Blockchain (aka Distributed Ledger Technology (DLT)) is seen by some, as the most important technology innovation since the introduction of the internet. It has the possibility to cut cost and complexity from managing transactions as diverse as a bank settling a currency trade to a supermarket tracing the provenance of the pork it sells. There has been enormous interest from the Insurance Market and a 2016 study of more than 50 firms, conducted by PwC and Z/Yen (Chain Reaction: How Blockchain Technology Might Transform Wholesale Insurance) concluded that there was real opportunity to utilise the technology and to save cost, reduce complexity and error and speed up transactions.
The benefit of blockchain is that it allows multiple parties who do not fully trust each other to update information without a central party managing the process. Where industries have created such a central authority it becomes a natural monopoly and inevitably, adds cost, time and complexity to business processes.
Richard Gendal-Brown one of the key architects of technology firm R3 explains this, saying “Distributed ledgers – or decentralised databases – are systems that enable parties who don’t fully trust each other to form and maintain consensus about the existence, status and evolution of a set of shared facts”
PwC have developed a set of six questions that can be used to identify ideal processes for the technology. Any process where four or more of the following apply is a strong blockchain candidate:
- Multiple Parties Share Data – multiple participants need views of common information
- Multiple Parties Update Data – multiple participants take actions that need to be recorded and change the data
- Requirement for Verification – participants need to trust that the actions that are recorded are valid
- Intermediaries add cost and complexity – not creating or the removal of an existing “central authority” record keeper intermediaries has the potential to reduce cost (e.g. fees) and complexity (e.g. multiple reconciliations)
- Interactions are time sensitive – reducing delay has business benefit and/or the time that information is updated or a transaction agreed is important
- Transaction Interaction – transactions created by different participants depend on each other
Those familiar with the wholesale insurance markets will see that there are multiple use cases that will meet these criteria. Indeed the very nature of insurance markets which distribute responsibilities across a wide network of parties that need to cooperate and work together creates an enormous opportunity to transform efficiency and transparency in the market.
The PwC and Z/Yen report highlighted benefits in a number of business processes that are being explored by firms independently and in consortia (for example b3i). These include:
- Interactions between clients, brokers and insurers could benefit from more efficient sharing of information about a proposed policy. Additionally benefits were seen for insurers being able to free up risk capacity by getting immediate feedback their risk offers within a syndicate that are not taken up.
- As well as efficiency, the transparency that comes from a shared ledger of contracts was seen as a potential answer to the problem of reinsurance spirals.
- Claims management.The management of information flow is seen to have the potential benefits in terms of efficiency and the timely processing of claims.
- KYC/AML checking. The processes for checking potential clients including Know-Your-Customer, Anti-Money Laundering, sanctions screening, and determination of ultimate beneficial ownership were all highlighted.
Across all of these areas respondents consistently identified problems such as inefficient communication, the need to rekey data in unstructured and poorly standardised documentation, difficulties with access to information in ancillary documentation impacting pricing and risk management, and the possibility of error.
Of course many automation and digitisation benefits could be achieved with other more traditional technologies. There are, however, a number of differentiators for blockchain:
- As each party has their own view of the data it is significantly more efficient than the scenario where parties have their own isolated copies of data that they try to keep in line thorough sending messages about updates. Each valid update is shared and visible to all parties once confirmed and so there is no duplication of data entry or need for reconciliation.
- A party can use its own version of the data to drive internal processing. This has the potential to be significantly more efficient than a process of using an internal record that is then “kept in line” with an external third party view (but which may be out of line at some points due to errors or timing issues).
- All parties see the same data and all parties know that every other party is seeing the same data. The possibility for disputes is dramatically reduced.
- The shared data allows participants to drive process efficiency across the whole interaction allowing orchestration of interactions between parties. The benefits that can be achieved are greater than those that can be achieved focussing on just the internal processes of each firm
- There is no need for separate messaging infrastructure. Updates happen within the data held on the chain and business process is driven by data updates rather than sending messages that (should) result in data updates.
- The insurance market by nature is federated between multiple parties each taking specific roles and there is no natural point that would act as a central record keeper. Blockchain is aligned to this paradigm.
- The lack of a single authority point eliminates a single point of failure for the system.
- Blockchain provides a tamper-proof transaction history that can be used to provide the indisputable record of a transaction including supporting documents attached to a record.
- Due to the peer to peer nature of the network it is relatively straightforward to add additional participants.
- The network is inherently scalable – as the network grows new processing nodes are added.
When viewed in this light it is little wonder that the insurance industry is showing such interest in blockchain and we expect to see multiple applications coming to the market in the next few years.
About the author
Steve Webb, Partner – Banking & Capital Markets Consulting, PricewaterhouseCoopers
