Insurtech: Blockchain
Betting on Blockchain

• Lori Chordas
• January 2019
• 

Key Points

• The Backdrop: Blockchain technology is set to redefine business operations and help insurers overcome current challenges.
• The Power of the Technology: The distributed, peer-to-peer ledger of records could reduce fraud and improve transparency and outcomes across the entire insurance value chain.
• Industry at Work: The Institutes RiskBlock Alliance plans to launch applications for subrogation and parametric insurance this year.

Blockchain is no longer hype. It's reality in insurance, and the potential for the disruptive technology to change the way insurers share data and process claims is creating much buzz across the industry.

But it's still the early days in its implementation, leaving many to wonder: Is blockchain an opportunity or threat for the insurance sector?

Blockchain, or distributed ledger technology, has the potential to drive radical change by improving transparency and outcomes across the entire insurance value chain, said Patrick Schmid, vice president of The Institutes RiskBlock Alliance.

The alliance is an industry-led consortium aimed at establishing blockchain-based applications for proof of insurance verification, first notice of loss data sharing, subrogation net settlement and automation of claims via parametric insurance.

Blockchain can also help insurers lower costs, simplify processes, combat fraud and lower regulatory burdens, said Schmid, a former economist.

He said if blockchain is a threat to the industry, the threat may be directed at industry players who fail to learn about or invest in the technology.

But that threat seems to be quickly fading.

This year insurance executives plan to more than double their investments in blockchain, according to SAP's Digital Transformation Executive Study.

The global market for blockchain, or what tax and audit firm PwC has dubbed a “tech breakthrough megatrend,” is projected to grow more than 42% annually to $13.98 billion by 2022, according to market intelligence provider Netscribes.

Best's Review talked to Schmid about the rise of blockchain in insurance and the opportunities it provides to those in the industry.

What is blockchain and how is it now being used in insurance?

Blockchain is a network-based technology that establishes trust and consensus through a verification process.

Until recently, insurers relied on centralized clearinghouses and intermediaries to verify transactions and ensure trust. The question that blockchain begins to answer is what if a network of computers did that instead? What if storage of information within a system wasn't centralized in one location but was distributed or decentralized and the encrypted information was broadcast to all parties involved in the process?

Formally defined, blockchain is a distributed ledger that maintains a constantly growing list of chronologically-added records, or blocks. In most blockchains, new blocks and the data within (transactions, smart contracts, etc.) are confirmed and verified through a decentralized consensus process. The verification process removes the need for intermediary involvement and establishes trust without the use of a centralized authority. Simply put, blockchain is a new technology that can improve information sharing for insurance and other industries.

Not only can use of the technology lower costs for insurers, but it also provides a means to securely share data in a permissive way so duplicative efforts can be eliminated and reconciliation issues can be minimized. The ability to use smart contracts, or programmable codes that can be written into the blockchain and self-executed, can extend blockchain application and make automating a large piece of the insurance process more practical.

Today, insurers are looking to use blockchain across the entire value chain. This includes areas such as products, pricing and distribution; underwriting and risk management; policyholder acquisition and servicing; claims management; finance, payments and accounting; and regulation and compliance.

Records are often duplicated throughout all of those processes. Blockchain provides a single source of truth that can reduce and simplify sharing that information and thereby improve operational efficiencies.

Are those in insurance receptive to its use? Is blockchain an opportunity or threat for the industry?

The excitement surrounding blockchain is growing.

Insurers are optimistic about its ability to help them better serve policyholders and reduce costs by streamlining premiums and payments and improving acquisition of new policyholders by validating accuracy of customer data.

Blockchain also facilitates verification of transactions between parties, regardless of whether those parties trust one another or not. That 'trust machine,' or the decentralized process that removes the need for intermediary verification, increases confidence in data integrity and reduces opportunities for fraud.

Insurers lose more than $80 billion annually to fraud. Blockchain creates digital records that can authenticate or track physical items of value and make it difficult for criminals to defraud the system.

The insurance industry is very receptive to the use of blockchain, and that's largely because of the current industry environment. Insurers are operating in an increasingly competitive environment, where profits have been constrained by low interest rates and weak returns. They have become increasingly focused on cost and operational efficiencies to drive and maintain profitability.

Blockchain technology provides a way for databases to be synced, forming a single source of truth. This allows the industry to come together to work on universal problems that plague the industry and use the technology to make existing processes more efficient.

The good news is that everyone can benefit from leveraging this technology, including insurers, consumers, policymakers and regulators.

What is the RiskBlock Alliance and how is it enabling the development of blockchain-based tools and creating new products?

Blockchain requires a network, similar to social network sites like Facebook or Twitter. It's only useful if you leverage the technology with others involved, hence the network aspect.

