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COVID-19’s Effect on P&C: Opportunity for Tech?

The outbreak of the novel coronavirus (COVID-19) and the shelter-in-place response has wounded the US economy. Business and consumer-oriented economic indicators show the extent of the damage thus far, but economic data released in spring/summer months are likely to demonstrate further deterioration. The P&C insurance industry has not been immune to the economic fallout. The downturn is likely to strain underwriting profits, and the decline in interest rates and financial markets will undoubtedly impact net investment yields, which will exacerbate the industry-wide profitability efforts. The P&C insurance industry should expect differing impacts dependent on the insurance line. The line by line policy and loss impacts are studied within this article. Going forward, it is anticipated the pandemic response and economic downturn may expedite technological change and adoption, as industry players seek to maximize operational efficiency in a new world.

The Economic Downturn

The emergence of the pandemic has wreaked havoc on consumer activity, business activity and governments. Declines in manufacturing, residential housing, trade, business formation, and retail/food sales have all shown up in April’s economic indicators. These numbers are likely to worsen with May releases.

Figure 1:

Economic Indicators released in April indicated a sharp decline in residential and business activity.

The decline in residential and business activity underscored by worsening economic indicators (shown above) forced businesses to reevaluate their operations. Many have cut costs, including staff. This process has resulted in an unprecedented spike in unemployment claims.

Figure 2:

Unemployment claims spiked in April 2020

The recent spike in unemployment is extremely alarming, and despite efforts by government and the Federal Reserve to provide temporary backstops, the impact is already showing up in lower frequency economic indicators, such as Gross Domestic Product (GDP). In the first quarter of 2020, GDP was estimated to have declined by 4.8%. Interestingly, a significant piece of this decline was a contraction in healthcare. The “flattening of the curve” was a mantra aimed at ensuring protection of the healthcare industry during the global pandemic, but an associated decline in elective procedures has resulted in significant losses for many hospitals.

Figure 3:

While the GDP decline was worse than initial estimates and undoubtedly indicates the start of a severe recession, it came in below the measure hit in Q4 2008 when GDP declined 8.4%. It is expected that the 2020 downturn will worsen significantly when 2nd quarter GDP is released in the summer. Some are estimating a 40% fall in GDP in Q2, hinting at an economic depression. Hopefully, that will be avoided.

Impact on the Overall P&C Insurance Industry

The P&C insurance industry is not insulated from the economic fallout. The impact on business activity is expected to be felt in commercial lines and the effects on residential activity and general consumer activity are expected to show up in personal lines. The effects are expected to impact the P&C combined ratio through changes to premiums, losses and expenses.

A combined ratio above 100 indicates the industry is paying out more money in claims then it is making from policies. Due to effects on policies and losses the industry should expect an increase in the combined ratio. Adding to industry stress, net investment yields are likely to decline as well. The industry typically invests very conservatively, so interest rates are a good measure to track as a proxy. Recently the Federal Reserve responded to the emerging economic crisis by expanding the money supply and reducing the federal funds’ interest rate to near zero (again). The decline in P&C investment yields related to lower interest rates will constrain P&C insurance profitability further. The duration of ZIRP (zero-interest rate policy) will specifically impact areas of insurance with longer time horizons.

Figure 4:

The industry-wide P&C combined ratio is expected to increase while interest rates (and investment yields) fall.

Which Areas (in P&C Insurance) are Expected to Be Most Severely Impacted?

While the magnitude of the impact on the P&C insurance industry combined ratio remains to be seen, the economic decline associated with sheltering in place from COVID-19 is bound to weigh on P&C insurance. There will undoubtedly be changes in the demand for insurance and the new environment will lead to alterations in insurance claims and losses. Down the road, this may also lead to changes in regulation and could even generate new business models.

Given the nature of the pandemic, it is challenging to predict all implications for insurance. A recent survey from PwC, for example, explored some potential areas of concern with finance leaders related to COVID-19 and found the following concerns rose to the top.

