There has been a great deal of information, misinformation, discussion and hype over blockchain over the last few years. This article will look at current developments and consider if this interest is being translated into intent and action – are we at a tipping point or not, for blockchain in the insurance industry?
Introduction
There has been a great deal of information, misinformation, discussion and hype over blockchain over the last few years. It’s not a surprise that an emerging technology is creating so much interest – we’ve seen it before with client-server computing, the World Wide Web, big data, etc. We review current developments and consider if this interest is being translated into intent and action – are we at a tipping point or not? In this article, we will use “blockchain” as a generic term for both distributed ledger technology and blockchain.
First let’s briefly explain why blockchain should be considered – after all without a need, we are unlikely to have attention, let alone action.
The insurance value chain is currently sub-optimal in several ways:
- Low-trust – There is a problem with trust associated with multiple parties using and sharing information.
- Do all relevant parties have the same information?
- Is it being used appropriately?
- Is everyone comfortable sharing information knowing it will be used appropriately?
- We currently invest a huge amount of time and effort in processes and controls to mitigate the risk of handoffs to other parties – inside/outside our organisation.
- Inefficiency – There is an unfortunate level of duplication of tasks across and within organisations including geo-coding property and KYC checks.
- Poor customer experience – Customer responsiveness is impacted by inefficiency, as is an onus on the customer to provide information at various stages of the process.
- Risk details, claim details – aspects that can in part be gleaned from other sources, or at least streamlined by focussing on the changes rather than a full resupply of information – is a cost ultimately borne by the customer.
- For example, US P&C expenses ratios have averaged 27.7% over the last ten years 1 despite many initiatives and delivering efficiency and reduced costs.
Consequences
All of this has an impact on quality, cost and speed and it results in a customer base that may not take up as much protection as it could.
To contextualise this in an increasingly competitive environment, with substitute products, higher customer demands and increased regulation insurers are typically motivated by the three levers shown in the diagram below.
There is scope for improvement and we have an established need. The opportunity
Blockchain as a technology has the potential to enable the efficiency, growth and compliance aims. Here are some examples in the diagram below:
Efficiency gains are the most talked about opportunity area. For example, Boston Consulting Group (BCG), estimated that blockchain can enable a reduction in the combined ratio for Property and Casualty (P&C) insurance in the range of 5 to 13 points which translates to a global P&C market saving in excess of USD 200bn (in terms of technical margin from total gross premiums).
However, it is more than efficiency – there is an opportunity for growth not only in the ability to serve previously uneconomic segments, but also in identifying new segments and developing new products and services through increased understanding and trust in data exchanges.
Quality can also be improved and a greater ability to detect and prevent, rather than just protect. This is not about blockchain working on its own as a competing technology, in fact the opposite. We see amplification to the benefits when blockchain works in concert with other technologies – in what we call the ‘new stack’.
We see not only an opportunity for improvement but an emerging technological capability to enable this change. That’s the theory, but what is actually happening?
Whilst there is a need for change, a potential to change and enabling technology to deliver change – all essential foundations – these are not the only factors needed to act. It is also necessary to have intent.
Intent and hype
There’s certainly been a great deal of hype on the use of blockchain in the insurance industry, which as we’ve seen with other technologies can raise a level of expectation that if not met leads to a level of disillusion.
There has been a lot of talk and positive noise – a 2018 Accenture report 2 claimed that 46% of insurers expect to integrate blockchain within the next two years, and 84% say blockchain-based ledgers and smart contracts are reinventing the way they engage with new partners.
In the US life and annuities space, LIMRA and The Institutes Risk Stream Collaborative recently announced plans for a blockchain based solution to streamline the licensing validation and appointment process for agents.
Best with others – networks, exchanges, ecoystems
The simple fact is that blockchain is an inter-party focussed technology – i.e. it is not a standalone. It requires the participation of a number of parties to not only deliver the benefits, but to also build a solution. We see a need for collective innovation which can mean increased complexity and time (but not always). We have seen the rise of a number of initiatives and consortia, which is a clear indication of collaboration, innovation and even coopetition 3.
Actions speak louder than words
We see positive action across a range of industry stakeholders involving clients, insurers, brokers, reinsurers and regulators. This ranges from discrete projects with a small number of participants and stakeholder groups to wider consortia, and more recently, industry exchanges.
