idea since no matter what in the flood peril world the government is the funder of last resort, why not make it the quick response at no more cost than we are used to source? FloodFlash has proven event-based parametric flood cover to be effective option for property owners in the UK, and per Artemis’ reporting SJNK (Japan) is rolling out similar cover for property owners there.

Is it time to make flood insurance a requirement of all homeowners insurance holders?  Flood Re seems a reasonable model to follow, and even with disparate regulatory bodies action can be taken to have an entire region/state/country participating.  Flood perils are growing, so are costs, so is the exposure to critical economic areas.  Smarter approaches to private flood insurance that is based on knowledge of not only insurance but on the factors behind flooding and risk as is used by Chris Greene at FloodInsuranceGuru are needed.  Partnerships such as experienced with Previsico and Loughborough University need to be supported.  Subsidized premiums are OK, but much greater breadth of participation is required to make programs even remotely viable.  The underwriting, mapping, and response tech is there, the political and economic will must be also.

 

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Small Business Fintech is levelling the playing field with big business over cost of capital

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Today, Jessica is taking a break. This post is by Bernard Lunn, CEO of Daily Fintech and author of The Blockchain Economy

We saw the potential in the Small Business Fintech megatrend, which we described as “big enough to drive a truck through” back in 2015 and Jessica Ellerm started our regular weekly column 4 years ago in February 2016 (when it was seen as a niche within a niche).

By 2020, Small Business Fintech has become mainstream and is scaling fast. Today we reflect on the growth of this market. 

Now that Small Business Fintech has attained mainstream status (as seen by all the financings, partnerships, exits and market traction that we report on regularly) it is time to look at 6 niche markets within Small Business Fintech.

  • Credit Scoring. Efficient loan processing through analytics, AI etc is key to Small Business Fintech.  It is easy to lend quickly, but much harder to lend quickly AND profitably.
  • Digital trade finance. This has lots of ventures some them quite mature, but is not as high profile as the first segment. These go via various names such as Supply Chain Finance, Payables Finance, Receivables Finance. These offer lower APR for companies that have invoices from customers who pay reliably (or have a good credit rating).
  • Asset based lending. This is not as mature and still ripe for innovation. It is complex because you also have to fix the currently messy business of asset recovery post default.
  • Innovation Capital for millions of entrepreneurs. The market tends to equate Innovation Capital with equity for Baby Unicorns aka Venture Capital. The much bigger and currently overlooked market is patient capital for Butchers, Bakers & Candlestick Makers ie for main street businesses.
  • Smart contract tokenised payment processing. Our thesis is that the stranglehold of the Credit Card networks will first be broken in Small Business and replaced by some form of innovation that uses smart contract tokenised payment processing using stablecoins. This is still very early stage. 

All these changes are levelling the playing field with big business corporates over the cost of capital. For years, big business corporates got capital very cheaply and quickly while  small business struggled with clunky processes, high rates and lots of personal risk. The second order implications of this levelling of the playing field are profound.

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Pulling back the curtain to shine light on ‘scary’ insurance phrases

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Reinsurance/ILS, Blockchain, and insurance financials.  Not quite lions, tigers, and bears, but for many who follow insurance the three concepts are as daunting and pose discomfort in understanding. Why then the mention?  Because in an earlier social media post I noted that the three words do not generate a lot of media content traffic, and if there is a related posting, not much response.  A wise connection dropped the key hint to that puzzle- the words need to be discussed in context that makes sense to the reader.  A cool idea, Modern Accelerator .

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.  Image

Let’s dive into the three concepts with a full recognition that this blog will serve merely as an overview and whetter of appetites causing the readers to want to consume more. Fair warning- even keeping the topics brief- TL:DR may apply.  That’s OK.

Insurance Financials

There is plenty of government oversight for accounting that dovetails with plenty of regulation, we can’t touch on all the respective countries’ agencies and regulators but in essence they all serve the key roles of making uniform 1) how insurers account financially for their business, and 2) how insurers account for how solid they are in being able to serve their policyholders relative to the agreed scope and cost of risk.

It’s an alphabet soup of government orgs or standards: GAAP, FASB, SAP, IRDAI, NYDFS, SEC, IFRS, FCA, FSDC, SUSEP, NAICOM, ICLG, ASIC, APRA, etc. (almost) ad infinitum.

Fundamentally there are three accounting principles (of the many) with which insurers must comply, just in a slightly different manner from most business organizations :

  • Revenue Recognition Principle
  • Matching Principle
  • Historical Cost Principle

Without complicating things too much, insurance companies have financial stability burden to prove continuously- a carrier’s ability to fund the risk costs that it has agreed to.  All those policyholders have an expectation of indemnity or payment if a loss or occurrence to which their policy agrees to cover /pay comes to fruition.

The three principles noted above are part of the key differences between insurance companies and others, primarily because what insureds receive for premiums is a risk agreement that elapses over time.  Receive $1000 for an insurance contract today for twelve months’ cover.  Money in the bank for a promise over time.  So in respect to compliance with the Matching Principle, premiums are deemed  ‘written’ only until an increment of the policy’s time is expired, wherein the portion of the premium that matches the period is booked as ‘earned’.  One month’s policy duration allows 8 ½% of the written premium to become earned, six months’ earns 50%, and so on.

So you can see how a carrier with a ton of cash on hand might not be as liquid as one thinks if there are an according ton of policies on the books whose expiration extends over twelve months or more.  Written and earned- key concepts.

Here’s an example of a P&L statement showing the written and earned premiums, from German insurer, DFV_AG or Deutsche Familienversichurung:

DFV Inc

The sharp eye will note in addition to written and earned premiums there are lines showing the ‘Share of reinsurers’; that will be touched on in the Reinsurance portion of our discussion.

Traditionally the written and earned difference followed a solid calendar pattern due to typical annual expiration of polices.  But what of on demand or ‘gig’ policies?  The covered period may be a few hours or days, so there is little lag between written and earned status.  Knowing a carrier’s business model has become more important than ever since a heavily funded entrant’s cash may be more restricted if it’s a traditional style insurer in comparison with an on-demand player.

