Blockchain Insurance Solutions ‘by the market, for the market’

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Prediction #3 from my 2018 predictions focused on the ‘Specific Technology’ that I saw making the biggest impact within the Insurance industry.

The two biggest technologies I see having an impact on the insurance industry, in 2018 and beyond, are Blockchain and AI.

These also happen to be two of the areas that I have not written about much on this site as yet.  

Given the amount of writing that Bernard, Ilias and now Zarc are writing about Blockchain coupled with the launch of B3i Services AG this week, it seemed an apt time for me to start.   

This week, I will take a look at:

  1. Distributed Ledger Technology (DLT) and Blockchain 101
  2. What is the B3i initiative and how did B3i Services come to be?
  3. Who is the target client for B3i Services?
  4. What are the use cases of focus for B3i Services?

For this article, I had the honor to speak with Paul Meeusen earlier this week.  Paul, Head of Distributed Ledger Technology for Swiss Re, has been appointed as the CEO of B3i Services. 

Distributed Ledger Technology (DLT) and Blockchain 101

This section is for the readers out there (including this author!) that don’t know much about DLT and Blockchain.  

Before going into what Blockchain is, it is important for all to know what DLT is.  

Paul explained to me that there are 3 key items as it relates to DLT:

  1. It is a distributed ledger.  This means that I have a copy of the information and everyone else that has access to the ledger has the same copy of that information.  
  2. There is a consensus protocol within the technology.  This means that all the data stored is correct and accurate.  This goes hand in hand with cryptography (an element of digital security) and ensures that while multiple parties are exchanging data for consensus validation, they also ensure not to give away private data that should not be given away.
  3. Smart contracts.  Once data is shared accurately and is private, how are sensible business transactions done?  This is where the concept of a smart contract comes in, allowing certain logic to be stored within the distributed ledger in order to execute specific actions (i.e. paying a claim automatically)

At the core, DLT allows something to be shared and executed in a safe and secure manner.  

Paul further explained to me that Blockchain is one application of DLT.   The genesis of the application of Blockchain was focused on payments and later cryptocurrency (i.e. Bitcoin).

The reason that we hear Blockchain so frequently, especially in the case of financial services and Insurance, is because it is the one that is most proven at scale (again, Bitcoin).  

There are two different types of Blockchain – one that is public (crypto/Bitcoin) and one that is private (permission-based).  I will explain more about this later in the article.

If all the above doesn’t make sense, I recently came across this article by Cooper Cohen on the Insurance Nerds website which I thought was one of the easier explanations of Blockchain I had read.

Once you understand the basics of Blockchain, you should follow Ilias’ weekly post as well as our former Chinese Insurtech writer now Chinese Blockchain writer Zarc.  To understand the practical applications of Blockchain in the wider economy, have a read of Bernard’s ongoing series ‘The Blockchain Economy book’.

This article is focuses on B3i and its use cases for the Reinsurance and Insurance industry.  The above is simply to give a bit of context in regards to what DLT and Blockchain is and how it works.  

What is the B3i initiative and how did B3i Services come to be?

According to the B3i website:

The Blockchain Insurance Industry Initiative (B3i) is a collaboration of insurers and reinsurers formed to explore the potential of using Distributed Ledger Technologies within the industry for the benefit of all stakeholders in the value chain.

The organisation was incepted in 2016 and is currently formed of 15 members from across the globe. As an industry initiative, all the members have equal rights and obligations in terms of financial contribution, resources and decision making.

We are focused solely on developing and testing technical developments aimed at better serving customers and enhancing transaction efficiency, thus promoting competition.

As of October 2, 2017, the Initiative had grown to 38 members to help expand its prototype testing.

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While the Initiative started as a consortium, once the group had done enough research and studies on the applications of Blockchain for the Insurance value chain, including a Blockchain prototype for property cat XoL reinsurance contracts in mid-2017, it made sense to form an independent business separate from the companies that were participating in the consortium.  

Paul stated ‘We don’t compete for risk, we make risk-taking happen.  Our job is to make risk-taking happen in an easier way. Our mission is to facilitate much more frictionless risk transfer’.

Following on from this, he also explained that by being an independent entity, they would be governed differently than if they were a business unit under one of the member companies.  Further, he shared that initial interaction with various regulators in Singapore, UK, Germany, Switzerland and the US, will see B3i Services likely governed as a third-party service provider.  This means they will not have solvency requirements and will be supervised as a third party provider, needing to provide assurance to the companies that use them that they have a functioning control environment with well-managed operational risk.  Data privacy and security will be key here, which are of the utmost importance to Paul and his team.

