How blockchain will reshape re/insurance

It is suddenly one of the most widely used phrases in the re/insurance industry—and probably many other industries. Few seem able easily to explain what it means, but many believe that blockchain technology can revolutionise the industry in a number of ways.

Blockchain, for readers not yet au fait with the term, is basically a method of recording data—transactions, contracts, agreements—in a way that means the data are simultaneously stored, but also updated in real time—on hundreds or even thousands of computers globally.

Without getting too technical, the advantage of this is that it makes the data almost impossible to tamper with or hack into—yet it is also accessible and updated instantly for every user.

The re/insurance industry is already testing the potential blockchain may offer in curbing costs and increasing processing speed and may thereafter explore more disruptive applications. The technology, originally developed to underpin the electronic currency Bitcoin, could be a game-changer for the sector. But the fact that it may need competitors to cooperate could represent a hurdle.

“Blockchain is probably the biggest innovation we’ve seen since the introduction of the internet,” says Steve Webb, PwC partner banking & capital markets consulting.

Potential to reshape

The technology combines a series of capabilities which could reshape the re/insurance industry. It allows for a continually updated list of transactions, keeping a record of each of them across a fully distributed or peer-to-peer network, either public or private. The blockchain integrity hinges on strong cryptography that validates and chains together blocks of transactions, making it nearly impossible to tamper with any individual transaction record without being detected, according to PwC.

Blockchain can be described as a mutual distributed ledger because it is owned equally by all partners and dominated by no-one. Any user can keep his or her own copy, thus providing resilience and robustness. Once a transaction is written it cannot be erased and, along with multiple copies, this means that the ledger’s integrity can easily be proven, says a July 2016 PwC  report named “Chain Reaction: How Blockchain Technology Might Transform Wholesale Insurance” that further describes the advantages.

The technological platform has the ability to distribute data among multiple parties which can be updated without the need for a central party to manage it and creates a tamper-proof transaction history, Webb explains.

“This could be game-changing in terms of frictional cost around the whole handling of information, the completeness and timeliness with which information could be maintained,” Webb says.

Large re/insurers or brokerage firms are likely to start applying blockchain to address the current slow and imperfect intermediary administrative process around placing a contract, managing a claim, and settling the claim as a contract, Webb explains. “They are seeing it as a sort of super tool to streamline those administrative processes,” he says.

Apart from cost reduction and efficiency gains, blockchain technology could also enable revenue growth, as insurers attract new business through higher-quality service, according to the PwC report.

Relationships with stakeholders, ranging from customers to regulators, will improve as errors in data and documents are reduced and accuracy rises, according to the consultancy firm. It may also reduce capital requirements as insurers on opposite sides of a transaction proceed to agreement more quickly, according to PwC. It also allows for the creation of ‘smart contracts’—essentially computer code which executes in response to an appropriate trigger, PwC claims.

The value of tractability

While enabling lower costs, blockchain technology should also allow for a better, almost real-time view of a policy, Webb says. It could lead to different types of products or even potentially change the shape of the industry, he adds.

“If you could add some ideas around the internet of things, such as the traceability of shipping containers which allows owners to know when they’re moved on or off a vessel, this could potentially result in a very tailored insurance which covers only the time the container is on the ship, for example,” he explains.

The biggest barrier for a wider application of blockchain technology in the re/insurance sector is arguably the need to cooperate in a group, Webb says.

“The business benefits of blockchain tend to manifest themselves pretty much only when multiple parties share documents. You get the benefit through the network effect and also through the mutual updating of information the parties rely on,” he explains. In order to take advantage of the technology, companies will have to discuss with peers—and therefore competition—potential providers and clients, how to cooperate, Webb says.

While this may deter some, there is also a danger that companies will wait for something to happen while a consortium involving smaller companies which work together in a particular space or region agree on a concept and gain a first-mover advantage, Webb warns.

“This is where a marketplace such as Lloyd’s may be at an advantage—it already has a cooperation structure in place on which a blockchain process could be built,” Webb says.

Blockchain is being considered as part of the London Market Target Operating Model, a set of initiatives to modernise the London Market.

Elsewhere, a few parties that do a lot of business together and have enough critical mass may see a blockchain-based cooperation as a commercial benefit, Webb notes.

While projects based on blockchain technology are still rare in the re/insurance sphere, interest is quickly picking up. Some market players have already experimented and are now ready to launch and go live in the next six to 12 months, Webb says.

“In 2017 the early adopters will launch projects and in 2018 we will see an acceleration in innovation,” he says. “Already in 2017 there will be commercial uses of this technology becoming well established in this market.”

Allianz seems primed to take a leading role. In June, Allianz Risk Transfer (ART), a provider of tailored insurance, reinsurance and other non-traditional risk management solutions to corporate and financial clients,  teamed up with Nephila Capital, an investment manager specialising in reinsurance risk to pilot blockchain technology for transacting a natural catastrophe swap. According to ART, the test run demonstrates that transactional processing and settlement between insurers and investors could be significantly accelerated and simplified by blockchain-based contracts. It also points to other benefits such as increased tradability of cat bonds and wider opportunities to apply this technology in other insurance transactions.

The technology has the potential to facilitate and accelerate the contract management process of such cat swaps and bonds, the companies claim. Each validated contract on the open shared infrastructure contains data and self-executable codes inherent to that contract. When a triggering event occurs which meets the agreed conditions, the blockchain smart contract picks up the predefined data sources of all participants, and then automatically activates and determines payouts to or from contract parties, the insurer explains.

Projects in the pipeline

Smart contracts powered by blockchain could make management of claims more transparent, responsive and irrefutable for customers and insurers, Deloitte has claimed in a  report called “Blockchain applications in insurance.”

Another example where the re/insurance sector is making inroads into the blockchain world is Blem Information Management, a developer of reinsurance systems. The company has enhanced its XLRAS application, which helps firms manage their recoveries under ‘excess of loss’ reinsurance, with functionality utilising a blockchain, enabling it to provide immutable transaction evidence.

In early 2016 workspace provider Vrumi announced a partnership with blockchain startup SafeShare to offer Lloyd’s of London-underwritten insurance products for the hosts that provide office accommodation in its Airbnb-style business.

One project which has attracted significant attention within the industry is Everledger, which developed a blockchain solution that helps tackle fraud and theft in the diamond industry.

“We aggregate all the information that exists around a diamond from the specifics of the diamond to the trade history. We created this global ledger which allows insurers to reduce the risk prior to entering a contract as well as fraudulent claims,” says Calogero Scibetta, business development and operations at Everledger. “A similar process could be suitable for art pieces, wine or luxury goods,” he adds.

According to estimates around £45 billion ($58.9 billion) is lost annually in the US and Europe through insurance fraud, while 65 percent of all fraudulent claims go undetected.

Everledger is particularly interesting because it created something that didn’t exist before, instead of replacing an existing administrative process, Webb says.

But the sector still needs to define in which cases it makes sense to apply blockchain technology.

“It’s very important for the re/insurance industry to select the right business case to apply blockchain technology. It’s particularly valuable in processes where information sharing adds value,” Scibetta says. In re/insurance, there is a set of information and data that needs to be shared, even multiple times such as in credit insurance or claims submission.

“You reduce the number of processes, you increase the speed of processing and therefore you enable multiple companies to improve their efficiency,” he adds.

“However, the technology is at a very early stage and its potential will be reached in five to ten years,” he notes.