Carrying the discussion to the Matching Principle (matching costs to the period in which the costs were incurred) suggests a few important financial factors:

  • Costs of policy acquisition is matched to immediate written policy premiums, e.g., agency/brokerage commissions, marketing, admin office costs, digital format costs, etc., but
  • Costs of policy administration, e.g., adjusting expense, loss costs paid, etc., may be charged to earned premiums in a different incurred cost period.

As for the Historical Cost Principle, regulators want to know concretely what amount a carrier assigns to portfolio assets.  Insurers need to be liquid in their asset portfolio so assets can easily be converted to cash if loss payment volume so demands.  For example, bonds might fluctuate in value over time due to variances in interest rates, but carriers need to maintain a historic cost to keep regulators content for solvency calculations.

Quite a rabbit hole are financials, so the conversation will conclude with THE common comparative measures for P&C carriers-  loss ratio, expense ratio, and combined ratio.  These measures will give the reader a clear idea if earned premiums (revenue) exceed or are exceeded by expenses and loss cost.

So,

loss ratio = claim payments + adjustment expense/earned premiums, expressed as a %

expense ratio = expenses other than adjustment expenses/earned premium. Expressed as a %

combined ratio is a sum of the LR and CR.

Ideally CR is < 100%, meaning earned premiums exceed costs and underwriting activity is profitable.

What must be remembered as carriers are compared- the maturity of a carrier in terms of time in business, how aggressive is growth relative to existing book, the nature of the carrier’s business and how that affects reserves (immediate draw on profits.)  Entrants may have LR that are in the hundreds of %; consider trends or peer comparisons before your lose your mind.

Reinsurance

Reinsurance is insurance for insurance companies.  There, that was easy.

Rei was once an easier financial concept to grab- carriers would sign treaties with reinsurance companies to help protect the primary insurer from loss outcomes that exceeded typical loss expectations.  Primary carriers do not plan (or price) for an entire region to be affected at the same time, but sometimes things happen that require excess over planned loss payments, e.g., wind storms, wildfires, tornadoes, earthquakes, etc.  Primary carriers will purchase reinsurance that for a specific period, and in an amount that is triggered once a carrier’s loss payments for the treaty peril or perils is incurred.  Pretty direct and expected by regulators, and part of claim solvency calculations.

What has occurred over years is that reinsurers have evolved into other types of excess risk partners, covering more than just catastrophe losses, and becoming excess risk options.  If you again review DFV_AG’s income statement and consider the premium and loss cost portion of the carrier’s P&L shared with reinsurers, you’ll understand the firm has ceded premium and costs to backers to help smooth growth and provide backstop to the firm’s ability to pay claims and serve its customers.  This has become a common methodology for startups and existing carriers, allows more product variety for reinsurers and spread of risk.

Another evolution over the past years beyond reinsurance is the advent of Insurance Linked Securities (ILS), capital vehicles that are designed solely as alternative risk financing.  Insurance-linked securities (ILS) are derivative or securities instruments linked to insurance risks; ILS value is influenced by an insured loss event underlying the security.  What’s that?  ILS are capital vehicles that simply are designed to pay on an outcome of a risk, e.g., hurricane, earthquake, etc., sold to investors looking for diversified returns in the capital markets.  A hedge against a risk for insurers, an option for better than normal market returns for the holders.  Often referred to as Cat bonds, these bonds serve an important role in the risk markets, and are an opportunity for holders for income.  Often ILS are sliced and diced into tranches of varying risk bonds to smooth the outcome of a linked event.  Don’t be surprised if ILS become a more accepted means of financing more common, less severity risk within the industry, or in use in unique new risk applications, an example being pursued by Rahul Mathur and colleagues.

Blockchain

So much promise, so much confusion, overreach and failure to launch.  Or maybe Blockchain’s connection with the perceived wild west of value transfer, crypto currency, has colored the insurance world’s relative arm’s length view of the concept.

A quick search of definitions produces many references to bitcoin and other crypto currency (I’ll leave those to my knowledgeable Daily Fintech colleagues), but we simply want a definition that maybe doesn’t sound simple (Wikipedia):

“By design, a blockchain is resistant to modification of the data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority. Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. “

Open. Distributed. Peer-to-peer. Decentralized. Immutable. Cool for generating crypto, but not so much for the wild data sharing needs of insurance.

So why is Blockchain not taking hold for insurance?  The use case is tough for carriers- unstructured data (of which carriers have a ton) do not play well in a Blockchain (Blkcn) environment, many changing players in an insurance claim, and so on.  Blkcn holds data securely, but doesn’t guarantee cyber security outside the ledger. Blkcn can be more cumbersome for data retrieval across consortia-based ledgers.  Multiple writers to the ledger, multiple efficiency issues to overcome.

But what of uses for reading data once placed in the ledger? Can be very cool. Anthem is a US health insurance provider serving millions of subscribers nationally, the company recently initiated a Blkcn pilot wherein the company is making ledger access an option for the test participants, with patient records stored in the ledger, and individual subscribers given the option to give providers access to health records via use of a QR code that has an expiration date.  Subscribers have the power over their records and access is given for read only permission.  There are many potential benefits to health insurance Blkcn but the options must dovetail with data security.