Figure 5:

These themes are also relevant for leadership within the P&C insurance sector. The entire insurance value chain — from policies, pricing and distribution; to underwriting and risk management; to claims and servicing; to finance, payments and accounting — will be impacted in some manner. The industry will have to navigate operational pressures as more employees work-from-home, while simultaneously finding ways to optimize profit as general business activity pulls back and the economy contracts. If premiums decline or losses spike, insurers will need to find ways to cut costs. Yet, each line of insurance will experience policy and loss effects differently. Figure 6 analyzes the directional impact to each line of P&C insurance.

Figure 6:

Premiums are likely to contract across a variety of lines of insurance as the economy weighs on new exposures and causes early policy cancellations. General auto and air traffic will decline as more people stay home. The uptick in unemployment (shown in Figure 2) will undoubtedly show up in reduced premiums for personal auto, aircraft and commercial auto. The reduction in in workforce along with movement to new work-from-home environment may also result in businesses cutting workers compensation policies. COVID-19 and associated isolation policies impacted global trade (Figure 1) and business projects, which will reduce policies for various lines like ocean marine and surety. Areas related to housing, like homeowners or mortgage guarantee, may have some short-term stability, but long-term risk as foreclosures spike. Cost cutting, particularly within small business, is expected to constrain property premiums as many businesses consolidate. Finally, medical malpractice may see a reduction in policies particularly if the non-COVID healthcare slowdown (shown in Figure 3) continues and more hospitals cut back on elective procedures and associated expenses.

As shown in Figure 6, claim losses are also expected to vary by line. Reduced business and personal activity is expected to lower losses in a variety of lines, including auto, airlines and ocean marine. Credit, mortgage guarantee and surety losses are expected to increase as the economic downturn causes capital challenges and project cessations. Homeowners may see a slight uptick in losses as more residential activity takes place at home, due to school cancellations and work-from-home policies, thereby increasing risk.

Business interruption coverage, which can be included in property coverage (for example), is an area of question. This coverage indemnifies companies for lost profits for nonexcluded risks, yet outbreaks of disease are generally excluded. Certain policies include coverage for “interruption by communicable disease.” Even with this language included, some policies still exclude contamination due to a pathogenic organism, bacteria, virus or disease. There are a lot of elements to consider with this issue. Therefore, it is likely there will be challenges and litigation related to business interruption.

Why the Pandemic May Be a Catalyst for Tech-Adoption in Insurance

The P&C insurance industry was thrust into a new business environment due to the global pandemic. Within a week a relatively manual industry, which relies heavily on face-to-face interaction, showed an impressive ability to adjust and leverage technology to continue to provide products and services. While some firms within the insurance industry had already made strides in tech-related innovation and automation prior to the pandemic, the industry as a whole has been somewhat reluctant to adopt emerging technologies. On the surface, it may seem unlikely that the efforts over the past few months may have lasting impacts and change tech-adoption rates within the industry. Digging deeper, the pandemic and the associated economic fallout may windup being the key catalyst for widespread tech-adoption within insurance.

Prior to the pandemic the stage for large-scale technological adoption within insurance was already set. While the economic downturn will lower the quantity of available start-ups and InsurTechs, the quality and adoption rates associated with InsurTech may increase. In addition, the count of internal projects for brokers, carriers and reinsurers leveraging new technologies has been rising over the past few years. Industry organizations had already understood the importance of innovation, yet had less reason to trigger production usage. Some forward-looking credit agencies understood the industry-wide hesitancy and have created scores for innovation. AM Best released its innovation score methodology in March, 2020. They explain that these company-specific innovation efforts (or lack thereof) are likely to have a long-term impact on an insurer’s financial strength. Put differently, in order to profit maximize, insurers need to innovate. In this new world, they need to do so now.

While innovation can include elements outside of technology, much of it is directly related to technology. A notable constraint to technological adoption within insurance has been lack of customer adoption. Telematics, for example, has been around for an extended period of time, but never experienced robust demand. It’s possible the pandemic could change this. In an environment where miles driven has collapsed and more customers are now unemployed, Telematics and Usage-Based-Insurance (UBI) may provide angles for auto insurers to maximize retention of policyholders. The cost-benefit for consumers to exchange private information for a reduced rate is likely to be changing as well.

