Blockchain adoption and optimal reinsurance design

Abstract

We study blockchain adoption in insurance–reinsurance markets. We consider operational costs related to claim verification and record-keeping. Traditionally, the majority of these costs scale linearly with the volume of claims. Instead, with a consortium blockchain these costs, per firm, become independent of claim volume and decrease with the adoption rate since they are distributed. In a consortium of insurance firms, we quantify how the equilibrium adoption decisions depend on the reinsurance contract characteristics, the risk aversion of insurance companies, the distributions of their potential losses and the blockchain cost structure. Under the optimal contract, the reinsurance firm internalizes the benefits of adoption on other insurance firms, thereby acting as a central planner. We then characterize the adoption gap between decentralized (Nash) and centralized blockchain consortia.