The early use cases for blockchain mimic the way the industry works today.
It is far too early to know if blockchain tech will, one day, enable a fundamental redesign of the insurance business model. So, for now at least, the early use cases mimic existing processes, improving them without being disruptive to them.
And it’s easy to see why and how blockchain can have such a significant impact in these insurance markets;
- Blockchain intrinsically supports peer-to-peer and collaborative business models where all parties are equal.
- Smart contracts are particularly suited to proposing, negotiating and executing agreements across independent trading networks.
- There is no central infrastructure, single point of failure or controlling body. Each participant runs the components that are common to everyone on the network.
- The cost of operation is substantially lower than conventional methods.
Use Case #1 – ChainThat’s blockchain solution for reinsurance
ChainThat are a London based blockchain development house that focus on the reinsurance market. They recently joined ACORD as the first blockchain startup to join the organization that sets the standards for the industry. (Ed note: I’m on the advisory board of ChainThat, see more about them here).
In the world of reinsurance, the process of placing business is fragmented, manual, complex, and intermediated.
It starts with a business, usually an insurance firm, called the cedant, looking to reduce their exposure to a specific financial risk (facultative) or to an entire book of business (treaty). The process starts with the cedant explaining their risk to a reinsurance broker. The broker then goes out to multiple reinsurers in the market who all take a piece of the risk.
And these are the very largest risks covered by the insurance industry. The business of reinsurance helps to protect insurers against unforeseen or extraordinary losses by allowing them to spread their risks. A catastrophic event at an industrial enterprise could financially devastate its insurer. With reinsurance, no single insurer finds itself saddled with a financial burden beyond its ability to pay.
It sounds simple, but it’s a marketplace that involves lots of going back and forward between all the parties involved. This is why Lloyd’s of London is unique and has been so successful as the global centre for speciality and wholesale insurance. Because in London, all the parties are physically co-located within the square mile. It also explains why standards are vital to the functioning of the market.
The broker holds the key
These big complex risks require lots of due diligence, information sharing and negotiations that involve going back and forth between the parties.
The role of the broker is keeping track of all these moving parts, particularly as negotiations proceed as the process gets harder. For example, there will be many versions of the same document going back and forth via email between all the parties. Everyone keeping track, each with their own standards and governance to follow.
Once agreed, the broker will get all the reinsurers to sign up, each having to complete their own internal approval processes. The broker does the same with the cedant before the risk is locked down and distributed back to everyone.
Except that, this binding process can take weeks and more likely, months to complete. Huge risks are left exposed with a heavy reliance on reputation and “my word is my bond” should any risk be called.
What’s more, there is often a disconnect between the risks placed by the cedant at one end of the value chain and those written into the agreement with the reinsurers at the back end of the chain.
It is no wonder that the brokers can take as much as 40% of the premium to manage this process. And this is before a claim has ever been made!
What have ChainThat done to address this?
They’ve built a placing platform built on blockchain technology, automating these processes in an immutable way that is efficient and transparent. ChainThat founder Dave Edwards told me;
“Data and process standards are absolutely key to enable effective collaboration between members in the insurance sector. By applying ACORD standards using Smart Contract workflows on the ChainThat platform, we have shown that we can dramatically improve operational efficiency. This is a step change improvement from peer-to-peer messaging to a universally common state of insurance data and processes between transacting parties.”
One issue from the current process is data consistency and quality. On the ChainThat platform, all parties hold the data that is relevant to them in a digital format. This removes the need for each party re-keying into their internal policy administration systems. Today there is a “trust” system on the broker, a reliance on them to get it right. But it’s not transparent to all parties.
Another issue is transparency. With blockchain, all parties can see what the other parties are doing. The blockchain holds a complete audit history visible to all parties, whereas the audit trail today relies on an email chain. In blockchain, there is a universal audit trail where everyone has a single version of the truth.
Another is with approvals. Today, (manual) digital signatures are used on PDFs passed around via email. With ChainThat, all agreements are signed on the blockchain and transparent to all who need to know.
Whether this will disintermediate the broker or not in the long run, only time will tell. I doubt it personally. This blockchain use case does not replace the knowledge and instinct of a specialist broker. What it does is to significantly reduce latency and inefficiency in the process.
Use Case #2- Symbiont eliminates settlement latency, reducing capital risk
This use case was posted on Daily Fintech Advisors a couple of months ago and it looks at Symbiont, who have built the first issuance and trading platform for Smart Securities. Symbiont, raised a $7m Series A in January 2016 and are using smart contracts as programmable versions of traditional securities on the blockchain.
