Tech innovations transform trade finance and risk

Tech innovations transform trade finance and risk

As data-centric technologies like blockchain, the Internet of Things and autonomous vehicles promise to revolutionize the logistics of trade, the way it is financed and the risks involved, insurers are in a unique position to help partners navigate this shifting landscape.

“While it’s true that many of today’s most cutting-edge technologies were initially developed for the consumer space, they’re rapidly being adapted for industry and commerce — and the impact on supply chains will be immense, if we can connect the physical and the financial”, says Marilyn Blattner-Hoyle, head of supply chain and trade finance at AIG.

Sensors and autonomous vehicles

New sensor technology has potential applications in transport and logistics that could inject visibility and predictability into trade flows, reducing the risk of damage, disputes and non-payment.

A Swiss developer, for example, has created smart sensors that are able to track shipping containers, rail freight wagons and even individual boxes, providing updates every five minutes on location, distance travelled, border crossings and other impact events. A secure distributed ledger houses the data, which is time-stamped, and can be used to provide proof of service delivery and automate payment fulfilment.

One firm whose technology could have implications for trade finance and risk is autonomous truck developer, TuSimple. Its vehicles are capable of carrying goods 3,000 miles — almost coast-to-coast in the U.S. — in just over two days, compared with around 4.5 days for a standard truck with a single driver to legally cover the same distance. This is because autonomous vehicles are not constrained by drivers’ mandatory breaks or maximum daily driving time but can travel around the clock, only stopping to refuel.

It also provides a tracking service, allowing logistics companies that use its trucks to monitor journeys in real time, including stops or deliveries. Although that data belongs to fleet owners, with their permission it could be shared with buyers, sellers, financiers and insurers.

Transparency reduces risk for insurers

AIG hosted over 30 clients at CES1, to share their experiences on industrial IoT and blockchain, telematics and the sharing economy, looking at how such advances are changing and shifting risks.

“The fact that we bring companies together to talk about these issues is quite unusual — we’re the only insurer that hosts over 30 clients for a discussion about risk and technology at CES,” Blattner-Hoyle says. “It shows a commitment to staying at the forefront of innovation, and ensuring that filters down to client solutions.”

Innovations like these have the ability to slash delivery times for goods, increase journey transparency, identify shipment issues and potentially shorten buyers’ and sellers’ working capital cycles, notes Blattner-Hoyle. This could allow insurers to cover a wider remit of risks.

The enhanced visibility and self-liquidating nature of such transactions could again reduce insurance costs and expand the availability of cover for lenders, she adds.

Distributed ledger drives closer collaboration

Meanwhile, technologies like blockchain are helping drive further convergence between physical and financial supply chains. Insurers are responding by playing a key role by collaborating with banks, tech firms and logistics providers to inject more speed and transparency into trade transactions.

For example, AIG teamed up with Standard Chartered to complete a receivables finance program for an international logistics firm on a blockchain-powered platform built by fintech TradeIX. AIG offers credit risk mitigation insurance, with Standard Chartered providing the financing, which enables the logistics company to help its customers extend their payment period while maintaining its receivables at current terms. The partners are now through the testing phase and are onboarding more of the logistics company’s customers onto the TradeIX platform, with further finance providers and corporates expected to join.

TradeIX also recently launched the live pilot phase of a blockchain-powered open account trade finance network it developed in partnership with enterprise software firm R3 and a string of lenders. It expects additional banks, logistics providers, insurers and enterprise resource planning firms to come on board later this year.

The Marco Polo network is built on R3’s blockchain tech, Corda, which “integrates and secures the entire stream of disparate data sources involved in insurance, while simultaneously ensuring transparency across an interconnected network of clients, brokers, insurers and other third parties,” according to Ryan Rugg, R3’s North America head.

“By working closely with our partners, which include a number ofmajor insurance companies, from the beginning, we can develop applications for a range of use cases,” she says.

Shipping firms embrace blockchain

Shipping companies have been fast to see the potential of blockchain, with a number already using the technology.

Japanese shipping firm Mitsui OSK Lines, for example, announced in December 2017 that together with IBM it will carry out a blockchain proof-of-concept in which trade agreements, logistics contracts and insurance documents will be stored and shared among participants. In September 2017, shipping giant Maersk and partners Microsoft and EY announced they had formed a joint venture to apply blockchain technology in the field of marine insurance. By sharing data about shipments and potential risks, they aim to enable more accurate pricing of risks and to help companies comply with insurance requirements.

Maersk has since expanded its work in distributed ledger tech. Third-party logistics provider Agility revealed earlier this month that it has joined a global trade digitization platform created by Maersk and IBM on Hyperledger Fabric 1.0 blockchain. Agility will share information about individual shipment events and believes this will facilitate risk analysis and accelerate the time it takes for shipments to clear inspections. That project too reflects the spirit of collaboration flourishing around trade innovations, with the U.S. Customs and Border protection, plus industrial giants DuPont, Dow Chemical, Tetra Pak joining hands to pilot an early version.

The way forward

With many of these projects still at the beginning stage — as is the technology that underpins them — their ultimate impact on global trade will include benefits and challenges early movers have not even considered yet, but the key will be a wide ecosystem, says Blattner-Hoyle.

Banks, insurers and shippers now have a unique opportunity to jointly explore innovations while they are at their most flexible — and to mould them into concrete solutions for clients.

AIG is innovating to support corporates and funders in the use of blockchain and distributed ledger technology, to increase efficiency and scalability of working capital trade solutions supported by AIG trade finance insurance.