Bringing Transparency to Reinsurance with Blockchain

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At IBM we have been demonstrating the increasing role of blockchain across industries. From finance, to shipping to food safety, we’ve shown the real value of bringing transparency and monitoring to the supply chain.

We’re now bringing that same level of tracking and visibility to the insurance and reinsurance industries. Reinsurance serves, in part, to distribute risk across many insurance companies so that no one company is made insolvent by a claim. Forming these reinsurance contracts requires the participants to negotiate contracts, track contract amendments and agree on contract finality in a mutually transparent but secure manner.

Blockchain technology is a natural fit, providing these capabilities and enabling efficient digitization. Once the contracts have been formed and the risk sharing is in effect, blockchain smart contracts enable the calculation of intensive transactions that govern the flow of premium and claim monies between contract parties.

To best take advantage of this new technology, the Blockchain Insurance Industry Initiative (B3i) was formed in 2016 to jointly explore how blockchain could remove friction and lower costs across the insurance value chain. IBM is the technical partner for the initiative, which now counts 15 insurance and reinsurance member companies, and the Hyperledger Fabric is the core technology. After less than one year of starting the initiative, earlier this week the consortium announced the milestone of a market-ready prototype at ‘Rendez-Vous de Septembre’ in Monte Carlo.

This prototype, which will be available to the expanding consortium membership for testing,  allows all members of the consortium to transact using a shared ledger. Companies (cedants in this case, who are ceding risk to other insurers) can request a quote and interact on the platform until all signed lines are agreed. Encryption is a vital feature as well as permissioning, which is the authorization for visibility to portions of the transaction based on a participant’s role and “need to know” basis.

In addition to our work with B3i, we are also working on initiatives with other insurers and within other industries. Blockchain distributed ledgers are being used by AIG and Standard Chartered to speed the issuance of complex international commercial insurance policies which, in the past, required many trades of paper agreements and verifications across borders, often completed with multiple manual interventions. Their ability to offer role-based access and visibility for the insurer, insured, brokers and regulators through a blockchain enabled smart contract has already earned them a favorable credit posture from ratings agencies.

Blockchain’s ability to provide trusted records across all parties in a transaction make it ideal to monitor supply chains, as a group of leading companies across the global food supply chain have announced to food traceability by providing trusted information on the origin and state of food. WalMart is doing today in a pilot program with pork suppliers in the Chinese market; as Maersk is doing today with shipments across 30 participating organizations; and as Colombian logistics solutions company AOS is doing across last-mile trucking.

We now have the potential for goods to be tracked, and insured, across an entire supply chain using a common blockchain technical infrastructure, the open-source Hyperledger Fabric. And with the recent announcement by B3i, risks incurred by such supply chains can be aggregated, ceded to reinsurers, and monitored as appropriate, greatly increasing the speed and capacity of the entire insurance industry to take on such risk and effectively advise on how to manage and reduce such risks.

Blockchain brings higher certainty, increased transparency and lower conditionality to such contracts, with significant process efficiencies throughout the supply chain. When goods can be identified and conditions monitored, problems can be identified as they happen and even predicted in advance. Problems can be addressed immediately, and the incentives to manage those problems – refrigeration maintenance, navigation around storms, sleepy drivers – are aligned so all are focused on quickly finding effective solutions.

In the insurance industry this means faster communication across involved parties, automated or faster execution of event-based transactions, and increased transparency for multi-party contracts such as reinsurance arrangements. B3i selected IBM and the Hyperledger Fabric for the platform, due to the maturity, modularity and security of the Fabric coupled with IBM’s experience of developing and delivering Blockchain solutions for many global enterprises.

They found Hyperledger Fabric to be the most suitable option to handle the insurance industry’s complex business logic.  Additionally, Hyperledger’s out of the box support for smart contract lifecycle management and flexible incorporation of consensus algorithms were winning features most suited to the needs of B3i’s distributed consortium members. Unlike competitors that play in a single part of the new blockchain model, IBM has a comprehensive view.

IBM knows how to build, manage and run enterprise-grade blockchain networks. As a founding member of the Linux Foundation’s Hyperledger, IBM allows customers to keep options open and provides solutions based on open standards, open governance, and an open source code to maximize value for insurance industry clients. We focus on blockchain for business – targeting managed, permissioned, trusted business to business networks.

IBM spoke in 2015 at the ‘Rendez-Vous de Septembre’ in Monte Carlo on Industry 4.0 and the implications of interconnected industries for the evolving insurance eco-system.  We are thrilled to continue to take part in these “innovations that matter for the world” becoming a reality.