One major challenge with consumer and business-adoption of internet connected devices, like those proposed with UBI, has been data security risk. There are still some concerns, but security is slowly improving and the risk is becoming more manageable. It’s likely that there’s a methodical upturn in IoT usage over the next few years, but any increase in insurance usage will be deliberate focusing on areas where security is tight. Interestingly, the large scale public adoption of IoT-oriented devices and the data streams associated may also present new insurable opportunities, while simultaneously providing insurers with an ability to further improve operational efficiency through automation.

It was shown in Figure 6 that certain insurance lines are expected to experience an increase in losses as the economy flounders. Some of the increase may wind up being attributed to fraud. AI and machine learning systems may help reduce the cost of reviewing potentially fraudulent transactions identified by traditional rule-based systems. An additional benefit of cognitive fraud detection systems is that they can detect fraud patterns that humans may overlook. This can help save insurers money in a challenging economic environment.

In an era where insurers are aiming to maximize policies while reducing expenses, AI may also be able to help. Artificially intelligent systems have been developed to read contracts, assess which areas of potential risk, and even offer suggestions on how to improve the terms of the contract.

Blockchain may be another useful tool as it emerges through the ‘trough of disillusionment’ towards production usage. According to Gartner, Practical Blockchain is a Top 10 Strategic Technology Trend for 2020. Within insurance, The Institutes RiskStream Collaborative has been working with roughly 40 P&C and L&A insurance-related organizations to design use cases for life and annuities, personal lines, commercial lines and reinsurance over the past few years. RiskStream had expected a downturn in industry participation in our working groups and committees due to COVID, yet we have been surprised to witness more participation. This may be another signal that the pandemic and economic downturn is causing industry participants to re-evaluate the need for cost savings through technology.

The timing of involvement in industry-wide initiatives may be also be ideal. RiskStream’s Proof of Insurance and First Notice of Loss solutions described in the video above, have moved through multiple path to adoption steps with members. Therefore, the associated ROI is within reach. Once adopted, it’s likely the path forged within these personal lines areas will allow for easier adoption of use cases being designed/built in other areas, such as commercial lines, reinsurance and life & annuities. RiskStream’s is not alone in demonstrating progress within blockchain. Other industries are also noticing advanced interest in their blockchain initiatives, such as MOBI (in mobility), BiTA (in logistics) and OCC (in energy). Each of these initiatives may also be of interest to insurers.

Whether insurers decide to leverage IoT, AI, blockchain or other forms of technology, there’s little doubt that firms that have made technological adoption progress have more room to withstand the economic downturn’s effects. This article demonstrated that the economic downturn will effect insurance, but also showed each insurance line will be impacted differently. The ROI of technological adoption is dependent on the underlying technology and the specific use case. While use cases for various tech have not necessarily grown since the onset of the pandemic, the overall economic environment has worsened, increasing the need for immediate operational efficiency. Insurers will be required to produce more with less resources. Optimization within the insurance industry, and business overall, will likely be more and more important in a world that is volatile and changing. Careful investment in technology is likely to be a useful resilience tool for insurers in this new, volatile environment.

***Special thanks to RiskStream’s Susan Kearney for offering your business insight and assistance with this project.

References:
https://www.census.gov/economic-indicators/

Time to Retire the Term ‘Insurtech’?

When I founded and edited what became known as a “new economy” magazine in 1997, to explore all the strategic possibilities created by the internet, a friend told me a curious thing.

“You know,” he said, “there were magazines with names like Popular Electricity back in the early 1900s, when it was this great new thing. Then electricity just became part of daily life, and the magazines went away.”

Sure enough, after half a dozen fine years, my magazine, Context, faded away, as did all the similar publications, including Business 2.0 and the Industry Standard, which once were so thick with ads that they looked like phone books.

It may now be time to start retiring the term “insurtech,” too.

It’s not that technology is no longer a key driver for the insurance industry. Far from it. In fact, the pace of innovation has been picking up for years as companies have become more knowledgeable about the possibilities of various technologies, about how to incorporate them and about how to innovate, in general. Now, COVID-19 is making the industry step on the accelerator because so many interactions must happen virtually.

