Blockchain has been talked about and explored in the London Market for a while now so will this technology revolutionise or fizzle out? Having gauged the interest of Blockchain in the London Market and seeing how it has progressed in the last 12 months I provide a view on the direction of travel.
Blockchain as a secure, trusted, distributed ledger promises to provide a secure peer-to-peer platform to allow transfer of ownership of digital assets without needing a central intermediary. This was essential for the electronic currency ‘bitcoin’ and the same mechanism could be used for anything including documents, financial transactions and indeed any information that needs transference (particularly of ownership) between multiple parties in a secure way.
The question asked by many is – “what is the business value of Blockchain in insurance, do we need to do anything with this technology and can we use it for competitive advantage?”
In order to understand this, let us begin by looking at why Blockchain has been valuable in its most successful format the ‘Bitcoin’.
- Bitcoins represents monetary value so we do not want anyone to make additional copies of the ‘coin’ or we would be double counting and creating the opportunity for double spending. So the encryption and the audit chain mechanism circumvents this.
- We need ensure that a bitcoin is not created out of thin air, or it would be like everyone owning a money printing press. The miners and proof of work, ensures this cannot be the case.
- Without a central intermediately such as a bank we need to make sure only one copy of the bitcoin exists and then once spent or transferred everyone knows about this transaction and their records are updated. The distributed ledger ensures this.
In the normal insurance world, we have many things that we would like to track, share and update to other participants in a secure way. We also have a small subset of things that we need to ensure only one owner exists and we want every single participant in the market to be aware of. If we categorise insurance items into the following buckets, it makes the thought process easier to understand.
Contracts, policy documents and other contractual paperwork. We do not really care if multiple copies exist of these, we just want to make sure everyone has the same version (the latest or the agreed), and this becomes more of a version control challenge. Yes we could put this on a distributed ledger however, mechanisms already exist e.g. cloud based document repositories, common file shares, or even local document stores – so there is no real world problem being solved. This information also needs only to be passed between the members who are carrying out the transaction, so it may be the customer, broker and insurer so the value of updating all participants is not required.
We have transactional information such as premiums, claims and other financial payments. There is a lot of value having these on a distributed ledger, but only if the payment itself is linked to an electronic currency. Where this links to a traditional payment system we are still relying on bank account reconciliation to ensure that the transfer has happened. We also have existing restrictions such as exchange rate, settlement periods, credit risk and clearing. Blockchain does not provide much apart from a centralised accounting ledger in this instance.
The last bucket is records maintenance activities such as certificate documents, document of ownership, claims records and events such as losses, and information relating to market participants such as up to date credit and company information.
We can see the value of having a system that allows records to be created and maintained that cannot be changed and available to everyone in a central repository. Blockchain does offer real value as the current solutions are lacking. Currently there are multiple and disparate agencies that hold information and there is a need for all participants to have the same information and be updated close to any changes. Examples of these are transfer of ownership, accident reporting and logging, changes in trading company or participants credit rating changes. These are all information that all market participates need to be aware and need to have the correct information which cannot be tampered.
Going back to the question; Should London Market participants (brokers and insurers) be looking at implementing blockchain platform? The answer is no, not in the current form. It would make more sense for a central platform to exist where participants could carry out transactions.
Lloyd’s itself could provide a platform (a single platform that handles all of its participants brokers, underwriters, cover holders, and other entities) this would be a powerful platform and significantly reduce costs as each participant does not have to have its own financial, records management, reconciliation, encryption and participant tracking systems. This platform would use Blockchain as the underlying technology stack and this will remove many of the current day issues around transferring files and housekeeping activities; yes this does sound like a supercharged Policy Placement Platform (PPL).
An individual Insurer, Broker or Coverholder has less value in in implementing its own blockchain ecosystem unless it wants to deliver a platform that will somehow be then adopted by all its network of participants. E.g. an insurer could conceivably provide a common platform which its cover holders, brokers and third-party uses. However, this would still require exchange with all other participants in the existing way and the value is very diminished. I do not believe this is the direction it will go, although some specialist hubs will appear outside the London Market.
How will this play out? I believe blockchain will be implemented as the underlying technology to some of the existing platforms this will be invisible to the end consumer. We may even get a platform provider that provides the full list of insurance services but with blockchain as its underlying architecture. E.g. Salesforce built on a blockchain infrastructure.
Lloyd’s would be the ideal provider for a new platform into the London Market. As it could spread the costs and mandate its usage across the market. However, with the track record of Lloyd’s it is more conceivable that it would be a third-party or a new player will provide a platform which acts as a common electronic insurance market; participants would then just subscribe to the platform and not have to worry about the systems, security, encryption and other infrastructure.
A very simple way to look at the ideal end state would be a sophisticated Amazon Market Place platform for insurers. This would bring together Brokers, Coverholders, Underwriters, record keepers (such as central marine or aviation tracking) and participant details to aid ‘Know Your Customer’ and sanctions.
This would allow a participants to connect all of the transactions and participants on this platform and make sure these are secure, validated and immutable. As a buyer or a seller of insurance you log on to the platform and conduct your businesses knowing that the information and transactions are fully trusted and the actual technical aspects are taken care of, all the benefits of blockchain are provided under the cover.
I have seen many Blockchain prototypes halt as once the technology has been proven. The lack of having a big group of participants willing to join the echo-system has meant that it has ended as just a pilot. For now at least this is an interesting technology to keep an eye on, it will certainly be more valuable in the finance domain for money based transactions. We may see it being used in an underlying platform rather than a rush to implement by an individual Insurer.
The London Insurance Market 