RiskBlock emerged out of The Institutes, which is a not-for-profit formed 100 years ago out of The Wharton School. The Institutes provides many services to the property and casualty insurance industry, but it is best known for its educational and research offerings.

The Institutes educates more than 100,000 insurance professionals annually, and has a board of CEOs who collectively represent a heavy majority of domestic insurance premium volume. The point of that being blockchain requires a network and The Institutes already has an established network.

In 2017, The Institutes created the RiskBlock Alliance as a consortium that uses its network to develop industry-specific blockchain use cases. Our members are involved in leading every aspect of our governance. We aim to work with our members to define use cases on behalf of the industry and then work with service providers to build out the use cases. We have a program of service providers consisting of organizations like Accenture, Deloitte, EY and Capgemini. They help by building out our framework and our use cases and ensuring the underlying blockchain or distributed ledger is completely secure.

What types of use cases or production-ready blockchain applications has the alliance created?

There are currently four use cases underway: proof of insurance, parametric insurance, first notice of loss and subrogation. And there are more for 2019, such as commercial applications.

With proof of insurance, for example, motorist verification is still done largely with paper cards. But what if there was a digitized way to place that information on a distributed ledger so motorists could quickly share that data post-accident? Motorists or officers could click on a QR code to verify coverage, thereby sharing information via a single source of truth and recording that an incident has occurred. The use of blockchain or distributed ledger technology can also expedite data entry and data sharing amongst carriers during first notice of loss while still allowing consumers to choose their channel, such as phone call or app, thereby lowering administrative burdens and improving the customer experience.

There's also the potential for regulator-required proof of insurance data to be aggregated. Insurers could leverage a blockchain to provide regulators with information, thereby eliminating the administrative burden of packaging data state-by-state and sending it out to various verification systems.

Blockchain also has the ability to aid in net settlement of subrogation claims. Carriers spend billions of dollars annually to settle subrogation claims. During the ebb and flow of payments and receivables from carrier to carrier there's much time spent reconciling accounts and writing checks. Instead of carrier A sending one hundred $1,000 checks to carrier B, and carrier B sending fifty $1,000 checks to carrier A, why can't they net settle where carrier A makes one $50,000 payment? With blockchain, payments could be netted and processing and settlement of claims could occur in real time through a single source of truth, thereby limiting manual interactions among parties.

We also have a parametric use case in which external weather sources, or oracle data, such as weather.com could be used to determine information such as rainfall amount. By simply entering a ZIP code and time, the technology could trigger a claims payout by determining if a specific rainfall amount, say two inches, on a particular date in a specific place is above a certain parameter. Our role would be to provide the framework to use the oracle data for members to create their own parametric use cases.

How do your members work together to identify, test and bring to market future blockchain applications to better serve policyholders and reduce costs?

We are closing in on 40 members on the property/casualty side and this year we hope to add members on the life, annuities and retirement side through our partnership with Limra.

Our members are engaged in every aspect of our governance, whether it's serving on an advisory board, a tech committee or use case prioritization working group.

All of our technology decisions and use cases are member-led. That process begins by brainstorming ideas, followed by prioritizing use cases, identifying potential problems, defining out a user journey to set use case requirements, selecting a solution provider or technology partner to build out the application, and having members in their own organizations test the security and functionality of the application. We are now testing applications with a cohort of members.

The final step is adoption. Early this year, we plan to move at least two of our blockchain use cases from testing to adoption.

Last year, the alliance launched Canopy, the industry's first end-to-end reusable blockchain framework, to build out your use case applications. How does the Corda blockchain platform work?

The long-term vision for Canopy is a standardized set of reusable blockchain applications. Before Canopy, many insurance companies were creating their own blockchain applications, each with their own unique framework or unique tweaks to various platforms and were operating in a silo. The industry wasn't capitalizing on network effects or scale with this approach.

Along comes Canopy, which can provide the backbone for all of these blockchain apps to be built upon.

This year, the alliance plans to build a large variety of applications on the Canopy framework across all areas of insurance.

We started our work in blockchain in 2016, and in early 2017 we were founding members of the Enterprise Ethereum Alliance, the industry's first global standards organization to deliver an open, standards-based architecture and specification to accelerate the adoption of enterprise ethereum.

We started by building use cases on public and private ethereum—an open-source, blockchain-based distributed computing platform and operating system featuring smart contract functionality.

Our early work really opened our eyes to blockchain's potential. By late 2017, our members started to explain that they weren't very comfortable with us storing hashed or encrypted policies and claims data in a fully distributed manner. There were concerns with metadata being used for competitive purposes. Instead, they wanted to start with a less distributed platform for carriers to share information only with other parties involved in that transaction.

Last year, our member-led tech committee went through an intense process of evaluating existing blockchain platforms and selected R3's Corda platform to help our members, including carriers, brokers and reinsurers, exchange data. The Canopy framework is built around Corda. We're very impressed with Corda but our members want RiskBlock to remain blockchain agnostic. We're building the Canopy framework with that in mind. It will be possible, long term, to use multiple platforms with Canopy.