Another positive scenario for Blkcn application- crop insurance in previously under-served markets.  OKO Insurance provides micro crop insurance policies in Africa, backing by reinsurance but administered in part by distributed ledger, each farmer’s information residing in the ledger, and access provided to underwriting and reinsurance.  And- if payment is made a partnership with digital payment systems to facilitate settlement.  An active Blockchain as a service company, BanQu, is expert at facilitating these frameworks and has a portfolio of projects around the globe where ‘first mile’ and ‘last mile’ data are administered within a ledger for the respective customer and its affiliates/suppliers.  Permissioned but not written by multiple players, QR codes to allow involved sources access to a supply chain.  And the sponsor of the ledger has a clear data record of each step in a supply or value chain.  Speaking with the firm’s business development executive, Brady Bizal, we discussed how a Blkcn ledger such as BanQu provides could serve as an ecosystem initiative for regions, including the details of insurance for a farmer, payment records, link to in country digital payment systems, risk mitigation firms, and as warranted, the transaction/finance data can be accessed by permissioned bankers at the customer’s choice- the magic of QR codes.  It’s an entrée to a trust system that may otherwise not exist.  Opportunity.  Maybe not the original thinking for Blkcn and insurance, but sit for a few minutes and you will think of many similar possibilities for blockchain use in health insurance alone.

Sorry, there is so much that could be written about the three concepts and I’m hopeful the article answered some questions about finances, blockchain and reinsurance/ILS.  It’s certain readers and experts will advise me of missing sections, and that will be the foundation for a next article on the subjects.

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Speaking of Blockchain, what of its place in insurance?

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I’ve felt as an orphan child within the Daily Fintech family, at the end of the common table but the uncomfortable ‘outsider’ because the content I produced for publication was not Fintech or Blockchain oriented.  The Insurtech content has always been embraced as an integral part of the blog, but like the student who does not quite know how to affix the sash on the uniform I have been feeling a little insecure.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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Hard to believe that lede?  Should be, and is.  My DF colleagues are experts in what they write of- finance, crypto, and by extension, Blockchain, and collegially embrace the InsurTech discussions.  So not under any pressure to do so but having an intellectual and industry curiosity I figure it’s time to discuss insurance and Blockchain- unmixed oil and water, or tasty salad dressing?  Blind dates or maybe life partners?

I am privileged to have insurance connections/colleagues who understand Blockchain and are willing to share perspectives, so I reached out to several for background and explanation.  See, while I am no expert at Blockchain (BKCN), crypto, distributed ledgers, etc., I do understand the basics, and have yet to find a ‘tipping point’ application of the principle for insurance.  One might figure if there was, a 5 trillion USD industry would have integrated the idea already.  Instead, there are rumblings of the benefits of BCKCN but few projects at scale.

Consider some projects with traction (thanks, Walid al Saqqaf, Insureblocks founder; readers can find these ideas and many others at his podcast, https://www.insureblocks.com/):

  • Addenda, an insurance subrogation solution founded by CEO Walid Daniel Dib, and located in the U.A.E. Addenda has developed a BKCN alternative to what has always been a manual process fraught with delays and errors, subrogation of claim payments.  The decentralized, trusted nature of BKCN lifts much of the existing barriers to efficient subrogation settlement through placement of immutable records of the loss that the parties can mutually access.  With sufficient subscription by companies, is it possible the volume of liability arbitration would be reduced in other markets?
  • B3i– a Property Catastrophe Excess of Loss Reinsurance application, with John Carolin at the helm as CEO. B3i is a vanguard of what might be commonplace for the insurance BKCN future- a Distributed Ledger Technology (DLT) that is owned by 18 insurance market participants, with active involvement by 40 insurance companies, shareholders, etc.  As such the question of who supports the ledger financially is answered, who has participation rights, and how is the common ‘language’ or protocol of data insertion determined.  As John states, placing reinsurance has traditionally been a very analog process, with the height of innovations being email communication of terms and bids.  BKCN through B3i ‘democratizes’ the data, and access to the players, and encourages use of smart contracts with their basis being the set terms within the ledger.  Can this democratization and sharing of costs be expanded to include other types of insurance, and a far broader community of permitted companies?
  • Blockclaim, a BKCN innovator founded by Niels Thonéthat has an aim of clarifying what is now fifty shades of gray (not that one!) that are generated by the many participants involved with insurance claims, and the volume of data that claims generate. Changing a cumbersome multi-lateral, manual/digital approach of claim handling to a permissioned ledger allows concurrent access to immutable claim facts for all involved parties, leading to less cumbersome (read as more prompt) claim handling.  Can this principle also be broadened to include underwriting characteristics for insured property?  One might think so with sufficient mutual ledger support across a spectrum of companies.
  • Ryskex, a “blockchain based ecosystem for alternative risk transfers”, championed by CEO and co-founder, Dr. Marcus Schmalbach. Ryskex stands for ‘risk exchange’, focusing on new forms of identified risk, and/or previously non-insurable risk in a B2B environment.  The firm’s principle- if these unique risks are typically outside an indemnity risk prediction form, applying parametric principles to these risks, in conjunction with AI methods for determining indices and with trigger forms/indices stored within a ledger for transparency and ease of payment, BKCN can facilitate risk vehicles in less insurance traditional forms that capital markets are more apt to adopt.  Can insurance evolve into a capital risk model and less of a peril/indemnity model?  Dr. Marcus makes a case for it.  In parallel with the risk model changes Marcus is supporting a soon to be released book with John Donald, “Heartbeat in the fog – Parametric Insurance for Intangible Assets”.  While this second book of John’s has a focus on newer risks, e.g., cyber, its principles lend well to parametric and BKCN.  And who am I to question its utility, as Dr. Marcus cites John as the “master mind” and “one of the smartest guys I ever met.”   We won’t let Dr. Marcus kid us about being a smart person in the room; his upcoming journal publication that focuses on insurance of 2030 has a fascinating excerpt speaking of an insurer of the future:

if you have sufficient capital at your disposal, you can be an insurer.  Capitalism meets Anarchism- an ecosystem based on transparency and security of blockchain technology…because of a risk trading ecosystem instead of industrial insurance.”

An additional recent insurance blockchain success deserves mention- insurance startup Etherisc’s quasi-parametric project conducted with partner firms Aon and Oxfam- micro-policies for crop failures for Sri Lankan farmers.  Not a direct parametric solution but a transparent form where the policy data and payment expectations resided within a blockchain ledger, and automatically triggered.  Progress.

