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What is it about Blockchain, and Corda specifically, that has insurers excited? In this post, we will explore the synergies between insurance processes and the promise of Blockchain, and why they are a match made in heaven. In the process, we will bust a few myths — not the “red cars are more expensive to insure than black” kinds but ones that relate to how the industry does its business.
2018 was a phenomenal year for R3 and our insurance community. We launched Corda Enterprise over the summer, welcomed several insurers across the globe to our ecosystem, watched several insurance CorDapps go live, and received a massive reception from the insurance community during our flagship conference, CordaCon. A recently released insurance market report captures the significant progress made by R3 in the insurance space in 2018.
In subsequent posts, I will explore why insurers globally are choosing Corda as their Blockchain platform of choice other products — while our vastly superior technology has been a key factor; there are several other reasons.
But first, let’s explore a few common myths surrounding the industry.
Insurance industry plays an important role in keeping society safe from any unforeseen and unanticipated risks and perils. Insurers have always adapted to changing needs and technological advancements to launch new products that protect customers and enterprises.
· With the advent of Uber and Lyft, several insurers innovated their product offerings to extend personal auto coverage to protect a driver while on Uber/Lyft duty. Grange Insurance identified a gap in existing products and expanded their coverage to ensure a driver is covered during the time between them accepting a ride and driving to pick up the customer
· Safeguard Guaranty Corporation is currently looking to relaunch their Marriage Insurance product to help divorced couples maintain the same standard of living
· Worried about an incident beyond your control sullying your businesses’ reputation? Reputation damage coverage protect you against various unseen foreseen circumstances that damage your reputation and cause you a financial loss
These examples argue that insurers are innovative when it comes to launching new business initiatives. A legitimate criticism, though, is that on a technology and process front, insurers have been slow to adapt and still conduct business through processes established 150 years ago on systems built in the 80’s.
Anybody who has worked for insurers would tell you this is not true. Insurers look to avoid adverse risk selection by keeping their underwriting guidelines robust and stringent. When a claim occurs, insurers look to verify coverage, details around the claim incident and perform a thorough claims triage and initiate a payout in accordance with the coverage.
What probably lends to this myth is that most insurers have archaic claims management systems and broken internal operations that lead to extensive delays and back and forth with the customer at the time of claims — thereby leading people to believe that insurers either don’t wish to payout claims or are looking to delay the process as much as possible. When the opposite is what’s true — insurers would rather payout claims ASAP than get into potential lawsuits and/or reconciliation issues.
Today, most, if not all, personal insurance products can be bought via a smartphone app just like shopping on Amazon or eBay. Depending on who you insure with, you could even pay your premiums, edit your policy and file claims all on an app. I know I can!
When it comes to commercial & specialty insurance, things are different and largely because the distribution model and the “supply chain” if you will is far more complicated than personal insurance with several handoffs and entities external to the insurer. Hold on to this as we will come back to this in a bit.
With some level setting with respect to insurance myths, lets move on to a broader question.
Insurance is undergoing a digital transformation. Nearly every insurer has set-up an innovation office to focus on digital and emerging technologies; while their business teams are executing large-scale enterprise transformations around core system modernization.
A fair question would be why should insurers have to undertake a digital transformation journey that is known to be expensive, time intensive and prone to risks? After all, insurance is a necessary evil. No matter how bad the website is or how broken the policy issuance process is, people will buy insurance. You cannot drive off the brand new Lexus off the dealers lot without buying auto insurance and it is not advisable to skimp on renters insurance and run the risk of paying for a clogged drain because kids flushed their toys down it!
The most important metric to measure an insurer’s profitability is the combined ratio. Simply put,
Combined Ratio = ( Incurred Losses + Expenses) / Earned Premium
Most insurers have a combined ratio of 95 or about 5% profitability which on the face of it doesn’t make insurance a lucrative business! Till you factor in the investment income earned by insurers off the premiums collected but not yet paid out through claims.
The last couple of years, however, have been tough for insurance. Market volatility has led a decrease in investment income; natural disasters and aviation mishaps have led to an unprecedented rise in claim payment. Insurers are increasingly looking at expanding beyond their existing digital tech stack and look at emerging technologies like AI, RPA, IoT etc. to cut costs in order to bring the combined ratio back to manageable levels (read: below 100).
