 Hey guys, it's MJ and as I said in my previous video on catastrophe bonds, the financial revolution has begun. Blueprints for decentralized institutions are being drawn up and more securities are finding their way onto the blockchain. In this video, I want to talk about reinsurance transfer and how blockchain can decentralize this process. Once again, this video is sponsored by SmartCash and they're going to be allowing me to give away $25 to the people who comment. So check the description below for more information on that. Okay, in this video, I want to first explain what reinsurance is. Then I'm going to talk about non-fungible tokens and finally we'll combine the ideas and state how this will benefit society. So first, let's start off with reinsurance and a quick definition is when a party that has accepted a risk transfers some or all of that risk to another party. So let me give an example. Let's say an insurance company is set up in Cape Town to insure houses from fires. Now we know what the classic insurance looks like. We've got the monthly premiums that the homeowner pays and they're going to receive a benefit from the insurance company if their house burns down. The local insurance company understands the Cape Town market. They have the relationship with the brokers and they know how to market in such a way that it fits in with the local culture. However, the insurance company knows that a great fire could strike the city and burn down multiple houses. Because if we look at it, the chances of, say, one house getting burnt down is probably around just for argument's sake, say 1%. But if one of these houses were to catch on fire, that is going to increase the odds of the surrounding houses. So if multiple houses get destroyed at the same time, the local insurance company will not be able to pay out and we call this financially ruined. And this is a bad thing. An insurance company in Mexico City has the same problem and so does one in Rio. To address this problem, a reinsurance company is set up. Normally they're based in Europe and they're going to be able to insure our companies in Cape Town, Mexico City and Rio. Of course, if the whole world goes on fire, then the reinsurance company is in trouble. But let's hope that that doesn't happen. So without reinsurance, each insurer will have to insure the homes in its area. Ensuring multiple local homes will allow the insurer to cover the cost of a small fire that destroys one or two houses. But it will not allow them to cover the cost of a great fire that destroys multiple houses. So a reinsurance company is set up and essentially it's taking the risk from the multiple locations and shuffling them together so that the risks become more independent of each other. Independence reduces overall volatility of claims, which is a good thing as it reduces the chances that the insurance company has ruined. Now with reinsurance, the insurer can cover the cost of both the small fire and of the great fire. But this is a centralized system. And it's giving the reinsurance company a powerful position. Remember, the insurance company has to pay fees for the service. Also, if we look here, they are ensuring less, which means less potential profit for them. Is there no way that we can cut out this middleman and create a decentralized system? And the answer is yes. We can actually create a decentralized system that allows the risks to be traded among the insurance companies. And what we mean by that is that Cape Town will ensure some houses in Brazil and some in Mexico. Mexico will ensure some in South Africa and Brazil and Brazil, Mexico and Cape Town. Now, in order for that to happen, we need to look at part two of this video, which is non-fungible tokens. And again, let's start with a very quick description. Non-fungible are when two things from the same group are not identical. So an example of something that is fungible is gold bars. And something that is non-fungible would be property buildings and, you guessed it, houses for London, this category. So let's look at a house. Okay, houses can have different locations. They can have different sizes, different values, and they can be made up of different materials. So even houses within Cape Town are non-fungible. Like I say, a two-bedroom house in Claremont is not going to be the same as a one-bedroom apartment in the waterfront. One of the first non-fungible tokens on the blockchain were crypto kittens. And I can imagine that the reinsurance market would look something quite similar to the crypto kitten market. What we could see is an insuring Cape Town going to the site and selling some contracts of the houses that they've insured in Cape Town and buying other insurance contracts from Mexico City and Rio. Now, remember, they're doing this to get that independence of risk so that if a great fire strikes, they're not going to become financially ruined. And that's the whole thing that we're trying to say here, is that a great fire in Cape Town will be partially paid for by insurance companies in, say, Mexico and Brazil. The interesting part, though, is that the insurance company in Cape Town will still do the admin, the claim process, and all that work for the contracts that they've sold off. Because if they neglect these contracts, it's going to hurt their long-term business prospects, as it's going to hurt the integrity. And people in Mexico City and Brazil are going to be like, we don't want to touch those Cape Town contracts. So we are still going to see the same amount of effort going into these contracts in managing them. Though actuaries will be involved, ultimately, the market will determine the price of the insurance contracts. So just like with crypto kittens, the market decides. One problem, though, is that all these different places use different currencies. And that's why a system like this could be built on Ethereum, where Ether is used as the single currency to trade. Or what I think is more likely to happen is that the reinsurers might be brave enough and build their own decentralized platforms and issue a uniform currency to facilitate the trade. So we could see Munich resetting up their own blockchain instead of piggybacking off something like Ethereum. But at the end of the day, what we want is a decentralized platform with a uniform currency to facilitate the trade. And I think that the reinsurance companies that don't do this, that don't embrace this type of technology are going to be fading away in time. But anyway, let's move on to the final part where we're going to be talking about the benefits that this will bring to society. And I mean, right off the bat, what we're going to see is cheaper insurance as the reinsurance fees will fall. This will result in more risks being covered as it's no more affordable, which is going to lead to a more stable society that isn't rocked by disaster. And what is also cool is that your everyday person, so you and me could invest in insurance contracts and we can get some really cool diversification benefits before you cannot do this. And it might be as simple as purchasing a crypto kitty. What you do is you simply come and pledge some collateral, receive your monthly premiums, and you'll get your collateral back if the house doesn't burn down, which basically means profit for you. So we could go from having these large corporates doing the reinsuring to large crowds. In fact, that's quite important, so let me reinstate that. Blockchains can allow for the crowdfunding of reinsurance and allow the public to participate in the profits from risk transfer. Now, what this basically means is that when it comes to say portfolio construction, you can include the LA Firecoins and the Cape Town Insurance Contracts, and you can create this whole new investment strategy focused around uncorrelated assets. Now, if you wanna know more about the LA Firecoins, you need to check out my previous video on catastrophe bonds. Anyway, thanks so much for my sponsor. Next week, we're gonna be looking at how blockchain can reinvent tax systems, and after that, we're gonna be looking at foreign markets as well. So I've also got a video on smart cash. If you guys wanna learn more about that, which I highly recommend that you do, and don't forget that there is the $25 for comments that I'll be giving out to a whole bunch of people. So don't forget to subscribe because we'll see you next week for another video. Cheers.