Tag Archives: reinsurance

New Paradigm for Reinsurance

The global reinsurance industry has been battered by several years of underperformance. It has been hit by natural catastrophe losses, both modeled and unmodeled, social inflation, declining investment returns and diminished reserve releases and is now facing an unprecedented globally systemic loss in COVID-19. Have we now reached the point where the global reinsurance market can morph into a new paradigm, allowing a more responsible and sustainable market to emerge? Or are we seeing a reworking of old approaches that have failed to deliver the sustainable, efficient solutions that primary insurers, policyholders and increasingly society seek?

Moments like this do not come often. Arguably, the last opportunity for a reset was 20 years ago in the aftermath of the 9/11 tragedy. So, what has gone wrong, and how can we build back better?

The harsh fact is that, with a consistent weighted cost of capital in the 7% to 8% range, the global reinsurance industry has not covered its cost of capital for the last six years. A prolonged soft market has led to under-reserving on many long-tail lines, a problem that is being exacerbated by social inflationary pressures. Overreliance on pricing models that have proved unreliable has led to unsustainably low pricing, which eventually requires disruptive correction.

Despite the unsatisfactory performance, capital has continued to flow into the global reinsurance market, most notably in the very significant expansion in insurance-linked securities (ILS) over the last 10 years but also through retained earnings on existing reinsurers, which have been bolstered by investment returns. Without the constraints of capital limitation to control excessive competition, the inevitable result has been underperformance as reinsurers chased top-line growth at the expense of profit.

Fortunately, the reinsurance industry remains well-capitalized, with capital levels above the end of 2018 and only slightly reduced on the capital levels at the end of 2019. Because capital constraint is clearly not going to limit pricing competition, we must look elsewhere for drivers that will help to put discipline and structure around achieving sustainable, adequate returns.

Investment income offers a potential solution. Unlike previous hard markets, when investment rates were much higher, current investment rates remain pitifully low, and are likely to remain so for years because nearly all governments are pursuing fiscal expansion as a result of COVID-19. Most reinsurers’ investment holding periods are four to six years, and they have to face the reality that low investment returns will continue.

Faced with the loss of the investment crutch, reinsurers have no option but to concentrate on improving underwriting results to generate enough margin to reward their capital. With a 7% to 8% cost of capital and return-on-equity (ROE) targets of 9% to 10%, reinsurers now need to run combined ratios in the low 90s, something the industry has not achieved for many years. This requires a back-to-basics underwriting approach to ensure that each unit of risk accepted is appropriately priced within a reinsurer’s overall portfolio. This approach inevitably means rate increases, along with changes to terms and conditions, neither of which will be easy to achieve in a global environment where many policyholders are under significant financial stress.

Reinsurers have a delicate path to navigate, but the strong capital position should let the industry ensure that risk is appropriately differentiated, and that pricing corrections are applied on a case-by-case basis in a sustainable fashion that clients can manage.

See also: 4 Post-COVID-19 Trends for Insurers

More important than addressing the short-term issues is to avoid the mistakes of the past and build a better future. Reinsurers must enhance their value to society and build long-term demand. Here, the COVID-19 situation helps, as it has moved the discussions about uncorrelated tail risk from theory to practice, and with it the demand for reinsurance. At the same time, the increased reliance on underwriting profitability is emphasizing volatility management, where again reinsurance plays a major role. Risks such as cyber and climate change also fall into the uncorrelated tail risk category, and again reinsurers have a pivotal role to play. Finally, there is the enormous opportunity represented by the uninsured economic gap. Finding innovative solutions to help society narrow the gap will lead to a complete reframing of the reinsurance market.

Achieving this will require dedication, long-term vision and the ability to build partnerships with organizations that the reinsurance market has never interacted with before, many in innovative public-private partnerships.

The opportunity to build back a better reinsurance market is clearly before us. The test will be whether reinsurers can develop transparent solutions that bridge the gap between capital that requires reasonable sustainable returns and new risks that threaten society. If the reinsurance industry fails to grasp this opportunity, it will be doomed to suffer the fate of so many, with the current generation repeating the mistakes of predecessors.

