Lightning after the storm. How blockchain and ILS can help manage climate calamity risk
The world faces natural disasters regularly each year—from wildfires raging in Australia's and California's forests to a glacier in India causing mass flooding. As these calamities pile up, so do the human casualties and fiscal damages. Yet institutions often remain woefully underprepared to handle the sudden onslaught of natural disasters. But with developments in blockchain technology and the rise of insurance-linked securities, risk-management mechanisms can be dramatically improved.
Climate change is creeping into our backyards on a yearly basis with more ferocious hurricanes, harsher winters, and raging forest fires. In fact, climate-related disasters nearly doubled between the periods of 1980-1999 and 2000-2019, according to a UN Office for Disaster Risk Reduction (UNDRR) report. The cost is often high in both human lives and for the property damages. The same UNDRR report showed that between 2000 and 2019, over 6,600 natural disasters occurred, which affected 4.2 billion people and cost US $2.97 trillion.
Barring a sharp turn in our carbon footprint trend, it's likely to get worse and increasingly expensive to adapt—especially for developing countries. The UN Development Programme projects the cost of climate adaptation in developing countries alone is expected to reach between $280 billion and $500 billion by 2050.
Managing the rising risks will be no small task, given how many governments are stretched thin fiscally as is. The private sector, on the other hand, can take on a lot of the risk financially by dividing it up amongst a pool of investors. Many of us recognize these as "insurance-linked securities (ILS)" or "catastrophe bonds," which can be highly lucrative opportunities for investors, and therefore the best way to insure humanity's future.
Since the early 2000s, ILS have risen to prominence as unique financial assets. Unlike most securities, ILS are not influenced by financial market factors, only by disaster events, which are relatively uncommon occurrences in comparison to other market influences. The limited parameters of risk are appealing to investors, as have the higher interest rates on certain types of ILS, namely catastrophe bonds.
Catastrophe bonds are high risk-high reward securities that serve as alternatives to reinsurance for insurance companies. However, when a catastrophe does take place, the principal is transferred in full to the sponsor of the insurance policy as a payout for the damages. In that situation, the investor would incur a loss. As climate change continues to progress and the likelihood of natural disasters rises, so will the pool of funds required to sustain the damages and the securities interest will increase. Thus, the need to sell more ILS to distribute the risk between a greater number of investors will be crucial. At the same time, investors will need to weigh the risk of losing the principal should a calamity actually take place versus the potential yields if it doesn't.
In the event of an actual disaster, where insurers need to pay out and time is the essence, remittance times and intermediary settlement processes can delay the shifting of funds during the initial recovery period. In addition to the time, the cost of remittance across borders to pay out for calamities can be an unnecessary one. An unlikely hero can resolve it. That hero is blockchain.
On blockchain, remittance is instantaneous, contingent on fulfillment of the conditions stipulated in smart contracts. Should a natural disaster take place, payment could be transferred instantly, with real-time verification on the chain, without the need of intermediary institutions that could only slow the entire process.
With the climate rapidly changing and its effects afflicting millions around the world, governments will need to cope with the reality. To help create the sufficient funds to manage these crises and quickly address them, institutions will need to find the investors to back this endeavour. ILS will be the way to go, and blockchain will be the vehicle to deliver the payouts.
About the author
Falk is the founder of DoubleJack, a fintech company with its own lottery and gaming platform powered by DJACK, the Tron-based utility token, which will be developed to serve as an insurance and insurance linked securities (ILS) backed token for online lottery and philanthropic affiliate as well as passive income platforms. DoubleJack makes online lottery safer by putting payments and jackpot insurance on the blockchain. Falk has over 30 years of experience in startup building, human resources management and strategy consulting. He has been providing strategy consulting for the tech, defence and fintech industries. According to his motto "plus ultra," Falk is convinced and has proven that with the right team everything is possible.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Source: Nasdaq Blockchin Topics