Smart Risk, Smarter Capital: Tokenizing Insurance-Linked Securities

We teamed up with Schroders Capital, the private market specialist within the Schroders Group, and Hannover RE, a leading reinsurance company, to launch a digital plattform for tokenizing insurance-linked securities (ILS). This pilot initiative has successfully enabled reinsurance contracts to be tokenised and traded on a public blockchain using smart contracts.

Each token represents a share in a portfolio of reinsurance contracts, showcasing how ILS funds could invest through a digital ecosystem in the future. By tokenizing these contracts, many time-consuming processes have been automated, increasing efficiency and enhancing transaction transparency, ultimately improving the client experience. Smart contracts now automate key phases of the product lifecycle, ensuring seamless transitions and reliable rule enforcement, while still allowing for manual intervention when preferred. Collateral management is governed by predefined policies and thresholds within a trustless framework, removing the need for intermediaries. This approach has streamlined traditionally complex processes, further boosting operational efficiency and client satisfaction.

“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 the broader application to wider investment scenarios and clients."

‍Stephan Ruoff
Schroders Capital’s co-head of Private Debt and Credit Alternatives

Let's take a closer look at what this means for the user and explore the technical details behind it.

What Are Insurance-Linked Securities (ILS)?

ILS are financial instruments tied to specific insurance risks – such as hurricanes or earthquakes. Investors provide capital, which is used to cover potential claims. If no qualifying event occurs during the risk-coverage, the investor receives the capital back with a potential return.

Current Challenges and Objectives of ILS

Traditional ILS processes are often characterized by complex structures, multiple intermediaries, and slow claims processing. The ILS Tokenization project aims to reduce this complexity by introducing automation, blockchain-based transparency, and digital execution through smart contracts.

System Structure and Stakeholders

This diagram illustrates the general roles and financial flows between stakeholders: the protection buyer, investor, agent, and protection seller. It shows how premiums, protection, ILS shares, and claims reporting are handled within the system.

How the Process Works

The Schroders Fund deposits collateral in USDC into a smart contract on the Ethereum blockchain.
At the same time, Hannover Re (reinsurance partner) pays the insurance premium – also in USDC.
The smart contract allocates these funds into a tokenized money market fund (MMF), which invests primarily in low-risk U.S. Treasury instruments via the digital asset platform Archax.
If no disaster occurs, the remaining collateral is returned to the investor at the end of the term.
In the event of a qualifying loss, the agent submits a loss report on the blockchain via the platform. Based on the reported data, the smart contract determines whether HannoverRe is eligible for a payout and, if so, automatically triggers the disbursement of the corresponding portion of the collateral.

At the end of the risk coverage period, the smart contract routinely checks whether the investors are eligible for collateral redemption, automatically releasing funds based on a predefined collateral release policy that is driven by the data from the submitted loss reports.

Technical Infrastructure and Asset Flows

This second diagram provides a more detailed look at the on-chain and off-chain asset flows. It shows how fiat money (USD) is converted to USDC, how each role interacts with the smart contract, and how collateral is invested in traditional capital markets via tokenized MMFs.

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Potential Benefits for Investors and Insurers

From the investor’s point of view:

All transactions are visible on-chain, providing a high degree of transparency.
Assets can be monitored and managed through a secure digital platform.
Automation enables the immediate release of previously trapped collateral.
The blockchain replaces the traditional custodian by securely holding and managing collateral through smart contracts.

From the reinsurer perspective:

The process enables faster claim payouts.
It reduces reliance on manual processing and intermediaries.

Our contribution

Transforming ideas into concepts by leveraging our deep industry expertise.
Platform design & development.
Smart contract engineering.

Conclusion and Outlook

This pilot project exemplifies how blockchain and smart contracts can modernize insurance-linked securities (ILS) by enhancing automation, transparency, and efficiency. Collaborating with Schroders Capital and Hannover Re, we successfully demonstrated the feasibility of tokenizing reinsurance contracts on a public blockchain, paving the way for more accessible and resilient risk transfer mechanisms. This initiative underscores our commitment to driving digital transformation in financial markets through practical, scalable innovation. Importantly the application developed during this project is designed with future use in mind—ready to support upcoming clients and projects as the ecosystem evolves.

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