Blockchain is a game changer
Regular readers of InsurTech Weekly will know that I’m a firm believer in blockchain tech. It has the game changing potential we’ve seen from cloud and, dare I say it, the Internet. Numerous industries and governments are all running blockchain pilots. And the global commercial and speciality insurance industry is one of them.
Hardly surprising when you understand the levels of operational inefficiency that exists in the market.
Still heavily reliant on paper, multiple intermediaries and manual hand-offs, it is staggering to think that the insurance industry accounts for around 6% of global GDP. And yet it is still the case that administration is analogue, clunky and out of sync with the business as it is being placed. The world could not operate without the global insurance market and yet it is an antiquated industry technically.
To get a fresh perspective on the impact of blockchain in the commercial insurance market, I have turned over this week’s InsurTech Weekly to guest author, Pratap Tambe. An insurance technology professional, Pratap has written many posts on the commercial and speciality insurance market (see his LinkedIn profile).
The following article is Pratap’s personal opinion on the subject of Blockchain and it’s potential for TOM and the London insurance market.
Over to you Pratap!
Challenges for the London Insurance Market
By Pratap Tambe
In 2014, the London Market Group (LMG) commissioned Boston Consulting Group to produce a report looking at the competitive position of the London insurance market. The report was called “London Matters” and it can be downloaded here.
Page 39 of the London Matters report says “Our survey demonstrated that the key drivers of placement decisions are not typically those related to market infrastructure. The ability and willingness to pay claims, speed of claims payment, speed of placement and ease of access to the market ranked below non-infrastructure related factors like financial security, price, scope of cover and product risk expertise”.
Despite this, the main goal of the Market Modernisation programme and the initiative called TOM (“Target Operating Model”) is reducing cost by sharing front-end and back-end infrastructure while improving secure ease of use through globally accessible shared front-ends like Placing Platform Limited (PPL).
There is some evidence that the London insurance market is losing large global customers to individual global insurers who offer multinational insurance programs with flexibility in the processing of premiums and claims.
For some customers, such global insurers can enable a centralised processing of premiums and claims, while for others, they can enable a variety of decentralised structures for processing premiums and claims. Customers can choose a processing structure suited to the spread of their portfolio, cash management preferences and regulatory restrictions.
Today the London insurance market does not offer this type of flexible processing of premiums and claims for coinsured multinational insurance programs and hence is losing out in the competition to insure the large global customers. Yet the London market TOM is not yet considering ways of modifying front-end and back-end market infrastructure to fill this gap.
The impact of blockchain on London Markets
Blockchain technology has a large number of use-cases for the existing London insurance market business model. These include those that reduce cost and improve secure ease of use.
The early use cases have focused on cost and ease of use in my view both in theoretical exploration as well as in proof-of-concept execution. For these use cases, conversations have now moved on from theoretical to tangible and this is a great step in the right direction.
But I think that the right next step will be to explore future-focused business value generating use-cases rather than limiting the focus to reducing cost and improving secure ease of use for primarily past-focused use-cases because of the following reasons;
- It seems theoretically possible to implement coinsurance for multinational insurance programs using Blockchain technology within the London insurance market.
- It also seems possible to leverage Blockchain based prediction market technology across multiple classes of insurance to create a new business model for the market itself.
- There have been descriptions of Blockchain and/or IoT based use-cases for specific types of insurance in the public and social media including catastrophe insurance, cargo insurance, property insurance et al.
- There have been descriptions in the public and social media of use-cases for various intra-insurer applications independent of the type of insurance, particularly for claims.
- Recent Blockchain based Catastrophe risk trading solution trials might point a way to a totally different business model for the market itself.
Where next for the London Insurance Market?
We need to use a multi-staged public consultative process to systematically gather and outline all the potential use-cases, define and evaluate options for changes to business model, business processes and IT architecture at a market level and choose the destination state based on the above potential use-cases.
- There are many alternative ways of leveraging multiple different Blockchains for the London insurance market for different purposes. While it is clear that some of them need to be private to the London insurance market, some of them may not be better off as private to the London insurance market. For example, it might be better for Assets and Identity Blockchains to not be London insurance market specific, since these have wider applications and implications. So, initially private Blockchains should be developed for Identity and Assets. Later as public ones emerge, solutions can transition to public ones.
- Essentially, for a given business model for the market, there are likely to be multiple market business process and IT architecture choices whose feasibility need to be considered.
We must leverage the above type of public consultative process to design and choose our destination state for the London insurance market, despite the temptation to choose the most natural and easiest evolution of our market and get on with implementing something. Because if we miss some use-cases and rush towards a solution, then future change may be more difficult given the fragmented stakeholders context of the London insurance market.
However recent theoretical articles and/or proof of concepts point to the following common elements in multiple alternative ways of leveraging Blockchains in the London insurance market.
- A global placement platform should be built to agree and digitally sign risk transfer slips with insurers/coinsurers removing the need for paper and colocation. The risk transfer slips should trigger insurance/coinsurance smart contracts to make risk transfer entries in a private Blockchain for risk transfers. These insurers/coinsurers may further transfer risk to reinsurers and retrocessionaires through the global placement platform. These subsequent risk transfers can also trigger reinsurance and retrocession smart contracts to make risk transfer entries in the same risk transfer Blockchain.Initially TMEL (The Message Exchange Ltd) could substantially remain as it is so that insurers and brokers do not have to change their systems too much. The private risk transfer Blockchain could sit on the other side of TMEL and speed up the processing of premiums and claims.
- Based on risk transfer entries in the private Blockchain for risk transfers, premium and claims payments can be collected, split and distributed from and to the on-risk and on-risk-chain parties.It might seem that such a system is not feasible, unless all insurance, coinsurance, reinsurance, retrocession parties are on the risk transfer Blockchain. I contend that if we can find some parties willing to take on “factoring” type responsibility to represent the receivables and payables from other parties on the Blockchain, such a system can be implemented easily. This “factoring” is kind of like 100% reinsurance/retrocession, but more of a cash management play, so I suspect that finding such parties should not be impossible.
- Initially ECF and CLASS based multi-party claims adjustment and agreement workflows could be integrated with minimal changes into the insurance smart contract operations. Once IoT data streams become available from asset Blockchains, claims decisions could be automated to reduce the need for multi-party claims adjustment and agreement workflows.
Related InsurTech Weekly articles by Rick Huckstep
If Insurance, Then Blockchain – featuring Dynamis
The author, Rick Huckstep, is an InsurTech thought leader and editor of InsurTech Weekly for The Digital Insurer.