Is blockchain key to revolutionizing the insurance industry?

Insurance is a multi-trillion dollar industry that impacts almost every other sector, yet future growth could be hindered by antiquated supporting technologies, says Ryan Rugg

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Ryan Rugg
Ryan Rugg

Despite its reputation for conservatism, insurers have consistently pioneered new ways to protect against risks. However, at the same time, the infrastructure has remained outdated and unfit for purpose.

In the rapidly growing Asian market, there are concerns that an inability to address the operational inefficiencies rife within the current system could cause growth to stall. Insurers are now taking steps to tackle this challenge head on with purpose-built enterprise blockchain technology.

Tackling the blockchain privacy challenge

Blockchain offers insurance firms a new way to coordinate information between each other, by using a pre-agreed technology solution instead of relying on a third party's bookkeeping. The technology enables disparate parties to connect via a shared platform environment. While this premise may appear simple at first glance, the insurance industry has specific requirements in relation to privacy and security that only certain blockchain platforms can fulfil.

For example, if a blockchain has the appropriate data privacy architecture in place, each insurance firm can maintain the same amount of control over their data as today, but with more flexibility. Unlike the traditional permission-less blockchain platforms – in which all data is shared with all parties – R3's blockchain platform Corda shares information with those who have a "need to know," ensuring the confidentiality of trades and agreements while also capturing the benefits of a shared distributed ledger infrastructure.

Insurers have already recognised the benefits of Corda's approach to data privacy, scalability and security. Following a period of experimentation with multiple consortia and technologies, insurers are now consolidating their blockchain efforts around Corda.

Testament to this is the decision to build Insurwave, the world's first blockchain solution for marine insurance, on Corda by Ernst & Young and Guardtime. This was deployed by Maersk earlier this year.

All the major insurance groups and ecosystems are coalescing on Corda in order to effect change and form standards. As Metcalfe's Law states, the value of a network is proportional to the number of connections in the network squared – the more insurers that build upon on a common platform, the more valuable the platform becomes to all participants due to the interoperability of applications. The consolidation around Corda creates network effects industry-wide.

Contract placement: leveraging the network effect

To more tangibly examine the benefits of these network effects, we can look at a specific insurance use case that involves a network of many different entities and counterparties – contract placement.

Contract placement is the process of negotiating a potential insurance contract between a broker and an insurer in order to issue the contract to provide coverage for an end customer. For most commercial and specialty insurance scenarios, except for small commercial and some mid-market products, this is an arduous, complex process involving several entities – a broker, one or more insurers, and potentially a reinsurer and reinsurance broker. Furthermore, outsized risks generally mean that multiple insurers come together to insure the risk at the requested limit price, resulting in additional complexity for the broker in managing the placement process.

Contract placement, with the extensive negotiation cycle between a broker and insurers, as well as between an insurer and reinsurers – with or without a reinsurance broker thrown in – has several inefficiencies related to inter-firm coordination. Extensive manual intervention and reconciliation is required for brokers, insurers and reinsurers to keep track of requests and responses; high IT spend is required for all participating parties to maintain an audit trail of the negotiation history between different entities; and each firm must make heavy investments in document storage systems to maintain separate contracts over the policy lifecycle.

Leveraging the network effect by connecting brokers, insurers and reinsurers onto the same blockchain platform can deliver numerous benefits. These include:

· Near-instantaneous communication between participating parties to eliminate delays associated with reconciliation and coordination;

· Real-time consensus among all parties involved in the contract on coverage, price, terms and conditions;

· Complete audit trail from all sides of negotiations and data exchanges;

· Greater regulatory compliance throughout the insurance industry due to instantaneous communication of in-force contracts to the regulator;

· Eliminating the "double spend" problem of having the customer buy the same policy from different insurers by involving the notary (regulator);

· Reduced IT spend for individual firms, with eventual decommissioning of legacy document storage systems and reducing spend on document generation systems.

A brighter future

Blockchain technology offers great promise across many avenues, not only contract placement. Platforms like Corda can add value to many insurance business segments – commercial and specialty insurance, life insurance, personal lines and health insurance, along with niche areas like marine and trade credit.

The industry's recent consolidation around Corda reaffirms that data privacy is pivotal for a network of enterprises and that the platform's peer-to-peer data sharing approach matters for insurance blockchain applications going into production. For a highly regulated industry like insurance, only Corda can ensure that the entire supply chain of brokers, insurers, reinsurers and consumers can interact in a seamless, secure and private manner.

With future growth across Asia expected to continue, we're excited to see the new opportunities and efficiencies that blockchain technology will enable, as the insurance industry moves into a new era.

Ryan Rugg is global head of insurance at R3, the enterprise software firm.