The issue is that technology is now so ubiquitous that it’s time to stop treating it as this new, alien thing. Yes, the many technologies now at the industry’s disposal — blockchain, the various flavors of artificial intelligence, etc. — are wildly complex. But so is the laptop or phone you’re using to read this right now, yet you treat your device as a tool, a simple extension of your hand or your brain. It’s time to start thinking of insurance technology — not insurtech — the same way.

We’re solving business problems, not technology problems, as we innovate within our organizations. We want to have the most efficient operations, the smartest underwriting, the fastest and smoothest claims processes for clients. Technology will play a role almost everywhere, often a key role, but the goal isn’t simply to have the best AI or the coolest blockchain application.

The industry has been migrating toward a more balanced view of technology and innovation. You see that, for instance, as companies try to rethink the customer journey, where the focus is squarely on the customer and where technology facilitates much of what happens, but in the background.

Some technologies will still require great attention, in and of themselves. Something like blockchain, for instance, could provide a competitive advantage if you figure it out before your competitors, or it could be an expensive bust for you, so you need to develop a deep understanding of the technology. But even with something like blockchain, you’re starting with that business problem you’re trying to solve.

I suspect the term “insurtech” will play out rather as “digital strategy” did at the consulting firm that published my magazine.

When the late, great Mel Bergstein founded Diamond Management & Technology Consultants in 1994, he had the then-radical idea that digital technology could drive corporate strategy, rather than just be an afterthought. The firm did a lot to popularize that concept, especially when one of our partners, Chunka Mui, co-wrote a best-seller in 1998, “Unleashing the Killer App,” whose subtitle was “Digital Strategies for Market Dominance.”

The notion of digital strategy stayed popular through 2010 or so, I’d say, and plenty of consulting firms will still sell you one, but every strategy has a digital piece to it these days. Try to imagine a strategy that isn’t digital. So, “digital strategy” has gradually become “strategy.”

Likewise, while a few people still talk about “e-commerce,” it mostly has a simpler name: “commerce.” Amazon was treated as a technology company for the longest time even though it sold books. Now, it’s treated as what it is: a retailer (that’s extraordinarily sophisticated in its use of technology) and a provider of technology services through its AWS cloud business.

“Insurtech” hasn’t been around nearly as long as “digital strategy” or “e-commerce,” and the combination of insurance and technology in innovative ways will only pick up speed from here. But the innovation needs to happen as part of, well, the normal innovation process and not as a sort of excursion into foreign territory. So, I think “insurtech” will soon enough be referred to by a different name: “insurance.”

Blockchain in Insurance: 3 Use Cases

Insurance, being one of the most conservative, centralized and walled industries, is awakening from its slumber and probing new technologies. Its shy yet solid interest in innovations, particularly in blockchain, is powered by customers’ increased distrust in centralized financial services, which has led to high rates of underinsurance. 

Driven by both curiosity and fear, insurance companies seek to hire blockchain developers to help them out. Curiosity comes from blockchain promising to save time and lower transactional costs. At the same time, insurers fear this innovation as it can open up new approaches for cyber-attacks. 

Let’s explore how insurance companies can adopt blockchain technologies safely and cease to lag behind other financial service sectors.  

What is blockchain in insurance?

First things first, let’s define what blockchain is in the context of insurance.

The blockchain technology is based on the distributed ledger principle that eliminates the need for intermediaries. Copies of the shared ledger are stored across multiple users’ locations, providing any endorsed insurance company, agent, broker or underwriter with access to the same source of data updated in real time. All the transactions registered on a blockchain are verified and encrypted, while all the changes to the records are published as additions to the original data. 

The practical application can look like this: With the help of blockchain, medical records can be encrypted and shared between hospitals and insurers (even across borders), thus cutting duplicated and erroneous records, lengthy claim processing, claim denials and excessive checkups.    