How can the use of blockchain improve insurers' combined operating ratios and generate overall financial savings?

Boston Consulting Group believes blockchain technology can potentially improve insurers' combined operating ratios by at least 5% to 13%. That indicates a $200 billion opportunity for the property/casualty sector.

While that's intriguing, we know blockchain isn't a cure-all. However, it can help in certain areas.

On the consumer side, it can improve the customer experience by eliminating delays and creating seamless personalized solutions. It can also make the insurance-buying process more affordable.

Carriers, too, have much to gain, including lower costs, simplified and streamlined processes, and a way to redefine business operations. Blockchain can also allow insurers to enter emerging markets that were previously challenging or cost-prohibitive.

In 2018, the RiskBlock Alliance and Limra formed the life and annuity insurance industry's first enterprise-level blockchain consortium. What does that consortium hope to achieve?

We are trying to replicate on the life and annuities side what we've done in the property/casualty space. Our goal was to find a life/annuity organization that's well-situated to be a network provider like The Institutes has been on the P/C side. We think Limra is uniquely positioned to bring life, annuities and retirement communities together to build blockchain-ready apps on the Canopy framework.

Recently, the alliance launched a working group focused on what we call the Mortality Monitor. The monitor will leverage Social Security data, other data sources and policyholder records to provide real-time notification to members of the deaths of life insurance and annuity policyholders. Not only will the blockchain-powered solution improve the claims process, we believe it will also reduce fraud and improve the customer experience.

How does the alliance compare to other consortiums such as R3 and B3i?

The alliance is one of several groups involved in the development of distributed ledger technology for the insurance industry. We have a good relationship with other blockchain groups servicing the insurance industry, such as R3, InsurWave and B3i. In fact, R3 is the platform provider for Canopy and other industry-related initiatives. But many of these consortiums are for-profits running blockchain networks. We're a not-for-profit. So there are differences there.

Certain models are needed to bring industry players together to leverage blockchain and build a network of users. We think a trusted nonprofit is well-suited to do that. And the reason for that has to do with the network (brokers, carriers and reinsurers in our case) and incentivizing its use.

A recent Forbes article questioned why companies would want to use a technology like blockchain if joining that network could enrich their competitors.

Some for-profits alternatives may potentially be positioned that way as those investing in will be rewarded, but that's not the case for us. We think the industry trusts our 100 years of experience as a neutral party dedicated to bringing the industry together.

What challenges does the insurance industry now face when it comes to blockchain, and what's needed to overcome those hurdles?

The biggest challenge is developing the network. We're getting there with the arrival of different networks in the industry.

After developing the Canopy framework, it's now time for us to bring our applications to production. That process won't be easy, but we're up to the challenge. It's going to take some education. Recently we created a course for members to become champions in their firms to manage the value of blockchain.

We're now on the path to production, and over the next several months our first cohort of members will begin testing the proof of notice and first notice of loss applications.

By the time the second cohort begins, we will have learned a lot. By the time the third cohort starts, we will have learned even more and at that point we'll be ready for production, hopefully in mid-2019. That will create efficiencies and help overcome some challenges now facing the industry.

Are there any global standards for blockchain yet, or is that still a challenge for the industry?

I believe global standards are coming. We're excited to be co-chairing an Acord blockchain standards group that aims to bring together early blockchain adopters and leaders in insurance. That group will help create standards for applications and blockchain capabilities in the industry. Those efforts are still in the works.

Where do you foresee the use of blockchain headed in insurance, and is it set to drive radical change, improve transparency and outcomes and transform the insurance industry?

It's going to be interesting to see how this evolves. We expect blockchain to roll out slowly over the next year and then in different ways thereafter. Use cases are now in development and we're not alone. Other groups are also developing use case applications for the industry.

Each use case will create efficiencies. While the efficiency gained from a single use case may not be earth-shattering, there will be huge gains from multiple use cases.

I expect blockchain to radically change the insurance industry, but that won't occur overnight. Rather, things will transpire slowly much like they did with other industry innovations such as relational databases and artificial intelligence. The key differentiator with blockchain is the network aspect of the technology, and it will be interesting to see how that plays out over the next several years.

What are the RiskBlock Alliance's future goals?

Our current goal is to bring our initial use cases to production and work closely with our first cohort of members to test out the underlying framework for those initial cases.

We'll also be focused on expanding globally. This year we will be setting up RiskBlock Canada, along with efforts in London and Singapore. While we anticipate a global expansion, we don't want to get too far ahead of ourselves.

We know it all starts with the current use cases, so our focus is there. We need to ensure that what we've built is brought to production, is used effectively and can demonstrate an ROI for our members.