Law firm Clyde & Co. has developed what it calls a first, a connected parametric insurance policy that runs on smart contracts and can automate payments for weather risk transfer agreements.
In the first implementation, Clyde & Co. developed a parametric lack of income or production insurance policy for a solar power producer.
Like other weather risk transfer products for the solar energy world, the insurance contract is designed to cover the risk of an expected energy production shortfall due to adverse weather conditions.
In this case, the âconnected parametric insurance contractâ receives data from the weather data providers and can make automatic payments, as the contract executes when it meets or exceeds the necessary predefined parameters.
Lee Bacon, partner at Clyde & Co and co-founder of its Clyde Code technology initiative, explained, âA connected contract is a digital agreement that connects external software systems and data sources to enable automatic contract execution. ‘assurance. By using real world data and streamlining processes, it offers significant cost and efficiency gains for the industry. “
Clyde & Co created this first of its kind connected parametric insurance contract through its smart contract consultancy, Clyde Code and in collaboration with the smart legal contract platform Clause.
The parametric insurance contract was developed to specifications developed by Project Accord, a member-driven nonprofit initiative that creates open source smart contracts and code related to the distributed ledger, and then provides the necessary documentation to enable smart legal contracts.
Clyde & Co. also noted that this connected and intelligent parametric insurance contract can also be deployed on other systems and platforms.
The contract consists of a data model, the necessary logic code and a natural language contract, which, along with the necessary data input sources, can automate the execution of the policy by receiving the weather data, by calculating any claim obligations and producing an exportable report. insurance premiums or losses.
In this case, the smart and connected parametric insurance contract facilitates the provision of reactive insurance to a solar power producer against energy production deficits caused by inclement weather.
Clyde & Co. said it intends to use this model to develop other smart connected parametric insurance contracts for different use cases.
Bacon continued, âConnected contracts will bring many benefits to our customers and we look forward to expanding the scope of this product to cover different types of insurance and reinsurance agreements to meet customer demand. Its launch is an exciting new step for Clyde Code and our work to help customers realize the potential of smart contracts. “
You can read more about this use case and the development associated with it here.
This is particularly interesting, as many have tried to develop parametric insurance products based on smart contracts, but their commercial application has so far been limited.
This launch of Clyde & Co. could provide the legal foundations for parametric smart contract-based insurance to achieve wider adoption, as well as legitimize it in front of enterprise risk buyers.
Imagine a smart parametric insurance contract connected to New Paradigm Underwriters’ hurricane-ruggedized wind anemometers, for example.
This could be used for both insurance and reinsurance purposes and as the trigger could include data inputs from multiple anemometers, as well as possibly additional inputs, basis risk could also be minimized through a smart trigger design.
As parametric triggers are increasingly adopted around the world, especially for climate and weather related insurance, and capital market transactions for sovereign disaster risk provision, connected contracts and smart contracts could become more and more useful.
Their application in the renewable energy industry, where data is abundant and more easily linked to production, is clear.
But perhaps they can also be put to good use in industries such as retail, where large retailers might associate weather factors with revenue generating factors such as footfall or chain factors. procurement, to create entirely new categories of insurance that can help shift some of their business interruption type risks.
Automating claims and payments processes under a parametric insurance contract has the potential to drive future premium growth, for those who are innovative enough to design and develop new forms of insurance and reinsurance . Clyde & Co’s work here provides a useful contract example that can be used more widely in the future, we imagine.
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