How blockchain is implemented in insurance

According to the Accenture Technology Vision 2019 survey, more than 80% of insurance companies claimed they adopted or were planning to adopt the blockchain technology. It’s true: Many blockchain insurance projects are lingering at the proof of concept stage. However, to accelerate adoption, some companies choose to collaborate and form alliances, such as the Blockchain Insurance Industry Initiative (B3i) or the Institutes’ RiskStream Collaborative. 

See also: Blockchain: Seizing the Opportunities 

These trailblazing alliances develop blockchain-based platforms to make the following blockchain use cases possible. 

Fraud and abuse prevention

Fraud costs the insurance industry monstrous amounts of money, mostly because it’s impossible to detect fraudulent activities with regular methods based on the use of publicly available data and private data sources. As a result, the accumulated data is usually fragmented due to legal constraints accompanying personally identifiable information. 

Unfortunately, these gaps in visibility are being compromised by fraudsters. For example, multiple claims can be filed for a single case of care.

When data is stored on a blockchain-based ledger, it’s secured with cryptographic signatures and granular permission settings. It means that all the parties can share data and verify its authenticity without revealing sensitive information. A shared decentralized ledger facilitates historic data consolidation and helps companies spot suspicious patterns, such as:

  • Multiple processing of the same claim    
  • An insurance policy’s ownership manipulation
  • Insurance sold by unlicensed brokers

To attain even higher security, insurance companies can provide customers with encrypted digital ID cards that can’t be faked. 

Boosted transparency and trust

Insurance companies are called walled gardens for a reason. Customers have little chance to see how their data is managed. For example, they will never know that their data is shared with third parties. It’s no wonder that customers grow distrustful of insurance companies, particularly when facing long claim processing times or receiving claim denials—while the cost of premiums is ever-increasing. 

However, when multiple insurance companies choose to contribute data to the same decentralized and shared ledger, it can lead to three big advantages:

  1. Insurance companies can build more complete customer profiles and eliminate duplicate records. As the data in the blockchain ledger is immutable, the insurance companies won’t doubt its authenticity.  
  2. Customers will get visibility into what data their insurers have on them, and how this data is processed. Plus, when blockchain is combined with machine learning and AI, claim processing can be automated, thus accelerating payouts. 
  3. Blockchain helps automatically verify third-party claims or payments made through personal devices. Further on, the insurance company will be able to see all those transactions reflected on the blockchain.

Streamlined claim management

Selling and managing insurance policies is a labor-intensive process. In the context of high competition, insurance companies that stick to slow and paperwork-heavy traditional approaches lose to more digitally savvy competitors. The latter are able to offer lower premiums by automating claim management. 

Some of the processes can be automated by means of smart contracts which are getting popular for property and casualty insurance. When used in combination with connected devices, a smart contract can trigger automatic claim processing when, for example, anti-theft sensors go off under certain pre-programmed conditions. 

However, the truly streamlined insurance management requires increased trust from both insurers and consumers. The best way to reach this balance is to create a blockchain-based ecosystem with a considerable number of high-profile participants. A model illustration is the Bank of China, which has recently partnered with leading insurance companies and launched its own blockchain. Once new records are added to the blockchain, the distributed ledger technology helps update and validate the data against other records in the network, which significantly reduces operating costs, at the same time providing high security for transactions.

The distributed ledger technology also deals with one more factor that slows down claim management—the need for bank transfers. As a rule, customers don’t see payouts in their accounts for weeks. However, when banks and insurers have a single system they trust, the payouts can be processed without considerable delays.

See also: Blockchain, Privacy and Regulation 

Final thoughts

Blockchain is a decisive factor in transforming the insurance industry and helping it break free from outdated traditions. The need for innovation in insurance is critical—customers are craving transparency, speed and cost flexibility. Blockchain is designed to deliver on these desires and meet all the participants’ particular expectations. 

When there’s little to no chance of fraud, people will trust their insurance agents more. When complex policy claims are processed 10x faster, there’s no room for friction. At the same time, when claim processing is automated, insurers have more possibilities to be flexible with pricing. 

What’s more, the covered use cases are just the beginning. With more blockchain-based applications going live and more companies entering into collaborations, the insurance industry can grow its tech ecosystem to create better products for case management, audit and risk modeling.

