You thought insurance companies were boring? They are among the first to explore the transformative new technology of blockchain.
Blockchain promises much, from improvements to operational efficiency to fundamental disruption of existing business models and everything in between. Separating reality from the hype is difficult when commentators, consultants and vendors are making wild claims with seductive financial prizes. There are many who wield the blockchain hammer, looking for nails, but when the only tool you have is a hammer, every problem looks like a nail.
There are however certain problems for which blockchain is highly suited, primarily where multiple stakeholders without full trust in each other are transacting business together and sharing information. In such cases, a blockchain protocol effectively automates trust, provides a single source of truth and shared environment on which business can be conducted and business processes automated without the need for third parties to notarise transactions or maintain shared platforms or services.
To understand how this concept delivers value, consider how business is conducted today: companies maintain similar IT systems, running similar processes and employ necessary but highly wasteful checks and controls like reconciliation. The boundaries between companies are seldom automated, more often requiring manual re-keying, dispute processing, validation and reconciliation. With no single source of truth across companies, determining the state of a particular market (e.g. for a regulator) requires the synchronisation, aggregation and auditing of reports from all parties in that market.
Now imagine the blockchain world, where all parties in a network are transacting on what is conceptually a single shared application with no boundaries, a single tamper-proof ledger and an execution environment on which shared processes can be automated. The wasteful processes are no longer required and the single source of truth can provide a fully transparent state of a market, for example how risk is distributed globally and what each individual company’s net exposure is, potentially enabling improved liquidity.
Potential benefits for customers
The potential benefits of blockchain include reduced costs through, for example, removing the need for third party intermediaries to provide independent verification of transactions or lower audit costs due to improved transparency. The technology could also make it easier to automate transactions, for example through the provision of smart contracts, and could make transactions between companies faster and more efficient.
“Wasteful processes are no longer required and the single source of truth can provide a fully transparent state of a market.”
Ultimately, this would deliver better results for customers by streamlining paperwork and reconciliations for contracts, while improving the flow of information and money.
Zurich believes in this potential and we’re currently taking an optimistic but cautious stance on blockchain. While we believe the technology has the potential to benefit the insurance industry, we also recognise that blockchain remains largely unproven outside of the now traditional value-transfer, decentralised crypto currency use-cases. There are many technical, regulatory and adoption risks that continue to slow blockchain’s progression into mainstream and widespread usage, some of these risks may yet lead to outright failure.
While those risks remain, Zurich will continue to make rapid but very measured investments in the technology. Right now, we’re optimistic and actually believe we can mitigate the risks, but we’re not quite ready to bet the farm
B3i – a true industry initiative
With this in mind, we co-founded the B3i initiative in October 2016. In the meantime, another 10 insurance and reinsurance companies decided to join, giving the initiative a truly international scope with members from Asia, Europe and the Americas. Compared to other blockchain related initiatives, B3i focuses on insurance use cases. A key consideration for the industry is to ensure that blockchain is implemented in a common, consistent way across the industry, with minimum standards to exchange data and secure transactions. The cooperation also ensures that we focus on solutions that add value that ultimately benefits our clients.
The crucial question is: should we establish an industry wide Blockchain network? To inform this decision we need to know if there’s a business case for using Blockchain and if there are any technical or business risks that will prevent us from achieving success. The B3i approach is centred on answering these questions as quickly as possible with the lowest investment. To do this we are following lean startup principles by executing clearly defined experiments that test our hypotheses, validate critical assumptions and test critical technical concerns.
Our first experiment is a Proof of Concept based on the post placement process of buying and selling of reinsurance. During this experiment we will learn many things including how processes can be streamlined and what business value that will deliver, if/ how we can maintain contractual privacy across the network and how much effort is required to build Blockchain solutions. This Proof of Concept will be completed in mid- 2017, at which point the B3i consortium will be able to make an informed go/no-go decision on Blockchain.
If we are successful, the following phase will deliver a fully operational network on which we can pilot transacting global reinsurance business. Chances are high that blockchain can help bring a digital mindset to the core of our business, simplify the way we work and support us in focusing even better on our customers.
Blockchain Insurance Industry Initiative B3i
- Co-founded by insurance and reinsurance companies Aegon, Allianz, Munich Re, Swiss Re and Zurich in October 2016.
- The members now include international companies such as SCOR, Generali Liberty Mutual, Sompo Japan Nipponkoa Insurance and XL Caitlin.
- The initiative is a collaboration to explore the potential of blockchain technologies to increase efficiencies in the exchange of data between reinsurance and insurance companies.