And are there firms working in the background to facilitate organizations’ migration to blockchain environments?  Yes, of course.  Global consulting firms are actively pursuing blockchain programs as are startups and independents.  A US-based firm, Fluree, is actively developing data platforms for what they refer to as the ‘Fourth Industrial Revolution.’  In discussion with Kevin Doubleday, Marketing Communications Lead at the firm, Fluree (as do many companies) recognizes the traditional database structure of data, middleware, and now APIs is being overwhelmed by the volume and form of data and business processes driven by same.  Many suggest that blockchain is not the ideal option for use in insurance claims processes due to the varied forms of and demands on data (thanks, Mica Cooper and Chris Frankland for that discussion), but as Kevin and I discussed perhaps considering eating the elephant one bite at a time by choosing insurance processes that would have narrow but meaningful applications, e.g., subrogation (as noted above), transparency and immutability that would facilitate anti-fraud efforts, or deed and title data repositories.  Fluree is also focused on having a universal access format that will accommodate all users.  Current users of Fluree’s services includes life insurance solution startup, Benekiva, whose co-founder and all-around smart tech person, Bobbie Shrivastav  introduced me to Fluree.  Quite a bilateral endorsement.

So, Blockchain and insurance, dating but not yet in a committed relationship.  Seems we might be wise to plan a formal ceremony a few years from now when the relationship ‘learnings’ have been resolved.

And, perhaps now I can have a seat at the big blockchain table at DF.  😀

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Buy Now Pay Later Player OpenPay Diversifies Revenue As Regulatory Headwinds Increase For Sector

Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a neowealth disruptor in Australia

Recently listed Australian fintech, OpenPay, has announced it has secured a flagship deal with one of Australia’s largest retailers, grocery giant Woolworths. The Buy Now, Pay Later (BNPL) platform will use the Woolworth’s deal to push forward growth plans for its new Openpay for Business product, which will allow Woolworth’s suppliers to more seamlessly interact with the large corporate when it comes to managing their trade account, from signing up to invoicing.

The launch of this platform represents an interesting strategic shift for a business that up until now, has been focused squarely on the BNPL space. Spread across the Australian and UK market, the company reported 206,434 active customers at the close of Q2 FY2020, jumping up from 151,948 in the prior quarter. It also saw a slight uptick in active merchants, growing from 1,694 to 1,894 over the same period. Year on year the business also increased its transaction volume, hitting AUD$84.4 million in December 2019, up 95% on 2018’s closing figures.

The new business line will deliver additional revenue to OpenPay, although just how much is not clear. The company’s latest published investor report demonstrated the business booked AUD$8.3 million in 2019, made up solely of merchant and customer fee revenue, a 73% increase on the prior year,

The fintech listed on the ASX just before Christmas, initially falling from its bullish issue price of $1.60 to close at $1.32 on its first day of trade. Like most freshly listed companies, it has had a bumpy ride since, however after the Woolworth’s announcement the stock was trading up on the prior day’s close at $1.24. No doubt it has room to move upwards with more deals of this ilk and continued strong growth in the core BNPL business.

The BNPL space is exciting, and growth prospects are solid both nationally and globally, but like any fast-growing industry, it doesn’t escape scrutiny. Merchants and consumer groups were reported this week to be calling on the sector and its major players to stop preventing merchants from surcharging to recover the costs of BNPL transactions. Data from UBS, published in the AFR showed the burgeoning transaction type attracts significantly more fees for merchants, sometimes up to 6 to 7 times the cost of traditional scheme debit.

While under the current law merchants can selectively recoup transaction costs on credit and debit cards via surcharging, many BNPL providers limit merchants, at a contractual level, from surcharging on a BNPL sale. It’s speculated by consumer groups that in order to recover costs, merchants must increases prices for goods across the board. They’re worried consumers who don’t choose BNPL payment types are potentially overpaying or subsidising those that choose BNPL.

It’s still early days as to how the regulator will ultimately respond to calls for more oversight into the sector, and BNPL businesses are expected to hold their ground, with solid arguments their networks deliver more customers to merchants overall through their platform approach, making them a different breed to traditional payment types. One thing is for sure – it doesn’t hurt to have a revenue back up plan. Perhaps that is what is on Openpay’s mind?

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When a traditional risk fix isn’t the fix, and sometimes a fix needs to be found for a risk

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It’s an increasingly connected world- digitally and physically- and that means occurrences there increasingly have effects on business existence here.  ‘Effects’ means risk, risk means exposure, and exposure means need for insurance.  Climate/environmental occurrences, urban congestion, or virus outbreaks have far reaching consequences.  It used to be that businesses simply dealt with consequences over which they had no control in mitigating, and who was dealing with the issues were local to the effect or involved in the business or its collaterals. Is that true in today’s insurance world?

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Daily Fintech– a top financial blog per Feedspot for Financial Technology Pros for 2020.

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Few risks are more terror-inducing than an unmanageable viral outbreak with unconfirmed causation such as is the coronavirus outbreak focused on the Wuhan region of China.  What to do other than quarantine the outbreak area, and limit individuals’ movement into other areas.  Prudent.  So, what do businesses do that are reliant on the movement of and visitation by persons?  Airlines, hotels, transport, tourism, and commercial businesses will have significant direct and indirect effects of the virus due to reduced attendance from travel, tourism and just regular business.  Compounding the effects for business is as reported by Insurance Journal, “companies are set to face billions of dollars (US) in losses linked to events and travel cancellations and closures of businesses.”  Most standard commercial insurance policies have had exclusions placed for communicable diseases in the wake of the SARS, Ebola and Zika viruses, leaving the insureds to self-insure for these occurrences.

But what of parametric options?  If you are a cruise ship operator whose business is reduced by 1/3 due to customer fear of an outbreak that happened across the globe, is there not a trigger/index that can be factored for in a parametric policy?  Even more common for that business is passenger count reduction for a single cruise due to norovirus outbreak- or fear thereof.   Same principle can apply to larger firms that may be affected in other industries- beaches, theme parks, tour providers, hoteliers, airlines, etc.  The Sydney (Australia) Morning Herald reports that the country’s economy may be affected to the tune of $2.3 Bn (Aus) due to the coronavirus’ effects as students and tourists remain home.

