Smart Contracts, Smarter Insurance: Blockhain - Tom Johansmeyer (2016)

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Smart Contracts, Smarter
Insurance: Blockchain
5 October 2016
1

Insurance Digitalization
• Online customer acquisition – Google AdWords
replaces the agent
• Underwriting with no-human interaction
• Fast-tracked claim settlements for your best
customers
• ‘Internet of Things’ (IoT) sensors that transmit loss
event data
These are the benefits we always hear about … but
what else is there?
2

What Else Can Digitalization Do?
• Provide a perfect audit trail
• Reduce the risk of record-tampering, fraud
• Streamline administration and management of
policies and claims
• Accelerate post-event activity for non-
underwritten covers (parametrics, industry loss,
ILWs)
3

Blockchain: Purpose and Objective
4
• Secure, distributed and
immutable record of
transactions
• Enables safe transaction of
value between two parties
• New transactions aggregated
into block which is added to
previous blocks, hence
‘block-chain’ is linked list of
blocks of transactions.
Content courtesy of Crowdaura

Blockchain Basics
• Distributed Ledger
– Immutable, append-only
database
– Cryptographically
secured
– Distributed, massively
replicated
• Smart Contract
– Self-enforcing terms and
conditions
– Execute administrative
actions automatically
– The code is the contract!
5
Content courtesy of Symbiont.io

Blockchain in Action: Ethereum
6
• Inspired by Bitcoin, Ethereum
is a programmable
blockchain
• Enabling the creation of
decentralized applications
(dapps) using smart
contracts
• Automate processes with
extreme fault tolerance and
zero downtime
Content courtesy of Crowdaura

Who Uses Blockchain?
• Bitcoin – this is the one most
people talk about
– Cryptocurrency through
distributed-ledger technology
– Perhaps the largest application
of blockchain so far
• Fintech/insurtech are
catching on as well
– Insurance has been watching
– Several pilots are in progress
with high-profile re/insurers
worldwide
– Still considered to be in its
infancy
7

Why Do Insurers Need Blockchain?
• Insurance enterprise systems are
designed around the manual
business processes
• Replacing/augmenting them
means replicating paper
workflows digitally (sacrificing
true benefits of digitalization)
• Commercial insurance, in
particular, suffers from the fact
that paper-based workflow logic
still underlies their automation
(Courtesy of Mike Fitzgerald, Senior Analyst, Celent)
8

New Technology, New Processes
Successful digitization of insurance involves replacing
paper-based processes with ones that leverage new
capabilities and deliver higher quality outcomes at
lower costs. Recent advances in digital technologies,
and one technology in particular — blockchain —
offer the potential to fundamentally change the
insurance business paradigm. The ability to add
information which cannot be altered into a single,
shared, immutable, global source promises to reduce
costs, collapse wait times, and increase service levels.
-Mike Fitzgerald, Senior Analyst, Celent
9

Insurer Benefits from Blockchain
10
• Operational efficiency
• Reduced dispute resolution
• Improved transparency
• Reduced latency
• Reliable audit trail
• No reconciliation
• Better cyber security
(Courtesy of Symbiont.io)

What’s a ‘Smart Contract’?
• The contract terms and
conditions become rules in
the blockchain platform
• Third-party data source (the
‘oracle’) indicates when the
conditions of the contract
have been met
• Execution automatic based on
the coded contract terms and
inbound data
Imagine a contract that does all
the work itself. This is it.
11

Example: ILW Contract
• Trigger terms:
– US ANP $20 bn
– Annual
aggregate loss
– $3 bn franchise
– $10 mn in
protection
– Reporting agent:
PCS
12
(Courtesy of Symbiont.io)

Smart Contracts and Cat Swaps
• ILWs (cat swaps and reinsurance) among most
popular areas of exploration
• Simple structure, non-underwritten cover
• Use of a third-party oracle rather than re/insurer
workflow reduces time and admin
• Third-party oracle also removes bias from the
transaction
• Reduced dispute risk as there’s effectively no
claims process (the way there is with traditional
cover)
• Parametrics (like Bosphorous Re) would also fit
into this category
13

But, ILWs Aren’t Enough
• Small market: only $4 bn in
notional, 2/3 of which is the
US market
• Limited growth given current
soft reinsurance market
conditions
• Trading is volatile from year
to year based on retro
market trends
• Ultimately serves only a small
portion of the global $400 bn
prop-cat market, let alone
global primary insurance
14
(Courtesy of InsuranceLinked.com)

Commercial Claim Management
• Indemnity cover obviates need for a third-party
oracle
• However, still plenty of benefits to blockchain in
commercial insurance
• Advantages include:
– Permanent record of all discussions – time-stamped
and tamper-proof
– ‘Single version of the truth’
– Reduced dispute risk
– Reduced cycle time as a result of above
– Lower overheads, lower LAE because of reduced cycle
time
15

Parametric Primary Insurance Covers
• Parametric primary insurance covers
• Already gaining traction for some prop-cat
business in the US
• Primary insurance triggers on event magnitude
rather than paying out based on the insured’s
loss
• Potential examples:
– Earthquake (magnitude, USGS or local sensors)
– Flood (floodwater depth at various locations)
– Terror (fatalities/casualties/hostages, incident/weapon
type, event duration)
16

IoT and Automatic Triggers
• IoT and automatic triggers
– Embedded sensors
– Automatic payment on event magnitude
– Data aggregation for dynamic catastrophe definition
• Sensors serve as the oracle
• Send event threshold/magnitude data to the
blockchain
• Data sent initiates smart contract execution
From sensor to payment, human interaction
becomes entirely unnecessary
17

Questions?

Smart Contracts, Smarter Insurance: Blockhain - Tom Johansmeyer (2016)

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