It is worth mentioning as well that the company is currently owned by the shareholders mentioned above and after the funding round that they raise, there will likely be a larger group of shareholders involved.

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Who is the target client for B3i AG Services?

Paul told me that the focus currently and the next few years for B3i are B2B solutions between Reinsurers and Primary Insurance Carriers (which can also include Captive Insurance companies, such as shipping companies who contract with a Reinsurer directly to carry their risks).  

They do have plans to also include Commercial Insurance where the Reinsurance counterpartt are large corporations who reinsurer risks directly as well.  

He explained that these are good areas to get experience before moving into the retail space (which are not in scope at the moment).  

As mentioned in the section above, their first prototype was for property cat XoL.  After this, they will expand into the rest of Property lines, then Casualty, Life and finally Health.  They aim to have the entire Reinsurance product suite covered over the next 2-3 years.

Carriers and lines of business that do not have any reinsurance of risk will not be in scope for the time being.  

What are the use cases of focus for B3i Services?

Paul told me that currently, the sharing of information, processing of premiums and the payment of claims between a Reinsurer and a Carrier can be quite onerous, unsecure and non-standardized.  

For one, Statement of Accounts and Bordereau are sent via secured file transfer and/or e-mails.  Secondly, there are ACORD data standards in place to explain what data should be submitted to Reinsurers, but it is not widely adopted by the Industry.  

At the moment, there is no central platform that Reinsurers and Carriers can exchange information.  Further, there are many customized ‘bridges’ or ‘pipes’ between Reinsurers and Carriers, which can be a lot to manage.  

Paul walked me through 3 areas that will be of focus for the initial product suite of B3i AG Services.

  1. Contract underwriting – as soon as Underwriting is concluded for a given contract, a Reinsurer (assuming the book is reinsured) will be at risk.  The Reinsurer must have contract certainty (avoid a period that has already started and paperwork has not finished). The first part of the solution is a distributed shared ledger whereby all relevant parties can know the final version of the contract that has been put in place.  
  2. When the contract is nicely in force and there is no misunderstanding, then there is need to make sure cash flows sufficiently.  This includes determining what the premium amount is, when it is due, the Terms & Conditions of the contract and any commissions payable.  This is the 2nd part of the solution being put in place; a smart contract that allows easy self-executing cash flow between different parties.  
  3. When big losses happen, the claims process kicks in.  The smart contract solution will also increase efficiency to make sure that the appropriate contract is identified quickly, the rules of the contract in terms of exclusions, limits, deductibles, etc are checked and the payment of the claim can be made quickly. Depending on type of claim, the smart contract can also use interesting sources of data and new technology.  For example, for parametric risk, weather data can be used to identify when/where a natural catastrophe has taken space in a a certain area, and rather than having to prove that property has been impacted by this, the weather data will automatically identify the instance happening, significantly accelerating the overall process.

Paul also went on to say that there will be a lot of heavy lifting at the beginning to build the fundamentals for the above as they will need to take into account different business models, legacy systems and consistencies between Reinsurers and Carriers.  

My favorite comment from him was ‘Before you just automate old process, you should rethink the old process first…if you start automating parts of value chain, then it may be a nice process but still expensive process’.  

This is why they will look at one line of a business at a time, ensuring that the process is streamlined so that the ‘bridges’ and ‘pipes’ they are building can work for all lines of business and as they move synergies, then it can be more easily replicated and adopted by Carriers and Reinsurers.  

Lastly, Paul and I discussed the point of scalability.  Scalability has often been one of the biggest disadvantages of Blockchain technology.  While the Reinsurance to Carrier transactions are not as much as that of say, the credit card industry, there is still enough volume to warrant some concern on scalability issues.  Paul and his team will be continuously focusing on this as they continue on their journey as they choose the right technology and develop solutions along other lines of business.

Summary

As I quoted Ed Deuser, Technical Architect & Developer, RGA in my article a few weeks ago from the ReFocus conference during the B3i panel, the ‘network effect’ that the B3i initiative is having and seeing ‘everyone coming together to solve systemic issues that industry faces…  regardless of what to do, that underlying fact is very impactful’.

B3i has specifically gone from consortium to start-up in an effort to bring value and efficiency to a process that is in much need of more efficiency.  

As for Blockchain, there are many other use cases for the Insurance industry, which I will cover in another article later in the year.  Cooper’s article at the beginning of this article as well as this research from CB Insights give some great ideas of how else Blockchain can be used in our industry.  

As for B3i, I am extremely excited to see how they get on and wish Paul and his team the best of luck in the coming months and years.  Now that they are crossing to the start-up side of the equation, it may be time for them to have a look at the Insurtech start-up’s guide as well 🙂

Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.

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