How Technology Is Changing Warranty

Let’s take a brief trip down memory lane.

In days past, whenever consumers wanted to make a major purchase—say, for a large appliance or the latest electronics—they had to leave the house and visit their local retailer. If they were concerned about the well-being of their new investment, they’d add a warranty plan once their transaction was complete. If something with their new fridge or stereo system went wrong, they’d need to pick up the phone to schedule a service visit.

Things have changed. Let’s take a look at just how much technology is influencing purchasing habits and changing the warranty experience for consumers, retailers and providers.

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Today, when consumers need to make purchases both big and small, they’re often opting to make them online. For big box retailers, incorporating additional warranty protection on their websites to accompany those purchases is no sweat; they’ve got the capability and budget to do so. But what about smaller retailers?

According to a report by CBRE Group, about 30% of e-commerce retail is sold by small and midsize companies. While many of these companies might want to offer online consumers the benefits of product protection like their big box counterparts, integrating third-party warranty protection with a retail e-commerce platform can be cumbersome. But some providers have cracked the code and developed apps that allow smaller retailers to level the playing field and easily establish and manage valuable warranty programs.

Another technology solution being explored is blockchain. For as long as anyone can remember, returns, warranties and service contracts have required proof of purchase. Blockchain capabilities can eliminate that need by decentralizing record-keeping, so all relevant parties can instantly access a digital proof of purchase, as needed. Innovative companies are already jumping on board and using blockchain to improve industry collaboration, increase customer satisfaction, boost efficiency and reduce prices.

Make the Connection

As the Internet of Things grows and consumers replace their obsolete, non-IoT devices, the true benefits of connectivity will continue to be revealed. For example, smart home technology will take the guesswork out of claims. Service providers and technicians will no longer be forced to rely on a customer’s diagnosis of the problem, because devices will accurately relay data about malfunctions or damage in real time.

See also: How Tech Is Eating the Insurance World  

Administrators will be able to better identify issues and potentially help the customer find a resolution via phone or chat, without a service visit. If a service visit is needed, the customer representative can approve repairs and estimate out-of-pocket costs in advance simply by using the data already available.

But before the advantages of this new technology can be enjoyed to their fullest, there are some obstacles to overcome. The complexity of connected devices can be a lot to tackle for many consumers. Without the help of a professional, new device setup and network connections can be time-consuming.

Recognizing the opportunity for increased customer satisfaction, streamlined processes and lower costs, service contract providers are stepping up their game to offer plans that not only cover repair and replacement but tech support, as well. This kind of 360-degree service plan can help simplify the consumer transition to the fully connected home experience.

Go Custom

Thanks to the intimate connection to products and data offered by IoT, the opportunity to customize service contracts and protection programs has never been greater. Driven by constant data collection, warranty analytics can be employed to create extended protection plans that categorize failures, identify customers who are most affected by these failures and key in on potential causes. These “intelligent” plans can help determine and customize proper coverage levels guided by each customer’s risk profile.

The opportunity to apply the data extends beyond the connected home to products on the road. Now with the help of analytics, the failures, causes and costs that affect drivers most can be identified to help create intelligent protection programs for automobiles.

Known as telematics, these systems facilitate the transmission of vehicle diagnostic data. Telematics can record a vehicle’s condition to provide quick, efficient analysis that can isolate an issue before it becomes a real problem. This technology can also simplify next steps by alerting the provider to the issue and directing the vehicle owner to the closest repair shop with relevant parts in inventory. This kind of efficiency can help consumers remedy potentially dangerous and costly situations early on, while also reducing expenses for service contract providers.

See also: Common Error on Going Digital  

While some may long for the old days, the benefits of new technology offer a chance to look on the bright side. For providers, retailers and customers, advancements have changed the warranty protection experience for the better and will continue to do so for years to come.

Blockchain: A Hammer Looking for a Nail?