The Wall Street Journal reminds the business world of the far-reaching effects of outbreaks in densely populated areas- the need to repatriate employees from outbreak areas, and mass closures of businesses, e.g., Starbucks, McDonald’s, IMAX, and other widely distributed businesses.  China does mandate that employers reimburse employees for lost wages, but on a practical basis the effectiveness of those regulations is low.  Risk exposure with little sharing of the cost of risk.  But is there an opportunity for a micro-insurance product to protect individuals?

Are there other risks to which property owners or business operators are exposed without easy access to risk sharing?  Sure.  Regional perils, environmental perils, and/or climactic risks such as earthquake, flood, temperature extremes are a few of these.  Flood insurance has been available for some decades but is not an easy match to insurance limits needed, and most often that cover is government subsidized and regulated, and is expensive if a subject property is in a flood frequency area.  But what of those persons who own property in less sophisticated emerging markets?  Well, more and more governments are looking to collaboration with other countries in establishing risk response pools, catastrophe bonds, or leveraging insurance linked securities (ILS) in smoothing the cost of disaster response.  These are products that may not have existed as little as ten years ago, and even when present in a country’s emergency portfolio may not provide the expected benefits.

Take for example the risk vehicle Mexico placed prior to Hurricane Odile (2014), providing reinsurance for the country’s Fund for Natural Disasters (FONDEN).  The bond was established as a hedge for when a hurricane met a certain central pressure trigger within a ‘box’ regional area.  Good idea, unless the index values are not clearly defined in how the values are confirmed.  The index was not met at that time but might have, except there was only one index measure point managed by one observer.  Even if triggered the basis risk the country was exposed to would not have been met by the full release of the bond’s principal, supporting natural disasters as being global basis risk issues.

Considering the disaster ‘protection gap’ being most notable in emerging markets (on average only 5% of disaster losses having cover in poorer countries), there are organizations such as Global Parametrics(GP) that are working to improve access to cover by means of parametrics products.  GP’s CEO, Hector Ibarra reports that a recent placement of parametric product produced advance payment to Oxfam and Plan International in anticipation of Typhoon Ursula in December 2019.  The use of forecast-based indices (payments triggered on forecast of certain conditions) provided communities in the Philippines payment before the actual typhoon landfall, allowing evacuation funding for residents.  Proactive risk sharing, with immediate payment upon reaching an index value.  Not a perfect answer to all similar events, but certainly a start from which to build.

Are the principles behind parametric products adaptable to local risk factors that regions or businesses encounter but cannot find effective indemnity products for?   Weather risk parametrics have gained a foothold within emerging ag markets in the form of micro-parametric products, with index factors of ‘on the ground’ conditions being verified by new techniques (sensors, satellite, drones).  Larger scale weather-related ag parametric products are slowly getting traction and are beginning to supplant traditional crop insurance.  In discussion with Norm Trethewey of Weather Index Solutions of Australia there are now more companies willing to underwrite smaller ag weather parametric or derivative products, say a $200K cover that used to be passed on by firms like Swiss Re and Munich Re.  The presence of wider and deeper data sets there can be indexes established that in the underwriters’ estimation will be profitable and responsive.

The exhibit noted below shows some of the relative complexity of cover that is supported by available data and the sophistication of index monitoring:

Para

There is not the same concerns of basis risk for ag parametrics because the value of the crop is known (within a range) so what remains is the farming business to calculate premium cost versus potential loss of yield.  This sounds straight forward enough but changing the ag industry’s thoughts on what to do about Mother Nature becomes the nuance of the product.  One thing is certain- as available data improves even more the underwriting of these parametric options will become more commonplace, for developed and emerging markets.

And for more extreme climate like there typically is in Australia, and where ag production includes upwards of 20 million exportable bushels of broad acre crops, having a spectrum of risk management options to include parametric and derivative covers is a potential stabilizing factor during spikes in conditions.

To wrap up this column is a short discussion of risks that simply may not have indemnity or parametric solutions, e.g., the number of, confusion caused, and accidents experienced through use of okadas (motorbikes) and kekes (three-wheeled vehicles) within the city of Lagos, Nigeria.  One of the most populous urban areas on the African continent Lagos has waged a continuous battle against sprawl and traffic congestion.  Add to that the easier acquisition of motorbikes and trikes compared to autos, and the growth of informal ride sharing using the more informal vehicles and you have traffic mayhem.  The state government has banned the vehicles’ use, presenting survival mode for commercial ride sharing companies like Max.ng, Oride, and gokada.ng.  Traffic risk, government risk, and no easy solution other than tossing the figurative baby out with the bathwater, and exacerbating the very commuting challenge for the city’s residents that prompted the popularity of the bikes and trikes.  Thanks to the East African for the reporting on the ban.

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50 Diverse Takeaways from Davos WEF2020

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I am transparently stealing Ben Pring`s format[i] to honor the 50th anniversary of the World Economic Forum’s (WEF) annual meeting in Davos, with my own 50 diverse takeaways. Some are my own big picture opinions from spending two intense full days in Davos and participating in two side events. Others are takeaways from the diverse speakers that I had the privilege to listen to. And some are my Tech innovation picks again from the events I participated.

  1. Great Greta Thunberg joined the status quo and is now confronted with all the difficulties that grown-up celebrities face. I am not supportive of this at all. I suggest `Leave the kid alone`, she has done enough already.
  2. The “Davos Manifesto” is clear and in alignment with Great Greta`s message. Businesses will continue to be the way we create wealth (of all kinds) but now all adults can role up their sleeves and look at ways to maximize Stakeholder value.
  3. Let’s pass on the torch that Great Greta held, to adult activists.

