During January 2016, we published What does the future hold for blockchain and Insurance?
About one year later, this post looks at what happened during 2016 and what is likely to happen in 2017.
The January 2016 post explains the value thesis of Blockchain in Insurance. It also mentions 5 pioneering ventures. In this post we take a “whatever happened to” look at what those 5 companies.
One trend we did not foresee in January 2016 was the big move by Reinsurance into Blockchain. In this post we explain the value thesis behind this move and describe what happened on this front in 2016.
Beware the bleeding edge of technology risk. In January 2016 we, like many others, were excited by the potential of Ethereum, but it was a difficult year for that platform. This left many ventures that were counting on Ethereum in a difficult spot.
The 5 Blockchain Insurance pioneers in January 2016
These were the ones we profiled in our January 2016 post:
Sadly I did not find any funding announcements for any of them (if we have missed any announcements of funding other progress please tell us). They might have been too early. Another factor may have been that investors saw what the incumbents were far from asleep at the switch.
Enter the Reinsurance dragon
This was our journey of discovery:
Feb: we interviewed Oliver Werneyer at Swiss Re. Takeaway: Reinsurance could provide a platform for innovation.
In April we explained why Blockchain may transform Insurance before Banking. This was where we described the 3 layer stack and the put some color on the idea of Reinsurance as a platform:
- Layer # 1: Brokers. Their job is to gather premiums from customers.
- Layer # 2: Insurance Companies. Their primary job is claims processing. They take in premiums via brokers, invest the cash flow and pay out claims when needed.
- Layer # 3: Reinsurance Companies. They are the payers of last resort. They insure the insurance companies. Their job is to have enough capital to pay out claims, even if the models did not predict the volume of claims.
May: we described how claims could be paid out automatically based on smart contracts
This holds out a win/win promise. Customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened). Insurance companies get two benefits:
- Elimination of fraud. The Insurance company does not rely on the customer’s version of truth. There is independently verified data.
- Elimination of claims processing cost. This is a consequence of elimination of fraud.
For this to work, it has to be binary simplicity. An algo has to make a yes/no decision instantly. Something with complexity (such as who is at fault in an accident or whether a medical procedure is covered) needs human intervention.
November: at an event in Zurich, presentations by SwissRe and Accenture taught us that the average time for claim to cash is about 4 months. This is where we learned about Settlement Latency in Insurance and the huge payoff from adopting Blockchain
If settlement takes 4 months (from claim to cash), then all the companies in the process have to manage counterparty credit risk and all the associated processes.
Even bigger than this is the big pay-off for consumers. This is missing from the move to real time settlement in the capital markets. Going from T+ 2 or T+3 to real time is good but going from 4 months to a few days is massive. Imagine putting in an insurance claim and getting a message a few hours later saying “your claim has been approved, with some deductions detailed below, you will be paid tomorrow”. When you have suffered a tragedy that kind of immediacy is critical.
This becomes feasible because we move from a consumer defining the event (crash, fire, hurricane etc) to those events being validated data events stored on the Blockchain. Then the consumer simply says “policy # xxx suffered a loss of yyy in event aaa”, with each of those being verified data points in an immutable database that all have access to.
All the participants – customer, broker, insurer, reinsurer – will apply their processes to those data points.
No amount of improved mobile front end will make much difference to the full lifecycle experience, but bringing the time from claim to cash from 4 months to days or hours will be a total game-changer. That is why we envision Blockchain getting its first big use cases in Insurance (before we see big rollouts in banking).
2016 was the year when Insurance started serious work on Blockchain. I believe that 2017 will see sme significant rollouts.