What can Blockchain do for you? An insurance carrier that you can trust!
By Ketan Pandit
Chief Information Officer
QBE North America
One of the common misconception in today’s Blockchain discussions is that it saves money across various departments in a company. In fact, some of the recent studies by a major consulting firm claim that as much as 70% reduction in costs is possible because of Blockchain, mainly through progressive reduction of Mainframe technologies which are the backbone of financial transactions in any Financial Services company even today. Another Consulting company puts the total impact to the financial services industry as a net savings of $15-22B per year attributed to Blockchain.
But the real question is whether this is reality or hype? In the past 2 years, IBM has made a huge bet and investment on Blockchain on its IBM mainframes. In fact, Blockchain is helping IBM position itself right in the center of the Blockchain boom using its Mainframe based Cloud services.
What does this all mean? If Mainframes are not going away, are the cost savings going to be real for the Banking industry?
And if Banking is not seeing the real savings, why should Insurance industry take a serious look at Blockchain?
Trust. One of the biggest challenges facing Financial Services institutions and more so in the Insurance industry. Trust plays a major role across the Insurance value chain right from “Who we are – Identity of Parties, Authentication; What we do & How we do it” – Processes, Documentation, Compliance with regulations and When & Where – Timing of our records, location of where transactions were performed etc.
Deficiencies in Trust are a direct result of several monolithic databases that replicate the same information within an organization. Every organization in the insurance value chain – Customers, Agents, Carriers, TPAs, Payment Providers and Regulators have their own version of information required for successful transactions. This situation has propagated asymmetry in information available to process transactions that are seamless, efficient and most importantly fair. Everyone in this chain is in the same predicament – “I cannot trust anyone’s data except mine”.
Blockchain enables Trust in an inherently trustless world. Blockchain is a secure transaction ledger database that is shared by all parties participating in an established, distributed network of computers. It records and stores every transaction or exchange of data that occurs in the network, essentially eliminating the need for "trusted" and centralized third parties. Blockchain facilitates entities to exchange or share information in a distributed and secure way and enabling anonymity of these entities if required. Blockchain will have wide ranging impact on all facets of Insurance – Policy Contracts, Claims, Accounting & Settlement and Payments.
The Insurance industry is in early stages of experimenting with Blockchain. Many billions of dollars have been invested in InsureTech over the past few years to advance the viability of Blockchain applications in Insurance. Some of the largest players in the global insurance and reinsurance markets have joined alliances such as R3, the Post Trade Distributed Ledger Group, and the B3i consortium to explore the technology. P&C insurers leading in Blockchain are already offering products built on distributed ledger technology and are accepting cryptocurrency for premium payment.
How can Blockchain be leveraged in Insurance?
Depending on the degree of inclusiveness, there are three frameworks to leverage Blockchain technology in Insurance
Enterprise Adoption – Blockchain can enable collaboration across various parties within an enterprise to enable seamless business transactions. BackOffice processing across multiple business groups or in some cases across geographies can leverage Blockchain to improve efficiency. Often this is a powerful driver or influencer for lower operating expenses and combined ratios. An example of such an application is in regulatory reporting and compliance. This process involves recording and storing data, synthesizing data – aggregation, transformation, business rules etc. and sharing information with related parties in a secure manner. Currently a host of centralized data warehouses through a complex set of roles and responsibilities generate this information and it often takes weeks if not months to get this in a manner that is trusted by the consuming party. These parties could be Business Executives, Auditors, DOI or other regulatory agencies. Instead of recording and aggregating information in a central database, the transactions (e.g. Policy or Claim creation) could themselves be recorded on a distributed ledger. A permissioned ledger can provide the level of transparency to the consuming parties in near real time. This process minimizes the mad scramble of systems and resources at period ends to comply with reporting requirements. It affords the most control but misses a main benefit of Blockchain technology: the facilitation of transactions between trustless or semi-trusted counterparties without an intermediary.
Enables Carrier to Carrier, Carrier to Agent or Provider transactions that benefit from the speed, traceability, and consensus mechanism that distributed ledgers provide. Reinsurance and Claims processing are ripe for disruption, but there are many more opportunities. A key aspect of inter party adoption is the use of Smart Contracts and Internet of Things (IoT) sensors.
Smart Contracts are embedded business logic within Blockchain. The Smart Contract contains business logic in the form of code and its associated data at a specific location within the Blockchain. These contracts can execute, measure performance of a contract in a distributed way that is completely secure.
