Brave New World: 1st Reinsurance Product Heads to the Blockchain
There has been a lot of press – and perhaps hype – about blockchain and its potential to revolutionize the industry’s processes and ultimately improve the customer experience.
However, the efforts of the industry’s B3i initiative shows the real commitment of major industry participants to put the blockchain – or distributed ledger technology – to the test. (See the first part of this series, “What Is Blockchain and How Does It Work?“, for a high-level explanation of blockchain.)
The 15 members of B3i are now in the midst of developing a “minimum viable product,” which means during the summer of 2017 “we will have blockchained a reinsurance property excess of loss contract,” said Paul Meeusen, head of finance and treasury services, Swiss Re. Meeusen is leading Swiss Re’s involvement in B3i.
If all goes according to plan, the blockchain will facilitate the reinsurance post-placement from closing written lines all the way to settlement, which involves the payment of premium and claims being reported and settled, he explained.
Blockchains, also known as mutual distributed ledgers, are defined as a common set of records of transactions, which are mutual (shared), can’t be changed and are stored in multiple locations with no central ownership. The technology is being touted as a solution to the industry’s inefficient back-office processes.
Only time and testing will tell, but the members of B3i, known formally as Blockchain Insurance Industry Initiative, are working hard – expending resources of time, money and people – to prove the concept works for the insurance industry.
After all, the industry’s age-old inefficiencies increase expenses and often litigation. Just look at the case of Sept. 11. The coverage for the World Trade Center had just been agreed but the paperwork wasn’t finalized—and then the planes hit. Years of legal proceedings followed, which culminated in a court verdict.
What a difference it would have made if the policy had been entered into one common, underlying ledger where both parties’ acceptance could have been verified, rather than weeks spent with paperwork and emails passing back and forth to agree on final terms and wording.
It’s just these types of problems that B3i is hoping to resolve with its blockchain project.
The current members of B3i are Achmea, Aegon, Ageas, Allianz, Generali, Hannover Re, Liberty Mutual, Munich Re, RGA, SCOR, Sompo Japan Nipponkoa Insurance, Swiss Re, Tokio Marine Holdings, XL Catlin and Zurich Insurance Group.
Can it succeed? Observers are very optimistic.
B3i’s Market Clout
Mark McLaughlin, IBM’s global insurance director, said B3i has a great chance for success, simply because its members have market clout.
“If you add up the premiums of the entities in that enterprise, they’ve got close to half the world’s reinsurance premium in that organization,” said McLaughlin. “They are pretty seriously committed to driving insurance and reinsurance transactions into a common blockchain standard, and they’ve got the critical mass to make that stick.”They are moving “from kicking the tires to early stage build-out,” he affirmed. “When you see initiatives like B3i get rolling, I think you’ll see a pretty rapid adoption.”
McLaughlin said IBM has received “a ton of insurer inquiries about the blockchain space.”
“Insurers are fast followers. They don’t like to get too far out in front, but they also hate being left behind,” he said. “We’re at that unique point in our industry where we are coalescing around the blockchain concept. We’re settling in on a couple of use cases, and those will drive a couple of technology adoption standards.”
That will be the signal when the rest of the market will jump on board, McLaughlin emphasized.
Early Mover Advantage
The early adopters of blockchain are going to be the ones that benefit because there’s a learning curve involved in understanding the technology and how it can be implemented, said Patrick Schmid, assistant vice president of enterprise research for The Institutes, an industry educational and research organization based in Malvern, Pa.Schmid provides blockchain thought leadership and is overseeing The Institutes’ blockchain working groups for 28 companies involved in developing four separate proofs of concept for blockchain and insurance. (These companies include brokers, insurers, reinsurers and third-party administrators).
Ultimately, there will be a prize for companies and industries that embrace the technology because it increases efficiency in areas such as automation of manual processes as well as disintermediation of those that don’t contribute to the value chain, he said.
Schmid is encouraged by industry initiatives, such as The Institutes’ blockchain initiative and B3i, which are looking at the technology and how to apply it. “The industry is working hard to understand the issues and how we can work together to solve some existing industrywide problems. That’s all positive.”
Interest Is Growing
Indeed, it looks like the industry’s interest in the applications for distributed ledger technology is growing. Meeusen said B3i is in constant dialogue with about 50 other firms that “have approached us in the last months to discuss how they could join.”
Once they join, B3i’s critical mass will be even greater. In the short term, however, B3i is closed to new members.
“We decided to limit the admission to the 15 existing members because we didn’t think it would be fair to have people jump on a running train,” Meeusen affirmed.
“Once we decided on the scope of the project, we really started working and people started to rally their resources and get organized. It would not have been very practical in the midst of the course to have new members join,” he said.
“We are telling people to bear with us. We are keen to have you join us because it’s difficult to operate a distributed ledger with just a small club,” Meeusen went on to say.
Until they formally join B3i, “we’ve invited them to help us with ‘beta testing.’ We will come out with a beta product this summer, which we’d like to open up to market testing, running a contract on the blockchain platform in a sandbox environment.”
Brokers are also being kept in the loop, although they are not yet formal members, he said.
Initial Reinsurance Focus
Meeusen noted that his expertise is in reinsurance and not in technology. “In hindsight, however, I think perhaps this is a good thing because I came to this project with knowledge of the real business issues or problems the industry faces,” he said.
“For a long time, I’ve seen that it takes too long for the industry to settle transactions. It’s too cumbersome for us to do cross-border payments and so forth,” Meeusen affirmed. “When we came together with other firms in the B3i project, these issues seemed to be common throughout the group.”