We are seeing activity across the insurance value chain from (re)insurance purchase, claims, settlement in P&C (including Motor, Marine, and Catastrophe) and L&H (Healthcare, Life Assurance).
From Q3 2017 onwards we started to see the first tranche of blockchain products delivered, including the following.
- September 2017 – Axa launched the flight delay insurance Fizzy.
- Fizzy is a mobile based, parametric insurance that automatically pays out when a flight is delayed by more than two hours.
- This significantly improves the customer experience and lowering administration costs.
- May 2018 – EY, Guardtime, Maersk, Willis Towers Watson, XL Catlin MS Amlin and ACORD partnered to deliver a marine insurance blockchain platform – InsureWave.
- The solution provides greater information sharing, transparency and efficiency between shipping industry customers, brokers, insurers reinsurers and other forms of capital.
- This is not just about lowering admin costs, but improved and dynamic underwriting, claims processing and decision making (for all stakeholders).
- We see the new stack of blockchain and IOT complementing existing GPS technology combining for improved solutions.
- July 2018 – Blocksure and Commercial & General brokers combined to support Insure Now.
- This was Commercial & General’s first product for the relatively untapped market of “millennial renters” insurance cover for valuable items, gadgets and contents insurance which is enabled through a mobile app and blockchain.
- It provides a high degree of self-service and automation that delivers flexibility and simplicity for customers. It significantly reduces admin costs to makes cover commercially viable.
2019 has seen more and more initiatives, most recently:
- July 2019 – B3i deliver its first product for Property Catastrophe Excess of Loss reinsurance, following market testing with insurers, brokers and reinsurers;
- August 2019 – Allianz announced that it is in the advanced development stage of a blockchain based token (note: this is not a crypto-currency) to simplify and accelerate cross-border insurance payments for its corporate customers.
It’s not just the insurers that have been getting involved. In July 2019 – the broker Aon announced a collaboration with Etherisc and Oxfam to launch blockchain enabled crop insurance in Sri Lanka.
We are seeing tangible examples of how the technology can transform the value chain from initiatives led by key insurance industry stakeholders – insurers, brokers and reinsurers. Wider participation AND action
Industry activity is certainly maturing beyond Proof of Concepts (PoCs) and pilots. Whilst no organisation is betting the house on blockchain, we are seeing material progress.
Critically we are also seeing other actors stimulating change:
- The customer in a number of cases is pushing for action. With blockchain arguably more advanced in certain industries we are seeing risk managers actively asking for blockchain solutions to be part of the solution in the near/medium term. We have even heard of some buyers even making it a condition of renewal.
- The regulator – we see positive action from many regulators:
- most recently the BMA’s support for a blockchain enabled exchange RICAP Bermuda (Risk meets capital) as the first product to go through the BMA’s Innovation hub;
- In the UK the FCA’s sandbox has been running since 2015 and is now on Cohort 5. It continues to admit a number of blockchain based solutions;
- Markets – Lloyd’s of London has undertaken a number of Proof of Concepts (PoCs) with blockchain based solutions. Through its incubator, Lloyd’s Lab, it has supported a number of blockchain enabled (and many other new stack technology) innovators. Lloyd’s is currently running Cohort 3 .
- most recently the BMA’s support for a blockchain enabled exchange RICAP Bermuda (Risk meets capital) as the first product to go through the BMA’s Innovation hub;
We see regulators and market places supporting innovation
We see the rise in vendor activity that indicates either a demand or expectation of demand:
- R3 expanding its footprint and organisation size, serving many markets, not just insurance;
- The Hyperledger consortium with the recent announcement of a potential for Ethereum to be the first public blockchain on Hyperledger (if the open-source consortium’s technical steering committee approves a proposal to adopt the ConsenSys-backed Pantheon project)4.
It can be argued that blockchain solutions are still at nascent/1.0 stage. However, they are advancing fast and the level of activity is increasing adoption and this will further accelerate learning, solution maturity and adoption.
Outside influences
A recent example that whilst outside the insurance industry, has huge parallels and potential for the way we can more effectively serve insurance customers. It comes from August 2019 where the U.S. Air Force announced two new blockchain-focussed initiatives 5:
- SIMBA Chain for manufacturing traceability project – to ensure 3D printing designs aren’t tampered with. Replacement parts printed on site to expected standards – incredible insurance implications.