Smart contracts coupled with IoT sensors have real world applications in Crop Insurance. The shared ledger provides single source of Trust for core data which includes input data- Weather, Soil and Crop provided by the sensors in the Vineyard and mutually agreed Insurance Policy between the Farmer and the Carrier. When damages are reported by the sensors in the Vineyard, corresponding insurance policy will be validated and processed for Claims. There is an order of magnitude improvement in efficiencies and speed when compared with the traditional route that starts with a First Notice of Loss and followed by a series of Claims Adjuster interactions and finally payment settlement. Today this process typically takes weeks if not months depending on the severity of the damage but Blockchain has the ability to get this process done in near real time.
Another example of Bi-Lateral Adoption of Blockchain is in the area of Accounting & Settlement in the areas of ReInsurance. Both contract placing & management and Claims agreement process integrate in the A&S process. While these al for Insurance operations and have a material impact on the cost quality of service.
In a Multi-Lateral model multiple stakeholders in the Insurance ecosystem participate in Trusted and seamless transactions using Blockchain technology. Some or all of Consumers, Brokers, Agents, Carriers, Claims Service Providers, Payment Providers and Regulators could participate in various aspects of the insurance value chain. Smart contracts, IoT, Advanced Cryptography and other aspects of Blockchain technology enable multi-lateral adoption. Amongst all the models Multi-Lateral adoption has the greatest promise not only for cost efficiencies but improving the brand value for customers and partners alike.
Blockchain and Smart Contracts can be applied in the area of Specialty Insurance for Trade Credit insurance to reduce risk and complexity while reducing the complexity of the Trade Credit process. For example consider a discrete goods manufacturer located in Germany and a component Supplier based in Taiwan. A smart contract allows you to record in an automated and Trusted way documents related to sales agreement, trade compliance, letter of credit and the associated insurance coverage for the transaction. Any change in the parameters of the trade enables settlement by the parties quickly and efficiently.
One of the key use cases of Multi-Lateral Blockchain adoption is in the area of travel related Micro-Insurance. Smart contracts combined with Oracles – which are nodes in the Blockchain to enrich external data provide the Trust for payments in a Multi-Lateral interaction. Insurers carriers can publish a smart contract to provide insurance coverage for delayed or canceled flights. Travelers can buy insurance coverage through crypto currencies against appropriate smart contract. Oracles which act as data carriers feed real time flight status into the Blockchain. Smart contract logic will execute an automatic payment if the given flight is delayed or canceled.
A large multinational Insurer has piloted a Blockchain based insurance policy generation. Insurance policies and other shipping documents are shared amongst parties through a trade. It was estimated that 85% reduction was achieved in a Shippers data entry time to secure an insurance certificate. Such improvements in turnaround times and trust not only increase the time to market but also streamline the associated claims processes as well.
Things to Think About
The potential for value realization from Blockchain is great and the use cases are very real. However, to successfully implement and capture this value carriers have to consider the following key factors
a. Geography – Blockchain solutions that cross national boundaries or statutory jurisdictions will have special needs for regulatory compliance. As these solutions are scaled cross border, solutions will become increasingly complex with special consideration for legal parameters, changing policies, foreign exchange, monetary policy and other macro-economic conditions.
b. Regulation – Being a regulated business, policy guidelines from various State Department of Insurance, Department of Finance, Federal Agencies and Other data protection and privacy laws like GDPR will present new issues for adoption. A robust compliance and regulatory program will be necessary to scale adoption.
c. Complexity – As discussed above benefit accrual increase as adoption of Blockchain evolves from the enterprise to Bi-Lateral interactions and finally to Multi-Lateral interactions. Increased participation leads to increased complexity in transaction load, security, integration, cost and risk. Failure costs in such an environment are very high and need to be balanced with effort to adopt them.
d. Investment & Risk – Significant investments are required to adopt Blockchain technology and the level of investment is based on the integration across stakeholders in the value chain. Investments are not only in the form of capital outflow but also in the form of mindset shifts to embrace the paradigm across multiple stakeholders. All parties involved in the Blockchain transaction should concurrently adopt the changes and a new way of working. Investments are also associated with significant risks. These risks are in the form of regulation, privacy and cybersecurity impacts and also risks from non-conformant stakeholders. While the investment profile and risks are not that different from previous paradigm shifts, the need for speed while balancing investment and risk is critical to capture early adopter benefits. A fail fast approach to adopting this technology would work well to get to the right balance between investment and risk followed by structured capital allocation process to embrace the technology for the medium to long term.
In summary, Blockchain offers a major technology breakthrough to address the fundamental issue of Trust in Insurance transactions and relationships. There are significant benefits to be realized across many real world use cases through this technology. Insurance carriers and stakeholders across the value chain stand to gain significantly not only in terms of improving their cost positions in the form of combined ratios but also improving their ease of doing business and brand positioning. Those who move fast and deliberately stand to gain the most and transform themselves to an Insurance firm trusted by one and all.