As a result, in the early days of B3i, Swiss Re and the other 14 members sat down to prioritize the problems that they hoped to resolve with the use of blockchain.
The group decided to focus on reinsurance, rather than primary insurance, because it quickly became clear that it would be easier to develop consensus on common standards for business-to-business products because they are international programs, he said.
“A homeowners or motor insurance product in the U.S. will always be very different from the UK or continental Europe,” Meeusen explained.
He noted that B3i has built its business case around four key pillars, which are the benefits the group hopes to achieve by using blockchain in post-placement activities. “We will pick up the process at the point where the cedents are closing their written lines with their reinsurer, and there may be a broker involved as well. Then we are at risk and the post-placement process starts.”
He described the four pillars as:
- Working capital.With blockchain, the group aims to achieve certainty about when cash will flow and due dates when premium is collected and claims are paid.
- Optimization of foreign exchange efficiencies.“We are truly a cross-border global business, and the foreign exchange handling is often also cumbersome and not cost-effective,” Meeusen said.
- General operational efficiencies and risk reduction.“If you do efficient straight-through processing, then you get more operationally efficient, which reduces the expense ratio,” he said. “Lack of standard data and too much reconciliation and pushing paper and data back and forth is a source of operational risk.”
- Data integrity improvements.While the project uses ACORD, the industry’s data standard, it will make improvements when needed. “By putting that standard on a standard platform, we hope we will bring improved data integrity and quality.”
These four pillars of benefits will help the group measure the benefits of placing the reinsurance contract on the platform. “That’s why we call it a proof of concept.”
The first blockchained reinsurance contract will help B3i understand the types of applications that will work as well as those that don’t work with blockchain, he affirmed.
“We have a long list of use cases across the 15 members. While we are getting our first product done, we have started to prioritize the portfolio of next applications,” he said.
“There is really no limit across the value chain, starting with the private policyholder—the individual—all the way to the reinsurer,” although there will be different legal and regulatory constraints in each country.
“The key thing that I see, especially when looking at primary insurance, is to improve the customer experience.”
Opportunity vs. Threat
Are there dangers of disintermediation of brokers?
All of those interviewed agreed that parties who don’t provide value-add in the process could be threatened in the long term.
“In the pre-placement of reinsurance, the essential broking is helping cedents get the best coverage. That market-making role, especially in international programs, provides real value-add,” Meeusen continued.
“They manage these programs and bring the cedents together with the candidate reinsurers and manage the placement process. Clearly, it’s easy to see how there will always be a role for brokers in that process,” he said.
With good use of technology, the placement process can also improve from today’s world where there’s still a lot of paper and emails going back and forth, “until finally we all have the same version of the contract.”
Brokers can also add value in the post-placement area. “Once reinsurers are at risk, brokers sometimes handle the administrative aspect of the process, collecting premiums and paying claims, which provides a value-add,” Meeusen confirmed.
He said he often hears cedents complain that brokers and reinsurers want them to use their proprietary platforms. So, they end up having to “feed all these different systems from different brokers and reinsurers,” which isn’t very helpful for the cedents —for the customer experience.
“So, with the brokers in this post-placement, we need to come to one uniform platform, rather than everyone pushing a proprietary one.”
The industry should look at blockchain “as an opportunity rather than a threat,” said Schmid, repeating his prediction that the early adopters will benefit. “That will be the case across all the various segments of the industry, whether it’s brokers, insurers or reinsurers.”
IBM’s McLaughlin acknowledged, however, that blockchain probably is a threat if an intermediary is not adding value to the process by “coming up with a unique way to hand over that risk or a unique way to structure that risk…”
Schmid said he was pleased to report that the brokers he has worked with are embracing the technology because they also see the need to improve industry efficiencies.
McLaughlin used the analogy of the travel industry. Before the advent of online travel brokers, many travel agents were very transactional in nature. “As a result, when online travel brokers were launched, within a few years probably 80 percent of those travel agents had disappeared,” he said. “But the remaining 20 percent are actually doing just fine because they now provide very highly differentiated value-added services for more complicated trips.”
Similar to the experience of the travel industry, blockchain will “take out a lot of the routine, transactional costs,” he said.
“There are probably some players that are going to be under threat when that happens, but it’s going to enable a lot more differentiated service for the players that are left. And it’s going to take out a lot of needless cost from the value chain. On balance, it’s going to be better for everybody,” McLaughlin emphasized.
Schmid said he is excited about new technologies that are being developed for the industry – and blockchain will provide a means for their applications. For example, he explained, shared data is key for the development of artificial intelligence or machine learning.
“Issues like fraud or uninsured motorists, which are universal issues that affect consumers, insurers and public policymakers, are difficult to overcome without sharing data – and blockchain is a perfect vehicle with its shared ledger,” Schmid continued.
“That’s why I think blockchain is exciting: It provides a means for companies to feel secure about sharing information with each another. It will help us work together to solve existing industry problems,” he said.
Schmid admitted that blockchain will be an evolution rather than a revolution, recalling the Worldwide Web and other technologies that moved forward, sometimes slowly, only when they became accessible and accepted by users—when the technology was ripe for picking.
“I believe the blockchain technology is going to be adopted one way or another, although I can’t predict what it’s going to look like. But it will happen,” he said.
“Everyone is trying to figure it out – including the experts. Tech people don’t necessarily have the business knowledge and vice versa for the business people. As a result, we’re in the middle of a transfer of knowledge that will take a little bit of time to shake out,” Schmid explained.
“I really think it’s an exciting time to be in insurance.”