In this use case, the subject is Catastrophe Swops, the financial instrument used by insurers to transfer risk from catastrophic events. In the post, Bernard Lunn wrote about the unbundling of insurance. He explains, “in this case an Industry Loss Warranty (ILW) uses an industry-loss trigger. It is possible that Symbiont technology will enable a more sophisticated alternative using a parametric trigger (explained here). This is what could facilitate microinsurance type policies such as crop insurance.
“At the investor end of the stack, Symbiont technology can transform insurance risk into a security, thus making it simpler for investors. This is what will drive the unbundling of Insurance and the democratisation of reinsurance. This Catastrophe Swap using Blockchain technology unbundles the link between Insurance Companies and Reinsurance Companies. Now any investor can be a Reinsurer.”
It ain’t what you do, it’s the way that you do it!
The take away from these two use cases is that they are enabling a different outcome to existing processes. These use cases are not disruptive per se. They mimic existing processes making them efficient and productive.
Significantly, they also remove substantial friction from the value-chain. This really is all about producing better, faster, cheaper business operations.
(For a trip down memory lane, here’s the link to the 1982 version of Funboy Three and Banarama’s “it ain’t what you do, it’s the way that you do it!”)
Where is the customer in all of this?
Operational efficiency is still the primary focus of the insurance markets. You only have to look at the London Market TOM to see their focus is an internal one. And blockchain will go a long way to addressing these internal issues.
But the real problem is that the way the market works today leaves a lot to be desired from a customer’s POV. This is what makes the driver for a blockchain enabled insurance market compelling.
To give me a fresh perspective on this, I spoke recently to Steve Tunstall, an active InsurTech commentator, author and public speaker. Steve’s Linkedin profile defines him as “a risk and insurance champion for the past 30 years”.
Steve is also the CEO at blockchain startup Inzsure.
Inzsure is an aggregator for commercial insurance on behalf of quality markets. The customer gets choice and the provider gets the chance to differentiate in real time to the customer via a mobile or desktop platform.
Steve told me; “It’s all about education. And I don’t just mean educating on the tech. This is not actually about blockchain. The real business problem is that corporate customers often don’t understand risk and how insurance can help smooth severe balance sheet fluctuations.
“Our goal at Inzsure is to educate corporate customers and the use of insurance to mitigate corporate risk. This is where the insurance industry has failed its customers up until now.”
Steve makes a valid point. Whilst the reinsurance industry is busy doing what it does, the customer is often outside the process and unable to fathom what’s going on. As a result, for most corporations, insurance has been pushed down the food chain and become a mere purchasing issue, not a matter of strategic importance.
Steve used this anecdote to illustrate the point. “If the CEO of a major bank called the average customer CFO and offered them lunch, they’d probably clear their diary. I’m not sure the same would happen if the CEO of a major insurer did the same. He’d probably be passed two levels down to a manager in the procurement team.”
What is the industry doing about blockchain?
According to a Z/Yen survey of the insurance industry, over half of insurance executives recognized the importance of blockchain technology.
However, 57% of them didn’t know how to respond!
From my experience, this is changing quickly. Which is why #2 in my 2017 predictions list is “Blockchain will rapidly move from Pilot to POC in commercial and wholesale markets”
Two months ago we saw the announcement that Aegon, Allianz, Munich Re, Swiss Re and Zurich have formed B3i. These giants of insurance will cooperate to build “a proof-of-concept for inter-group retrocessions by the use of the Blockchain technology”. Lets hope this consortium doesn’t go the way of R3!
Just last week, China announced a $1.4bn Fintech fund with a strong focus on AI and blockchain tech within financial services. We’re also seeing talk of an ‘Enterprise Ethereum’ are emerging. This is to allay any concerns in the corporate IT world of the viability of blockchain as an enterprise class technology.
At the recent Digital Insurer Asia conference,Vitalik Buterin (co-founder, Ethereum) spoke with KPMG on the subject of blockchain and insurance in this video.
And the regulator?
According to Oliver Bussman, he argues that blockchain won’t disrupt FS first. The reason he cites is regulation as a barrier and a drag on innovation across the Financial Services sector as a whole.
Steve Tunstall has a different POV; “regulators are going to like blockchain. Everything that blockchain enables is in the customer’s interest. Transparency, immutability, efficiency and lower premiums. The blockchain use cases act in best interest of customers and regulators will applaud that.”
Readers might be interested to watch a live replay of the Federal Advisory Committee on Insurance (FAIC), discussing blockchain technology (as well as auto safety and insurance fraud) in this recording found here.
My sense is that regulators will not want to be left behind on blockchain and they will act (relatively) quickly. Especially given that the upside is all to the benefit of the customers (retail as well as commercial).
The author, Rick Huckstep, is an InsurTech thought leader, public speaker and Chairman, The Digital Insurer.