 

  1. The WEF was originally known as the European Management Forum and only 16 years later when it expanded its scope, was it renamed to WEF. Watch the WEF roadmap here.
    Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019. You get 3 free articles on Daily Fintech. Get all our fresh content and our archives and participate in our forum, by becoming a member for just US$143 a year
  2. Even Davos was supportive of Greta. There was less snow and it was too warm. However, that did not reduce the number of men & women wearing light color fur coats and (women) bright color heavy makeup and hanging out on the sidewalks of the Promenade.
  3. Pop-up stores, as “corporate showrooms” on the Promenade are growing.
  4. Last year there were two Teslas showcased outside the Morozani hotel. Honestly, I expected to hop on a driverless car this year, but I was disappointed.
  5. Female dominated panels were all the rage. We were even got offered a special `Women in Fintech`trophy at TechParkDavos (amazing event).
  6. Background and geographic diversity in panels was also rising.
  7. For the first time, the balance of the agendas of the ever-growing Davos side events was greatly tilted towards Sustainability rather than Blockchain.
  8. During the two days in Davos, I did not hear 4IR once. The dominating themes were around ethical regulation of the technologies.
  9. WEF Davos is becoming more about social issues rather than businesses, which gives us hope for explicit and intentional innovation on the Societal front.
  10. Surprise on the Promenade: A “cannabis-tech” expo for the first time. No comment.
  11. Ben Pring says that `Wellness” advisors from Beverly Hills have started showing up in Davos. I did not see them. However, the Blockbase Davos space was really well attended. Linking spirituality, arts and technology. Worth visiting.
  12. WEF Davos was echoing with links between Ecology, Economy and Consciousness.
  13. Goldman Sachs`s announcement to no longer take any company public unless there is at least one diverse board member, was very in vogue with the Davos narrative. Maybe they will be the ones taking Ripple to IPO (an unexpected hint during Davos) as their board is really diverse.

Artificial Intelligence

  1. AI will have huge applications in the real economy. We humans will be training lots of micro-robots to perform tasks (micro-robot training).
  2. AI will have huge applications in optimizing transportation.
  3. Only 20% of large corporations have made a difference by using AI.
  4. 54 million people are wasting their time with jobs that AI data management can do better.
  5. “AI is going to become more and more accessible to everyone. It is not going to be only for the privileged neither controlled by the big companies.” says Jürgen Schmidhuber
  6. `X+AI will be the norm` says Ben Pring
  7. `Self-improving AI will change everything`says Jurgen Schmidhuber, founder of Nnaisense.
  8. #AI is like babies – they need lots of #Data, lots of #Information. They need their parents teaching them. AI needs us, humans” says Jurgen Schmidhuber
  9. Did we ask for this?: AI & IOT can help moms monitor whether their kids brush correctly their teeth
  10. Did we ask for this?: AI & IOT can help men & women apply moisturizer exactly on the areas that need it.

DATA:

  1. The old adage `Location, location, location` is now transformed into `Availability, availability, availability` which means the power is in the accessibility and data.
  2. $4 trillion USD is spent by corporates every year to prepare data to be used by AI algos.
  3. Global Data Excellence is global leader in Data excellence management that maximizes business value with a clear focus on the social value mission.
  4. Trigyan offers an innovative data platform that is domain neutral to link data at scale and real-time – Glide (Graphically Linked Integrated)

Platforms are the only Sustainable business model (a pick of the ones I met in Davos during the WEF)

  1. Capital Markets: LoanBoox is a Swiss debt capital market platform digitizing capital markets for the municipality sector and eyeing much more.
  2. Banking: Pelerin is a blockchain-powered core banking operating system. No fractional reserve banking, rather a marketplace approach to digital assets.
  3. Digital ecosystem: The 1 billion retired people are a virtual continent that needs to be serviced accordingly. Dmitry Kaminskiy is the coauthor of the upcoming book Longevity Industry and covered tech in this the longevity space.
  4. Digital ecosystem: YesWeTrust is a Swiss-based unique ecosystem growing a community around health, sustainable investing, and a marketplace for sustainable consumption.
  5. Digital ecosystem: Beyond Animal is another Swiss-based unique ecosystem focused on the sustainable economy. A networking platform, a crowdfunding platform for sustainability business, and a AI-powered supply chain assistant.
  6. Digital ecosystem: Graypes is another Swiss AI-powered ecosystem that evaluates business ideas. Funds them and offers a network to grow them.
  7. Sovereignty: Liberland is a micronation powered by blockchain and other technologies that setup a rep office in Zug after the WEF.
  8. Ria Persad spoke at TechParkDavos: She is the founder of Statweather, a 10yr old award winning company providing state of the art weather prediction systems and risk mgt. She bootstrapped the company with stay home moms working part-time!
  9. NASA and Diversity: The NASA Artemis program, will send the first woman and next man on the Moon by 2024, using innovative technologies to explore more of the lunar surface than ever before. Cindy Chen spoke at Diversity in Blockchain about Artemis and the new female spacesuits.
  10. Data scientists: NASA Datanauts is a community for data newcomers, introducing and advancing data science skills, and creating a vibrant data problem-solving community.
  11. Edge technologies: Marco Tempest showed us a VR live application that combines science and illusion. A kind of camera that as you speak on stage, autonomously projects you in a VR enhanced way (a real-time transformation to a magical virtual world).
  12. The transformation via AI is leading the world from Automation to Autonomous; said Nicolai Waldstrom, CEO & Founder, VC BootstrapLabs
  13. Evan Luthra, is a truly native entrepreneur and angel investor, who has founded the iyoko.io ecosystem supporting people and innovative ventures.