You can find this article originally published here.

Blockchain: Golden Opportunity in LatAm

Blockchain technology’s potential for disrupting the re/insurance industry is frequently mentioned, and it’s easy to understand why, given the nature and volume of data that flows between the insured, insurer, broker, reinsurer, service providers and other external stakeholders.

Something that hasn’t been discussed, however, is the extent to which specific markets, and those in Latin America, in particular, could be helped by this technology. That markets across the Latin American region could use blockchain technology to establish a new status as a role model for efficiency and technological development and a desirable place to conduct and attract business appears not to have been recognized.

Approached correctly, blockchain technology represents a golden opportunity to not only introduce real, tangible operating efficiencies into Latin American market practices and operations but also to transform the image of the region’s business environment and discard many of the long-held and damaging misconceptions.

Lack of transparency, lack of data integrity, inefficient and outdated business practices, poor claims data and excessive operating expense are some of the more common complaints of foreign management on the subject of their participation in LatAm markets. While these concerns are certainly not valid across the board, it is difficult to argue that there’s no substance to some of them.

Implementing blockchain technology into market practices could instantly address all of these issues by bringing total transaction transparency, providing consistent processes (vertical and horizontal) and introducing multiple transactional efficiencies, enabling significant time and cost savings.

Putting this in an operational context, during typical high-pressured renewal periods, underwriters would witness considerable reductions in valuable processing time and in the cost of placing their risks by eliminating the rekeying of data and eliminating duplicate tasks for the cedent, broker and reinsurer. The new policy as a “single source of the truth” has considerable benefits for all parties in the chain, not least removing the likelihood of costly future disputes.

As blockchain applications can be designed to process treaties, send notices to all participating parties and process the associated premium and commissions, technical accounting teams can be leaner and more focused on improving transaction efficiency. Payments no longer become stuck or withheld for unreasonably long periods, as all parties can access and follow the payment flow, thus freeing considerable administration time and assisting Treasury needs. Claims teams will see faster processing and verification of claims. Audit teams and compliance staff will enjoy the substantial benefits that transparency brings, especially around the burdensome “know your customer” (KYC) and anti-money laundering (AML) processes. The impact could be significant and enterprisewide.

These benefits could, of course, apply to most re/insurance markets. However, several markets in Latin America have particular characteristics that mean they stand to achieve potentially greater upside benefits and, from a practical perspective, enable easier implementation.

See also: Blockchain in Insurance: 3 Use Cases

First, several ecosystems in Latin America are already familiar with blockchain technology as a result of the wide adoption of crypto currencies and digital assets in the region. As blockchain technology is a key element of crypto currencies, a high level of familiarity and expertise with the technology already exists in the region, which re/insurance industries could leverage. As adoption of crypto currency continues to grow in markets such as Argentina, Colombia and Brazil, in particular, the use of blockchain technology will also grow, increasing the supply of resources with technical blockchain knowhow.

The structure of markets such as Argentina, Brazil, Chile, Colombia and Mexico, lends itself to an easier adoption of blockchain. There are relatively fewer players (than in, say, U.S. markets) operating in more localized markets, which makes intramarket collaboration – which is vital – much easier and quicker to achieve than in larger international markets, which are often more fragmented. In addition, the more relationship-oriented nature of the markets in these countries where there’s a higher degree of trust, long-standing bonds and greater familiarity between players will also induce a greater level of collaboration.

The relatively lower direct cost of labor in Latin American markets has in many cases resulted in unnecessarily high head count in back office functions performing menial, heavily manual tasks such as rekeying of data, repetitive receivables collections procedures and reconciliation work. This has often resulted in bloated expense ratios, less effective processes and additional HR burden. Blockchain will streamline many operational processes, significantly improving efficiency and minimizing headcount.

