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Blockchain: A Golden Opportunity to Transform Re/insurance in Latin America

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Blockchain technology’s potential for disrupting the re/insurance industry is frequently mentioned and given the nature and volume of data which flows between the insured, insurer, broker,reinsurer, service providers and other external stakeholders, it’s easy to understand why.

Something which hasn’t been discussed however, is the extent to which specific markets, and those in Latin America in particular, could be positively impacted by this technology. That markets across the Latin American region could use blockchain technology to establish a new status as a role model for efficiency, technological development and a desirable place to conduct and attract new business, appears not to have been recognised.

Approached correctly, blockchain technology represents a golden opportunity to not only introduce real, tangible operating efficiencies into Latin American market practices and operations but also to transform the image of the region’s business environment and discard many of the long held and damaging misconceptions.

Lack of transparency, lack of data integrity, inefficient and outdated business practices, poor claims data and excessive operating expense are some of the more common complaints of foreign management on the subject of their participation in Lat Am markets. Whilst these concerns are certainly not valid across the board, it is difficult to argue that there’s no substance to some of them.

Implementing blockchain technology into market practices could instantly address all of these issues by bringing total transaction transparency, providing consistent processes (vertical and horizontal) and introducing multiple transactional efficiencies, enabling significant time and cost savings1.

Putting this in an operational context, during typical high pressured renewal periods underwriters would witness considerable reductions in valuable processing time and in the cost of placing their risks by eliminating the rekeying of data and eliminating duplicate tasks for the cedent, broker and reinsurer. The new policy as a ‘single source of the truth’ has considerable benefits for all parties in the chain, not least removing the likelihood of costly future disputes. As blockchain applications can be designed to process treaties, send notices to all participating parties and process the associated premium and commissions, technical accounting teams can be leaner and more focused on improving transaction efficiency. Payments no longer become stuck or withheld for unreasonably long periods of time as all parties can access and follow the payment flow, thus freeing up considerable administration time and assisting Treasury needs. Claims teams will see faster processing and verification of claims. Audit teams and compliance staff will enjoy the substantial benefits transparency brings, especially around the burdensome KYC and AML processes. The impact
could be significant and enterprise wide.

These benefits could of course apply to most re/insurance markets. However several markets in Latin America have particular characteristics which mean they stand to achieve potentially greater upside benefits and from a practical perspective, enable an easier implementation of the technology.

Firstly, several ecosystems in Latin America are already familiar with blockchain technology as a result of the wide adoption of crypto currencies and digital assets in the region. As blockchain technology is a key element of crypto currencies, a high level of familiarity and expertise with the technology already exists in the region which re/insurance industries could leverage. As adoption of crypto currency continues to grow in markets such as Argentina, Colombia and Brazil in particular, the use of blockchain technology will also grow, increasing the supply of resources with technical blockchain knowhow.

The structure of markets such as Argentina, Brazil, Chile, Colombia and Mexico for example, lend themselves to an easier adoption of blockchain. There are relatively fewer players (than in say, US markets) operating in more localised markets which makes intra market collaboration – which is vital – much easier and quicker to achieve than in larger international markets which are often more fragmented. In addition, the more relationship oriented nature of the markets in these countries where there’s a higher degree of trust, long standing bonds and greater familiarity between players will also induce a greater level of collaboration.

The relatively lower direct cost of labour in Latin American markets has in many cases resulted in unnecessarily high head count in back office functions performing menial, heavily manual tasks such as rekeying of data, repetitive receivables collections procedures and reconciliation work. This has often resulted in bloated expense ratios, less effective processes and additional HR burden. Blockchain will streamline many operational processes significantly improving efficiency and
minimising headcount in these areas.

The regulatory and compliance burdens imposed on businesses in several Latin American markets are substantially greater than in many other international markets. This burden translates to increased expense and as well as greater demands on valuable management time. Blockchain would bring efficiencies to the compliance and regulatory aspects of the business through transparent, consistent processing and more streamlined processes. AML and KYC procedures are obvious examples which would see immediate benefits. The potential gains are exponentially greater where the regulatory burden is heavier.

So, the case for blockchain in Latin American re/insurance markets seems pretty clear. The big challenge facing these markets lies in making the transformation and successfully managing the implementation of blockchain technology. Stakeholder collaboration is absolutely fundamental to the success of blockchain in any market. The technology needs to be embraced by multiple market participants and serious conversations need to take place among the risk takers, the service providers as well as regulators and national associations before any transformation can begin. No single entity alone can make this happen, influential players who see themselves as leaders need to step up and drive the initiative into their markets.

While Blockchain is long established in technology circles, it is perceived as a UFO in re/insurance circles, too complex to understand and beyond the reach and comprehension of most operational management. It shouldn’t be. There are several solutions and advisors who are accessible and can assist the entire process from preparing feasibility and design to managing implementation. It is an active and growing sector.

Largescale adoption of blockchain technology in Europe and the US has been relatively slow to date which probably means international companies are unlikely to invest the required resources in their Latin American operations, at least until a proof of concept has been established in the traditional markets. The onus may therefore lie with the larger indigenous entities in the region to take the first meaningful step forward and begin the collaboration.

Whomever seizes the initiative and delivers this new world stands to gain not only financial and operational rewards but also recognition in a larger context; true recognition as a market leader in thought leadership and innovation. Opportunities to make such a profound impact on a market do not come around often.

1 PWC has estimated expense savings of between 15% and 25% in their paper “Blockchain; the $5billion opportunity for reinsurers.

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