Davos Events I attended or were on my list but never made it:

  1. Follow SwissCognitive – The Global AI Hub, the host of the TechParkDavos, and Yusuf Berkan Altun, the organiser of TechPark Conference Davos 2020.
  2. Follow Diversity in Blockchain and their sponsor BloomBloc who is focused on the sustainable supply chain for agriculture.
  3. Follow the World Innovation Economics events; a platform for sharing ideas, discussing and exploring ways to resolve real-world challenges using Innovations.
  4. The Digital Economist hosted the book launch of Bridgital Nation : Solving Technology’s People Problem co-authored by Natarajan Chandrasekaran and Roopa Purushothaman (Tata). A dream application of AI in India.
  5. The Digital Economist roundtable with MIT Professor Alex ‘Sandy’ Pentlandfocused on co-creating solutions to driving technological convergence into the new digital economy. Using the SDG framework to improve the state of the world through social entrepreneurship.
  6. The Prosperity Collaborative presented insights around building an efficient and fair taxation system by harnessing innovative technologies, hosted by GBBC. Alex `Sandy’ Pentland and John Werner and Tomicah Tillemann were involved.
  7. The Planetary Supernodes annual gathering (an invitation-only event) took place at Blockbase Davos. The mission is to energize and activate thriving projects of planetary impact that engender a sustainable future.

[i] Ben Pring leads Cognizant’s Center for the Future of Work and is a co-author of the books What To Do When Machines Do Everything and Code Halos: How the Digital Lives of People, Things, and Organizations Are Changing the Rules of Business. – FIFTY THOUGHTS FROM DAVOS 50

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Security Token news for Week ending 24 January 2020

Week ending 17 January 2020 in Security Tokens

Here is our pick of the 3 most important Security Tokens news stories during the week:

One. Silicon Valley Coin by Andra Capital Uses Tezos Blockchain and TokenSoft for Its Security Token Offering

“Andra Capital, a San Francisco based venture capital firm, announced plans to issue Andra’s Silicon Valley Coin (SVC) via a Security Token Offering (STO). Collaborating with the Tezos Foundation, SVC will utilize TokenSoft’s issuance platform and be built on the Tezos blockchain.”

Equity ownership and governance are closely related in early stage ventures, so the use of Tezos is significant.

Two. EMURGO Establishes Strategic Task Force with Uzbekistan Government to Develop Framework for Security Token Offerings & Exchanges

“EMURGO Ptd. Ltd. – EMURGO – the official commercial arm of Cardano blockchain – announces the establishment of a blockchain task force with the National Agency of Project Management (NAPM) under the government of the Republic of Uzbekistan, and alongside advisors KOBEA Group & Infinity Blockchain Holdings, to lead the development of a legal framework for security token offerings (STOs) and exchanges (STXs) in the Republic of Uzbekistan. In addition, EMURGO & KOBEA will advise on infrastructure for digital asset banking & exchange, and blockchain education units, amongst others. EMURGO will provide advisory services to develop the framework and business units with the task force & mutually explore the potential for Cardano’s third-generation blockchain for infrastructure projects.”

Alternative blockchains such as Cardano have to battle the network effects around Ethereum and alternative jurisdictions such as Uzbekistan have to establish themselves in investor’s minds. So expect more partnerships such as this.

Three. GreyP Completes Equity Token Offering on Neufund. Securities are Distributed as Investors Will Also Benefit from Neu Token Distributions & Payouts

“GreyP Bikes (an e-bike company), one of the first “equity token offerings” or ETO to complete a primary issuance on the Neufund platform distributed the digital securities to investors last week. The security offering began last October with a pre-sale followed by a public sale that ended towards the end of November.

As was previously reported in December, GreyP raised €1.4 million from 1017 investors from 34 different countries – . The offering was described as the first IPO every completed on a blockchain-powered platform. The company sold the ETO at a pre-money valuation of €45 million.  Founded by Mate Rimac, who also created Rimac Automobili, GreyP claims the backing of large investors like Porsche and Camel Group.”

We like it when we see issuers who have nothing to do with Crypto/Blockchain as it indicates market traction. It is even better when, as in this case, the issuance transaction close/executes successfully.

We have a self-imposed constraint of 3 news stories each week because we serve busy senior leaders in Fintech who need just enough information to get on with their job.

For context,  please read the chapter on Security Tokens in our Blockchain Economy book and read articles tagged Security Tokens in our archives. 

You get 3 free articles on Daily Fintech. After that you will need to become a member for just US$143 a year (= $0.39 per day) and get all our fresh content and our archives and participate in our forum.

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Blueprint One- a building plan for a Lloyd’s digital/culture change decade, or pie in the culture change sky?

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It’s really a tour de force, the 146 page Blueprint One recently released by leadership at Lloyd’s, a detailed road map for the staff and approximate ninety syndicate players that comprise the firm, its reinsurers, customers, associated MGAs, vendors, brokers and agents.  Plans, flow charts and implementation strategy that are planned for the next two years, with all the new moving parts in synch by close of 2022.  Oh, and did I mention the £35 billion in annual premiums that the organization generates through its stakeholders?  Bold plans for a three-hundred-year tenure organization.  And there is the unmentioned tension- an entrenched business model planning to evolve into an agile, cutting edge tech leader.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

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Lloyd’s is the industry standard bearer for specialty risk management, AKA ‘the stuff an underwriter can’t thumb to in his/her U/W manual’.  Its technique and mystique have evolved during the more than three centuries since a few gents sat in front of some pints and pondered financial hedges against loss of shipping cargos.  Why then, does the firm think that several months of research, interviews, participant interviews, technology vendor schemes, and resulting blueprint from Lime St are the best answers to changing the course of the culture and operations of a complex global insurer?

Consider this voice from the street (location to remain unmentioned):

“Sadly, it seems that Lloyds underwriters have developed a degree of contempt for the XXXX market, over the last year I’ve seen the worst performance from certain Lloyds underwriters I’ve ever experienced in the last 20 years or so. In particular, not having renewal terms ready in time when renewal submissions have gone in well on time. It’s definitely a hard market from where I’m standing, and it isn’t particularly civilised either!”