Netting of subrogation payments, the exchanging of payments between carriers at regular intervals instead of on a claim-by-claim basis, is a concept that has been around since the mid-1990s. It is once again back in the news with the announcement that State Farm is developing its own blockchain solution to net subrogation payments between itself and another unnamed carrier. Some say this is an innovative solution for the use of blockchain for the insurance vertical, but is it really nothing more than a hammer (blockchain) looking for an old nail (payment netting)?

All will agree there is room for vast improvement in reducing friction of the subrogation workflow, including the exchanging of funds. Carriers send thousands of checks to each other on a monthly basis in the settlement of subrogation claims – the same process that has occurred since the beginning of time relative to the subrogation process. It’s expensive, involving the printing of checks, mailing costs and the labor to apply funds by the receiving company. Each payment needs to be broken down and applied in the claims system to the individual lines of coverage for the original claim payment and then balanced out in the accounting platform. In a “netting” scenario, the total value of what two companies owe each other is issued by one payment, but then still has to be reconciled on both an outbound and inbound basis, making sure to reconcile every claim that is affected. Remember, each side of the payment has premium ramifications. Many touchpoints, applications and processing.

No wonder this has been an issue, but why does it still garner so much focus, with the advancement of financial technology and the reduction of check processing fees? Shouldn’t we now be focusing on a more holistic solution for the industry affecting more than just the payment?

In the mid-1990s, banking costs drove the netting conversation as a way to reduce fees, but the industry wasn’t able to come together on how to solve the problem. Competitive pressures, internal constraints and the problem of how to reconcile the carriers’ multiple platforms contributed to the futility of the conversation. Industry organizations even tried to solve the problem but with no success.

9/11 changed forever how the banking industry dealt with checks. The country was brought to a standstill for three days due to air traffic being halted (remember, checks were physically moved between the Federal Reserve branches on a daily basis via planes at that point). One of the outcomes of this national tragedy was the implementation of the Check 21 Act in 2004, allowing the image of the check to have the same “value” as the original check. Financial technology, better known as fintech, was developed to place the imaging process of the check into the hands of the business customer, allowing it to image the payment and send it to the bank. The banking industry gave the insurance carrier a digital scanner so the carrier could do the teller’s job of scanning the payment instead of the bank incurring that cost, but the insurance industry still had to manage the application of funds manually as it did before.

Great move for the banks and yet carriers couldn’t figure out their now 10-year problem of netting even though technology existed to take that scanned copy of the payment and automatically apply it to the claim file via new insurance technology. No changes were required to claim platforms of the paying carrier or how the receiving company had to apply the funds – just a straight automation opportunity with a substantial labor savings. However, the major carriers still pursued the netting solution even though the problems they were originally trying to solve were no longer an issue.

See also: Blockchain: Seizing the Opportunities  

We are now 15 years removed from the introduction of fintech by the banking industry, and the netting conversation remains! Banks allow their business customers to image and deposit their checks through a scanner. Consumers manage their accounts through their mobile devices along with the ability to transfer money to each other through apps such as Venmo or Paypal. Moving money has become extremely inexpensive, with the result for all of us being the reduction in the processing fees. Then why does netting continue to be promoted as a problem that needs to be solved when the costs have dramatically decreased? One does have to wonder.

The industry is working through various use-cases for blockchain, and, yes, you guessed it, the financial transaction of the netting of payments is still being pursued. The original problem of check processing costs is no longer an issue, while the same issues of allocating the information to both claim files remains. Participation remains problematic, but the level of concern increases if a blockchain is being managed by one of your competitors. Who has access to the data? Where is it stored? How can it be used? Does a netting solution created and managed by a carrier create a competitive advantage for that carrier?

If we can get beyond these questions, the bigger issue remains as to why time, money and effort are being used to address a 20-plus-year-old issue that can be handled via existing technologies rather than complicating the process with the additional friction of netting being added to the industry’s expense? Maybe the alternative is to use blockchain to digitally transform the subrogation workflow affecting LAE in dollars rather than cents while also maximizing recoveries.

Our industry will continue to evolve and build on new technologies. Let’s be sure to swing our hammers at nails supporting the future building blocks rather than those 20-year-old rusted out nails.