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Blockchain-for-Insurance Applications: How Should Global Insurers Respond?

 
April 5, 2018

Blockchain has several applications in the insurance industry, both within an organization and beyond. This impacts the entire insurance value chain. Over the past few years, some use cases have been explored and various proofs-of-concept (POCs) have been successfully completed by insurers (e.g. MS-Amlin and AIG) and consortiums of insurers (e.g. B3i Prototype). There is, in general, a lot of optimism and excitement about blockchain’s potential for the insurance industry.

2018 is an important year for blockchain in insurance with B3i (the Blockchain Insurance Industry Initiative) announcing the implementation of production blockchains in the year – significant progress has been made in this regard. R3, the collaborative group working to develop a distributed ledger platform specifically for financial services, is also working on this. Additionally, the London Market Target Operating Model (LM TOM) has done a feasibility study and published a detailed whitepaper on how blockchain can be leveraged to dramatically transform the London Insurance market in the next few years.

In this context, it is useful to think about how global insurers should respond to these emerging ecosystem offerings and weave them into their own strategies. Some key opportunities for blockchain application in the global insurance industry are:  

    1. Inward and outward placement and trading of insurance risks.

        Global insurers may acquire risks through inward risk placements through B3i, R3, or PPL placement         platforms, and may place risk through outward risk placements as well. For these inward and         outward risk transfers, a global insurer needs to enable its enterprise architecture to support the         process flows needed to process or generate global placement message or electronic back-office         transactions, electronic claims office transactions — equivalent updates to own copies of B3i, R3,         or PPL blockchains or distributed digital ledgers, as well as related multi-currency cash accounts.

    2. Multinational insurance programs — flexible premium, claims processing.

        For multi-national insurance programs, risks placed in different countries can be written to an         internal risk transfer blockchain using an insurer’s placement, transfer, and service platform. This         will involve clients and underwriters negotiating the risk placement, as well as transfer of risk         portions, to their own subsidiaries or fronting insurers directly or through brokers in different         countries to meet client requirements regarding premiums payment schedules across countries, and         currencies subject to country-specific compliance requirements. Based on the risk placement as         well as risk transfers, automated premium processing and claims processing can be done to meet         client requirements with maximum flexibility, while ensuring transactional transparency.

    3. Inward transfer from countries to regional hubs, internal transfers from regional hubs to            central hub, central outward transfers from central hub.

        This use case is primarily about the simplification of core global insurer systems using an internal         risk transfer blockchain like the one described above. Country risk managers may use an insurer’s         placement, transfer, and service platform to transfer country risks across regional countries to the         regional hub, and regional risk managers may transfer regional risks from regional hubs to a         central hub. A global insurer’s outward reinsurance team may decide to retain part of the aggregate         risks in the central hub internally and transfer some of the risk to third-party insurers through B3i,         R3, PPL, or other mechanisms.

Clearly, insurers should consider all of these together to create the roadmap for blockchain adoption and the resultant enterprise IT architectures.

Blockchain will spell huge benefits for global insurers, the key ones being:

  • Working capital savings, foreign exchange efficiencies, operational efficiencies, risk reduction and data integrity improvement (owing to the reduction in reconciliation effort, duplicate work, and waiting time).
  • Potentially profitable outward risk transfer to insurance-linked securities (ILS) parties that can bear that risk with lower capital, reducing the average cost of capital per unit of risk underwritten.

Opportunity for revenue from primary issue of custom-designed ILS to parties with diverse positions.

What’s your view in this regard? Do you think blockchain will truly reimagine the insurance industry as we know it? What, according to you, are some of the key benefits of blockchain to an insurer, and how can those be realized?

Pratap Tambe is the Business Development Manager at TCS handling commercial insurance in UK and Ireland. He has over 20 years of experience in managing IT services for a global customer base including 6+ years of experience in the London Insurance Market. He is well known for his LinkedIn articles and public speaking on London Market Target Operating Model (TOM), Blockchain, Catastrophe Modelling, and Cyber Insurance.