Blockchain: the future of re/insurance?
Few innovations have generated as much excitement as blockchain, the technology that its advocates claim can transform the way re/insurance—and all financial services—operate. Are they right? Bermuda:Re+ILS tapped into the wisdom of its readers.
Whether you see blockchain as an innovation that will transform every aspect of society, or an overhyped fad that will soon fizzle out with a whimper, there is no denying this technology’s unique power to capture people’s imaginations.
Given the buzz that surrounds all things blockchain-related, it is easy to forget that this technology is, at its heart, a ledger. When was the last time there was so much hype around a new way to store and share data?
Every industry is currently working on test cases to see how it can use blockchain to increase efficiency. Where does the re/insurance industry fit in?
Figure 1: In which part of financial services will blockchain have the biggest impact?
A quarter of respondents believe that blockchain will do more for reinsurance than for any other form of financial services (Figure 1). A survey in Bermuda:Re+ILS should probably expect some bias with a question like this, but it is still a huge indicator of the confidence people have in the technology’s potential in this industry, especially considering nearly 40 percent believe blockchain will revolutionise all financial services, including re/insurance.
Taken together, it means a little under two-thirds of respondents see blockchain driving a transformation of the industry.
There are, of course, the blockchain sceptics, and 14 percent of respondents argued blockchain will have little impact on any financial services. However, it can be inferred that even those who expect blockchain to have a bigger impact on banking than it does on re/insurance (14 percent) still expect blockchain to deliver efficiency gains to this industry.
Does it work?
Figure 2: How significant have blockchain and distributed ledger technology been in increasing efficiency in Bermuda’s re/insurance industry?
The perception of blockchain has been clouded to some extent by the high expectations people have had for it, and by the lofty promises that have been made about the impact it can have. While a hard core 6 percent of respondents believe that it has already transformed the industry, more than half of the respondents felt its real impact is yet to be felt (Figure 2).
Until technology companies can convert that potential into tangible improvements in efficiency, and use cases that people can see for themselves, there is cover for the 11 percent of respondents who doubt such advances will ever materialise.
Still, more than a third of respondents said blockchain has already made some incremental improvements to the industry, even if there was some disagreement among those people about how much more they can expect.
A larger proportion of that group said they expect to see more improvements to come as the industry gets to grips with the technology, with a smaller proportion believing the advances that have been made to date are probably as much as the industry can expect from blockchain.
Potential for claims
Figure 3: Where do you see the most potential for blockchain to improve/streamline the re/insurance industry?*
*Respondents could choose more than one option
Assuming blockchain will deliver improved efficiency to the re/insurance industry, the next question is: where? Respondents again highlighted the high expectations people have for the technology, with large numbers expecting blockchain to improve the industry in many different areas (Figure 3).
The greatest potential, respondents felt, was in claims, with more than half of respondents believing blockchain can increase efficiency in this area. This may reflect the industry’s view that claims is the area most in need of improvement: it is the client-facing part of the business, the shop window of the industry.
If the claims process can be sped up, simplified or in any other way improved, re/insurers stand to gain a lot from improved client satisfaction.
There is also scope for improved data-sharing in claims, between customers in one place and back-office claims handlers in another, with claims investigators potentially making site visits to areas that may be different from the location where the claim was filed.
Allowing people from different departments spread out over wide geographical distances to share and update data seamlessly, makes it easy to see how people might have high hopes for the technology’s application in this area.
A little under half of the respondents also saw potential for it to improve re/insurers’ accounting and treasury function, while a third thought it could improve underwriting. Nearly a quarter of respondents thought it could improve compliance.
One respondent summed up its expansive potential, arguing it could help with “exposure-tracking, assumption, retention, cessions, and retrocession”, adding it would improve the industry across the entire chain of business.
Figure 4: What is your biggest concern about the use of blockchain?*
*Respondents could choose more than one option
There are clearly blockchain sceptics out there, and even those who agree the technology can deliver enhanced efficiency disagree about the extent of those benefits. What are the doubts?
Advocates and sceptics of blockchain agree about one thing: the basic premise of blockchain technology. A distributed ledger, blockchain is about collaboration and data-sharing. The biggest efficiency gains come where barriers to sharing data do not exist, or can be easily swept away.
Where data is proprietary or sensitive, and where institutions do not want others to see information, the technology appears to have less potential to deliver improvements.
Nearly two-thirds of respondents cited issues around information-sharing and collaboration as a potential sticking point (Figure 4). Whether re/insurers are particularly bad at sharing data compared with other financial institutions, it is true that all large financial institutions—and many other non-financial corporates too—guard their data jealously, and have concerns about losing their edge against their rivals by sharing too much information.
Nearly half of respondents expressed concern about the security of the blockchain, another issue that is regularly raised by the blockchain-curious. Blockchain’s advocates insist the technology is safer than current systems, not less safe, but no matter how many times they repeat the message, the concern never goes away. It may be that the only way to overcome this fear will be to test blockchain in live environments, and observe its performance against hackers.
Nearly 30 percent of respondents argued that, regardless of whether blockchain could prove a useful investment for re/insurers, it is not the only new technology available, and others make a more compelling case for their tech budgets.
Seventeen percent said re/insurers are not currently in a position to make the necessary investment in blockchain. Given the uncertainty around the COVID-19 crisis they may have a point: it remains to be seen how much appetite institutions will have to make huge outlays in new technology systems when there is such a big question mark over the state of the global economy.
Another 18 percent see blockchain as a solution to the wrong problem, a technology that might be useful in some areas, but not necessarily in this one. It will be up to technology vendors to prove those doubters wrong. “Blockchain needs a clearer cost-benefits analysis,” noted one respondent.
Another added: “Most reinsurance and securities products require a complexity that leads to ‘fat fingers’, and while blockchain can reduce the risk of fat finger problems occurring, it can't fix them when they do occur.”
The place of Bermuda
Figure 5: How does Bermuda compare to other re/insurance hubs in terms of its engagement with blockchain technology?
Assuming blockchain can transform the industry, that institutions overcome their reticence in a range of areas, and that big, revolutionary platforms emerge—where will Bermuda fit in?
A little over 10 percent of respondents see Bermuda as a potential leader in this area, leveraging its re/insurance expertise and its culture of innovation and openness to technology (Figure 5).
Around half that number took the opposing view, arguing that Bermuda is being left behind by other jurisdictions that are making more progress developing blockchain technology.
However, this question elicited the most decisive response of the whole survey, with 83 percent of respondents taking a different view from both of the above. Blockchain is a geography-agnostic technology: it makes little difference whether an institution is in London, Tokyo, Bermuda or Beirut.
What matters is the culture of institutions that are either willing to invest in the technology, or not—to share information, or not. In that sense, Bermuda is in the same boat as every other reinsurance domicile.