Well, hard markets currently abound for many reasons across the globe, and anecdotal responses are a little unfair.  But the basis of the speaker’s concerns may not be- Lloyd’s is a huge, multi-variate, multi-cultural, global organization that cannot be changed under dictate, singular plan, or silo-driven flow chart.  Underwriters remain subject to the performance matrix of the day, and grand plans from on high take a rear seat when quotas aren’t met, or loss ratios are trending north.  Additionally, the firm remains entangled in aftereffects of sexual harassment accusations, mitigating the perceived impact of an over-arching office culture of suits and club decorum (although well past the days of PFLs), and recent years’ declining profitability.  Can Blueprint One be communicated, integrated and adapted uniformly in the face of these challenges? And can the evolution avoid the strong effects of the “Quarterlies?”

Culture and process changes aren’t new with the advent of Insurtech, innovation, globalization or change of leadership.  Much of what the blueprint discusses has its foundation in technology and transparency across the organization’s depth and breadth.  At its core we are talking insurance, so the topic may be busy, but it’s not rocket science.  Identify risk, understand risk, price risk, hedge risk, service occurrences that confirm risk (claims), and pay less than is taken in.  The firm is smart, therefore, to look to leverage technology for easy inclusion of participants across many regions and many forms of access, easier aggregation of business, more effective application of information, collection of data, and so on.

Consider the Blueprint’s ‘what it is’:

  • The firm’s strategic intent, description of vision.
  • Current thinking on each of six identified solutions-
    • Complex Risk platform
    • Lloyd’s Risk Exchange
    • Claims Solution
    • Capital Solution
    • Syndicate in a Box
    • Services Hub
  • Details of the initial phase of each solution
  • Invoking cooperation from Lloyd’s market players in the firm’s future
  • How and why success will be gained.

That’s on page 7 of the 146 page blueprint; it is an ambitious, wide scale road map.

It’s clear the more complex a plan is the greater the chance of incomplete implementation; the more incomplete or disuniformity of implementation the greater the chance of not achieving success.  The firm has its plan, its foundation for success, if the plan can be implemented.

Skipping forward to “Why we will succeed,” on page 11 , and I chime in with some observations that the principles suggest from other large org’s culture/ops changes:

  1. Capitalize on prior market investments (that’s funds spent previously on innovation).
    • This the “not throwing the baby out with the bathwater” approach. How to include the capital investments of the past few years in how we move forward.  A small anchor on innovative thought?
  2. Learn from the past
    • There are plenty of reorg carcasses along the wayside, let’s figure ways to have innovation not die at birthing. Of course putting the words, “Our collaborative approach to building the Future at Lloyd’s will ensure the solutions are designed for the benefit of Lloyd’s and the wider London market,” are contradictory right out of the box.  Perhaps solutions designed by and for Lloyd’s global staff and customers might sound more collaborative.
  3. Communicate regularly
    • Cascade those ideas from Lime St. to the world.
  4. Ensure the corporation and the market has (sic) the right skills to deliver the plan
    • Collaborators- prepare to invest time and money in change management plans that will be as successful as any change management programs. Can’t buy success.
  5. Deliver value to the market quickly
    • The rollout cannot interrupt business. There are those darn quarterly reports.
  6. Deliver the technology in parts
    • Deliver solutions in parts- of course each discipline needs different starting points; the law of unintended consequences will prevail.
  7. Retain control and operational responsibility (for tech)
    • Autonomy is resolving rollout issues will be suppressed to ensure uniformity. There will be scapegoats.
  8. Ensure the appropriate governance is in place
    • Central control of the collaborative integration. Decision making is the firm’s.

Rather than ramble on I am going to shamelessly borrow some innovation/org change concepts from a Property Casualty 360 article penned by Ira Sopic, Global Project Director at Insurance Nexus that has an apt perspective- “Agility is the key to technology innovation for insurers.”  But let’s build a contrast from Lloyd’s presentation.

Agile?  Can a global, £35 billion insurance giant be agile?  Do Lloyd’s customers demand innovation, or will they benefit materially from innovation?  We can see what the author and Lee Ng, VP of Innovation at Travelers Insurance say.

Fundamentally, the article notes org agility means looking at how decisions are made across an org and making significant changes.  That’s ambiguous until the addition of, “you can’t prove innovation before it happens.”  Uncertainty of innovation’s results can be overdone with analysis.  ‘Agile’ is the opposite of ‘waterfall’, an approach where plans and decisions are made at the top and cascaded down through the org as steps in a process are encountered.  Rolling out comprehensive plans by their nature inhibit iteration- big plans have milestones, have successive designs, benchmarks and schedules.  Agile has ideas, iterative maps, acceptance of failures.  Lloyd’s has established a grand approach to the former method- I kid you not, here’s an exemplar flow chart of planned core technology:

Core tech

Many participants influencing and accessing the tech core of the firm, and those magical skeleton keys to open the doors- APIs and interfaces.

Continuing, agile can be successfully piecemeal- protect the primary ROI factors of the biz, experiment with agile ways of working with collateral functions, build the innovative environment without whacking the quarterlies.  The inherent problem with piecemeal approaches?  They are hard to measure for success, and hard to program into project management software.

Another agile tack to take? “Done is better than perfect’.  Resist the urge to over plan, over measure, and to set expectations that the first attempt is a go or no go for the entire org.  A popular innovation concept applies- try, and fail fast.  Then try again.  There are many vendors who are experts in narrow parts of an org’s innovation path- it’s OK to rely on them.  Investment in a POC or two is as good as implementation.

Perhaps another day will allow discussion of the plans for the six Solutions, particularly Claims and Risk Exchange (the nexus of provision of service and of customers’ expectations from the firm.)  In spite of a skeptical take on the Blueprint I certainly want Lloyd’s to remain the bastion of risk management in a increasing risky world, but the concern is the firm is approaching this insurance elephant as a full take away meal, instead of as tapas.

In closing consider this- if there are five levels of Blueprint implementation and each effort has a 98% probability of success, after the five levels there is an aggregate probability of integration success of 90%.  That’s not bad, unless the interplay of five operational areas serving clients is considered with 90% effectiveness at play- aggregate 59% average Blueprint compliance outcome.

Consider those little bites, Lloyd’s.  The industry is pulling for you.

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