Blockchain Adoption and Optimal Reinsurance Design

Abstract

We study blockchain adoption in insurance-reinsurance markets. Unlike standard operational costs related to claim processing that scale linearly with the volume of claims, blockchain operating costs per firm are independent of claim volume and decrease with the adoption rate since verification and storage costs are distributed among the adopters. In a consortium of insurance firms, we quantify how the equilibrium adoption decisions depend on the reinsurance contract characteristics, the risk aversions of insurance companies, the distributions of their potential losses and the blockchain cost structure. When a reinsurance firm acts as a central planner in the blockchain consortium, the optimal adoption rate from planner’s viewpoint is higher than the Nash equilibria adoption rate. We observe that this gap widens when the blockchain cost becomes more sensitive to the adoption level.

Keywords: Blockchain, Nash Equilibrium, Insurance-Reinsurance, Technology Adoption, FinTech

JEL Classification: C70, G22, O33