Emerging technologies like AI, RPA, IoT etc. as well as core system modernization efforts might be able to help an insurer cut costs. But what’s so special about Blockchain? After all, Blockchain is relatively new, requires a network and is early on the implementation maturity scale. Great questions.
Reason # 1 : Insurance Supply Chain
Let’s revisit the point we made at the end of Myth # 3 — when it comes to commercial insurance and specialty insurance, the supply chain network required to place a risk is long and complicated. At the bare minimum, you have a risk manager of a client requesting a quote via an insurance broker. The broker in turn reaches out to multiple insurers who absorb different parts of the risk. The insurers in turn might need to reinsure a part of the risk and depending on the business line, whether it’s treaty or facultative contract etc. the insurer would need to involve a reinsurance broker and repeat the process described above with a reinsurer.
If insurers really want to reduce their operating expenses; piecemeal interventions such as core system modernization are not enough as they address part of the problem. Insurers need solutions that reduce costs across the entire supply chain. If an insurer has to be a truly digital entity; their entire supply chain needs to be digital. One could build agent portals and have some brokers directly place risks by logging on to it; but the nature of the business is such that brokers need to coordinate across multiple insurers to place a highly complex risk. To summarize, as an insurer underwriting commercial risk you could make your internal processes efficient through the existing tech stack but the inefficiencies across the chain still remain and hold you back from truly cutting your operational expenses — resource costs, maintaining IT systems, loss of time etc.
How can Blockchain help? Blockchain is next-gen internet where all entities are connected over the internet and can seamlessly run the same application, share information in a secure, private manner and not worry about having to reconcile data or interactions across systems. In an insurance context, think of the entire supply chain running the same application whilst maintaining their own copy of the data and transacting instantaneously, seamlessly to place a risk.
Reason # 2: Nature of the business
A fear that most corporations have is — if I am on the same network as my competitors and running the same technology, what is my competitive advantage? For insurers I argue that this point is moot.
Why ? Because the nature of the business itself is such that insurers share an open relationship with their peers. To place a complex commercial risk, a broker reaches out to multiple insurers. The broker does a price comparison and finally structures the policy such that it makes most sense to the paying customer. Competition is inherent in the business and using the same tech stack or not does not change anything.
The true differentiator is not the tech stack but an insurers product offerings. How accurately can they price risk while providing the coverage they need, how efficient are they at structuring product offerings while providing comprehensive base coverages and appropriate endorsements etc. A truly innovative insurer makes use of technology to differentiate their product offering versus using technology as a pure distribution tool. A great example would be Metromile insurance.
Reason # 3: Because it’s insurance!
The 2 primary promises of Blockchain are:
1. Consistency — what I see is what you see
2. Legality — smart contracts or computer code to adjudicate contentions in a legally compliant manner
Now let’s go back to insurance and disputes. A dispute arises when a claim occurs and you could differ over what was covered under the claim, how much was covered, whether or not the claim adjudication was carried out in a fair manner etc. At the end of the day any dispute is judged based on only one document — the insurance contract !
Going back to the promises of blockchain:
1. If all parties share a consistent view of the insurance policy and the intermittent transactions leading up to that point; it eliminates any scope for confusion
2. If all claims are adjudicated in accordance with the insurance contract — which as we have determined above is consistent in each parties eyes — it eliminates any perceived ambiguity or maliciousness in payout out a claim. Even if it doesn’t in the eyes of the “aggrieved” party, it does in a court of law.
The early use cases for Blockchain emanated from the Banking & Capital Markets industry. Here at R3 we have seen widespread adoption in the insurance industry and this post explains why so.
If anyone clicked the link to the insurance market report at the beginning of this post (do it now if you haven’t !!) it’s fair to wonder why is it that insurers globally have converged on to R3’s Corda as their blockchain platform of choice. Great question, but stay tuned for the next post.
If you have any questions about this post or would like to discuss how Corda can benefit your insurance business, feel free to reach out to us at firstname.lastname@example.org.
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