- Constellation – with a focus on interoperability of data with different types and different sources, and the ability to analyse, trace and use securely. Massive potential not just within the insurance sector, but in connecting data across multiple industry ecosystems.
September 2019 – Nestlé Australia announced it is using Amazon’s managed blockchain service to deliver a new supply chain transparency project called ‘Chain of Origin’. The solution will improve transparency and traceability not just for Fast Moving Consumer Goods (FMCG), but has huge insurance implications as well (product insurance, supply chain, business interruption, etc).
Whilst not all of this will be immediately in insurance, it is safe to assume that as insurance buyers (initially risk managers and later consumers) become more and more comfortable in using blockchain for other aspects of their business they will expect insurance to “keep up”:
September 2019 – MasterCard and R3 announced a partnership to develop a blockchain enabled cross-border payments solution:
- Their aim: to tackle long-standing industry problems including payment processing costs, liquidity management and the lack of standardisation and connectivity between banks and national compensation systems.
- The initial focus: to connect faster payment schemes and banks backed by the MasterCard clearing and settlement network;
- Settlement speed and cost have seen service and efficiency issues for many years.
- The ability to improve all elements of not just the insurance value chain but cross industry has huge potential for quality, efficiency and growth.
The formation of the Libra Foundation and its impact could be a whole article in itself – the relevance to this discussion is the participants:
- We see a global, cross-industry set of participants, looking to support the massively underserved and unbanked (circa 30% of the global population) – to provide greater stability, opportunity and independence.
- This has huge parallels to the insurance industry which seeks to close the “protection gap” of the “un/under-insured” – a population for which protection is either not relevant, not accessible and/or unaffordable.
Whilst there is a long road ahead for Libra and others, we see a greater “normalisation” of the discussion around the use of blockchain and this will only make it easier for others.
Blockchain is seen less and less as a standalone, dare I say “silver-bullet” solution; it is now an enabler to complement other technologies such as IoT and AI to deliver even higher performance.
We see an increased momentum outside the industry that will help pave the way for insurers, e.g. technical solutions, buyer behaviour, delivery considerations, regulation, etc, Conclusion
Blockchain technology is definitely being taken seriously from a demand and supply side, evidenced by:
- increased customer sophistication and demands for blockchain enabled solutions;
- productive delivery from insurers, brokers and reinsurers, often working collaboratively on specific initiatives and consortiums;
- regulators actively supporting innovation;
- vendor development to meet the demand side;
- outside industry initiatives that will not only signpost the future but will most likely lead to cross industry ecosystems for even greater growth and efficiency;
- blockchain being an important part of the new technology stack and no longer seen as a standalone experiment or choice.
I think it is clear to see we have tipped from curiosity to action and from more than just the early pioneers.
As with many advances it is not just about the technology aspects of the change, it is about the people dimensions.
What is your point of view on reaching the tipping point?
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Written by Mark Simpson, Armour Risk Management Limited
About The Author
Mark Simpson helps clients optimise the performance of people, process and systems, delivering effective and sustainable change with an additional focus on building organisational capabilities for self-sufficiency and resilience. Formally trained in software engineering, further supplemented with an MBA, coaching and change capabilities Mark is able to provide the ‘oil and glue’ required to bring strategy and execution together in person and customer-centred approaches. He currently spends a lot of his time working with the new technology enabled changes, including blockchain technology where he has worked with a range of organisations and consortiums over the last 2 ½ years.
Footnotes
- U.S. Property and Casualty Insurance Industry, Brian Briggs & Bree Wilson, naic.org, 2017
- Ultimate Guide to Blockchain in Insurance, Jim Bramblet, accenture.com, 5 Dec 2018
- Coopetition – defined as “cooperation amongst competitors usually stimulated by a common interest”. wikipedia.org, 17 Sep 2019
- Ethereum Poised to Be First Public Blockchain in Hyperledger Consortium, Nathan DiCamillo, yahoo.com, 22 Aug 2019
- US Air Force partners with SIMBA, Constellation for blockchain solutions, Miranda Wood, ledgerinsights.com, Aug 2019