Blockchain

5 Ways blockchain is changing the complex world of reinsurance

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Calamity strikes. You’re okay, your family is okay, your property isn’t, so you call your insurance company, and then, you wait. We’ve heard stories of people frustrated by slow claims processing and payment in the aftermath of disaster. The delay isn’t often due to the enormity of damage—the delay is mainly due to the complexity of underwriting, with hundreds of insurers and reinsurers figuring out where contracts are, which are correct, who already paid what, and what ledger has the right accounting. It’s routine that insurers and reinsurers spread risk around. As premiums are collected and claims are paid out, the web of insurers and reinsurers sleuth through paper and electronic trails to reconcile their books according to their level of risk participation. The process hasn’t been easy, until now.

Blockchain technology is already infiltrating the insurance industry with projects running at some of the world’s biggest insurers, but now blockchain is working across consortia of insurers too. B3i is launching blockchain across its 15 network members to manage accounting and reconciliation for insurers and reinsurers, bringing new speed, transparency, and security to premium and claim settlement.

As B3i launches large-scale market testing, there are massive implications for its network members. Here are five of those implications, that prove why insurers outside of the network should be paying attention.

  1. Cash flows improve by freeing up working capital:
    When we created our first blockchain for an internal IBM financing unit, cash flows improved drastically, within the shared financing ledger—or chain—that sits between partners and suppliers. Nearly $100 million in working capital that would have otherwise been tied up with settling disputes was freed up, once we housed the essential assets for the financing process on a shared blockchain. And, where the few disputes did occur, visibility of shared assets on the chain remarkably reduced dispute resolution times. The members of B3i will experience similar benefits.
  2. Contract certainty restores faith in the system:
    Clarity around reinsurance contracts will increase for parties managing the Ts-and-Cs, making it easier to create and renew them. No more cycles spent in tracking down policies, comparing version numbers, etc. One has only to look at the Sept 11th World Trade Center incident and the chaos that followed to understand the implications. It took years to settle claims, because of disputed veracity of contract terms among the reinsurers.
  3. A whole new class of data driven intermediaries emerges:
    Many articles talk about using blockchain to disintermediate value chain intermediaries. On the contrary, I think quite the opposite. I see new functional intermediaries emerge, who deliver value-added services both by mining blockchain data and by delivering utility services on the chain. It’s relatively easier to create insights from data available from shared processes more cost effectively than relying on third party data aggregators for this function. The market opportunity here is huge.
  4. Open collaboration leads to data “standardization”:
    We are all familiar with decades-long efforts for data standardization in many industries. Evolution of these standards has always been slow because of difficulty in achieving consensus – mainly driven by cost considerations to enable co-existence of standards with internal IT. Standards today reflect a compromise instead. Blockchains such as B3i are going to change this fundamentally. When you have to collaborate on a shared chain, you have no choice. This collaboration around shared data becomes especially important with processes that cross industries—like Insurance. Insurance, as it is relevant to many different industries—think: supply chains, international trade, transportation and so on.  I do think however, that rather than standards committees, ballots and voting periods, we will see open community based approaches come to rule here – driven by the desire to balance between the need to interoperate and the need for speed.  It’s time for standards bodies to take notice and evolve.
  5. Money will move with more efficiency:
    Huge efficiency will emerge in the movement of money across the insurance value chain, as rules around transactions are factor in during, rather than after the fact. In what essentially operates like a multinational business, the contract logic running on blockchains will encapsulate the complex logic of taxation, exchange rates and myriad regulatory compliance checks. I expect parties involved in such chains to reap money movement benefits.

There is growing realization within the insurance industry that initiatives like B3i bring real business value – testament to this is the fact that 23 additional insurers have signed up to do a market test of the reinsurance solution—up from the original 15. A key consideration is an enterprise grade secure platform to execute such transactions – which is being provided by IBM, a long-trusted partner in the insurance technology.

Executive Architect, Financial Services Sector

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