During the last year, I've been working on Blockchain at Swiss Re. In my work on the technology, my interest and focus has been on investigating practical ways to make it useful and create business benefits for insurance and reinsurance. You may have heard about the B3i (Blockchain insurance industry initiative), which we started this year to look at how we can roll out Blockchain industry-wide. I think it's safe to say that our industry has now truly discovered Blockchain. But you're probably wondering, "Is Blockchain just a hype?" So today, I will try to answer that simple question: "Will it be a game changer for our industry?" Here are 10 reasons why it may.
# 1: Blockchain is easy like lego
The simplest first: the beauty of building something block by block. Our children do it with lego or dominos. In insurance we often work with multiple versions of contracts. They form the basis to collect premium payments and reimburse claims after loss events. We use account statements to exchange information about what happened. These are our "building blocks". Each block only makes sense if connected to another. When you have built a giant lego castle, you cannot take out any block in the middle of it and try to replace it without being noticed. Blockchain works in a similar way and that is a good thing, especially in insurance, which relies on trust and truth around events, properties or people. An immutable mechanism to trace and manage authenticity and versions of data can be a breakthrough, as it will eliminate inefficiencies, reduce fraud, mitigate operational risk and strengthen contract certainty.
# 2: Latency is legacy
Executing an insurance contract or settling a claim can take time, a lot of time, with limited overview of a payment’s status until it has fully traversed a cross-border chain. The so called "batch processing" leaves parties unaware of the settlement while the beneficiary receives the credit only after a delay. Reducing this latency, not only of payments but the entire upstream contract and settlement cycle, mitigates risk, improves liquidity management and reliability of financial reporting. Rather than being in the dark, it will be much clearer when transactions settle. This can be a "what's app" moment for insurance, enabled by Blockchain's smart contract handling on a distritubed ledger.
# 3: Omnipresent means sharing
Underwriting or claiming insurance often involves agreeing on different versions of the truth, as it relates to assumptions, scope, cover, facts or circumstances. Is the claimant really the owner, does the property really exist, what is the industry consensus on the large loss event? Shared ledgers with shared logic, covering the same events and actions recorded at the point of occurrence, provide an instantaneous and shared view of status. Sharing data in a trusted central place makes the management of authenticity and identity much easier.
# 4: Consensus can be efficient
Judgement or plausibility checks can be required for contractual parties to reach agreement. If such consensus is found between contractual partners, without relying on a central authority or intermediary, things can really get efficient. This does not mean a fully machine driven process. Human interaction will still be key (e.g. for underwriting and claims adjustment sanity checking or auditing) and a blockchain signature authority mechanism can process such human approval steps. The overall process of reaching consensus will become leaner. Insurers then use their reserves primarily to compensate for losses, rather than to fund disproportionate administrative, transaction or legal fees. It may not be intuitive but law and computer science are quite natural partners, or with a quote from Nick Szabo, the man the man widely credited with inventing the smart contract concept itself: "Traditional law is manual, local and often uncertain. Blockchain smart contracts are automated, global and predicable in their operations."
# 5: Kata – when we collaborate, we make things better
This lean mindset advocated by Toyota relentlessly pursues continuous improvement in cost, quality and service. Processes typically improve when people collaborate. That is why you see teams huddling together on lean managed factory floors. Insurance dearly needs this, to address the cash and paper flow trapped across its value chain. The insurance industry now has a unique, common platform to jointly run such improvements and make insurance more accessible and affordable to all.
# 6: Cash is king
Time value of money is key to insurance, surely in times of low interest rates with high opportunity cost. It further increases the pressure to improve the cash conversion cycle and optimize asset-liability management. This requires reliable cash forecasts from re/insurance operations. The engine for such forecasts are quarterly settlement processes, which can take many months to settle, leading to credit risk, unreliable forecasts and inefficient usage of liquidity. A distributed ledger, combined with latest payments message standards can bring a break-through in the payments and cash management cycle. Why can we transmit a private video message across the globe in seconds, but need several days for a payment? This is the "last mile" that needs to be solved to address the latency issue described above. There are examples already that prove this use case, even if they may only leverage particular parts of blockchain technology, such as cryptography and instantaneous settlement, that add most value to payments.
# 7: Holistic vision rather than proprietary
Insurance participants handle massive amounts of data via various platforms. The industry has already developed partial e-admin solutions, taxonomies or exchanges, but with adoption limited to certain portfolios, segments or markets. The industry needs to depart from its proprietary legacy towards a holistic solution, much like what SWIFT became for banking and preferably even more courageous, more efficient and open source.
#8: Actors not just altruists
Is it a too simple and altruistic view that the industry actors can come together for something that may not bring competitive advantage to any single participant? Insurers, brokers and reinsurers will have to choose their act in this play. Standards exist already that can be leveraged. Unlike banking however, the insurance industry does not have an industry-wide network to operate messages with this standard. Blockchain could fill this gap. It will reduce time for shuffling cash and paper around, and free up time to manage risk and portfolios.
# 9: Immutable means "first time right" thinking
In large-scale insurance contracts, parties self-declare how their portfolios have developed. They reveal facts about business development, exposures, losses or reserves, yet without running competitive risk. It is good to apply a "first time right" mindset to such reporting, with a clear audit trail of every change to the initial declaration. This will eliminate much reprocessing and reconciliation work that adds no value. A distributed platform for estimates where updates are traceable, auditable and most of all immutable is new and powerful for the insurance industry and can dramatically improve its business processes.
# 10: Neutral
Insurance implies periodically reporting mutual obligations. Parties run these data through the terms and conditions of the contract that binds them. The outcome should be the same, only with reverse signs. Yet a lot of time is spent performing separate calculations, hoping to arrive at the same result. When multiple parties share the same contract logic, the benefit of executing the contract in a shared, neutral ledger is obvious.
These are not yet full fledged solutions but ten knots which, if unraveled, will make up a game changer. My recent experience tells me that, if the industry collaborates and combines its business and technical knowledge, there has never been a greater window of opportunity to make this happen. As Nick Szabo once told me: "I don’t think a computer can understand most real-world conditions, exclusions, or the general variety of damages, but anything in insurance that is automated and not intensive in terms of computation or data storage can be done on the blockchain where there would be benefit from the added security and reliability."
If you think this makes sense, come back and read my more specific findings on these topics in the next series or write me a comment below. I look forward to a discussion!
Category: Funding longer lives: Social contract, Climate/natural disasters: Resilience, Other
Location: Zürich, Switzerland