The regulatory and compliance burdens imposed on businesses in several Latin American markets are substantially greater than in many other international markets. This burden translates to increased expense as well as greater demands on valuable management time. Blockchain would bring efficiencies to the compliance and regulatory aspects of the business through transparent, consistent processing and more streamlined processes. AML and KYC procedures are obvious examples that would see immediate benefits. The potential gains are exponentially greater where the regulatory burden is heavier.

So, the case for blockchain in Latin American re/insurance markets seems pretty clear. The big challenge facing these markets lies in making the transformation and successfully managing the implementation of blockchain technology. Stakeholder collaboration is absolutely fundamental to the success of blockchain in any market. The technology needs to be embraced by multiple market participants, and serious conversations need to take place among the risk takers, the service providers and regulators and national associations before any transformation can begin. No single entity alone can make this happen; influential players that see themselves as leaders need to step up and drive the initiative into their markets.

While blockchain is long-established in technology circles, it is perceived as a UFO in re/insurance circles, too complex to understand and beyond the reach and comprehension of most operational management. It shouldn’t be. There are several solutions and advisers who are accessible and can assist the entire process from preparing feasibility and design to managing implementation. Blockchain is an active and growing sector.

See also: Is Blockchain Ready to Hit the Market?

Largescale adoption of blockchain technology in Europe and the U.S. has been relatively slow to date, which probably means international companies are unlikely to invest the required resources in their Latin American operations, at least until a proof of concept has been established in the traditional markets. The onus may therefore lie with the larger indigenous entities in the region to take the first meaningful step forward and begin the collaboration.

Whoever seizes the initiative and delivers this new world stands to gain not only financial and operational rewards but also recognition in a larger context: true recognition as a market leader in thought leadership and innovation. Opportunities to make such a profound impact on a market do not come around often.

Avoiding the Pitfalls in Catastrophe Claims

Managing catastrophe reinsurance claims is a big challenge for carriers. In particular, dealing with the “hours clause” can be baffling. But taking the best strategy can make a big difference in how much reinsurance a carrier will collect.

As climate change accelerates and the weather becomes more violent, catastrophe reinsurance has become increasingly complex, making modern technology a necessity for carriers to get the most value from their premiums. Ceded reinsurance has been one of the industry’s most technology-resistant areas, but that has begun to change over the last several years.

Tracking reinsurance claims in general is challenging; managing catastrophe claims is especially challenging. One problem is claims leakage. This occurs when the insurer fails to file a claim with the reinsurer because no one at the company realizes that a claim should have been filed. That might seem unlikely, but it’s not an uncommon occurrence.

Unfortunately, many insurers still use a spreadsheet to track policies and claims instead of a dedicated ceded system. Insurers that use spreadsheets must rely on staff combing through multiple spreadsheets to identify claims. Legitimate claims can fall between the cracks.

See also: Reinsurance: Dying… or in a Golden Age?  

Dealing with the “hours clause” in catastrophe claims is another complex challenge. With catastrophe reinsurance, defining the event, or catastrophe, is crucial. Under the “hours clause,” the duration of any one loss occurrence is usually limited to 72 hours. If a catastrophe’s duration exceeds the hours limit, the insurer may divide the catastrophe into two or more loss occurrences.

Consider a catastrophe that lasts 290 hours. Because it’s possible to have up to four loss occurrences for such a catastrophe, grouping individual claims becomes a complex exercise. For instance, you can have four 72-hour losses that start at hour 1 and omit all claims for hours 289 and 290. Or you can start with hour 2 and skip claims for hour 1 and hour 290. That only hints at the complexity of the challenge facing insurance companies needing to optimize reinsurance recoverables. A ceded reinsurance system with an algorithm designed to optimize for such claims can remove much of the guesswork.

How can you achieve the best solution? Reinsurance software is not a core system, but its usefulness largely depends on how tightly it is integrated with core policy administration (PAS) and claims systems. To ensure that, you’ll need to make a preliminary study before installing the software.

The study should include a detailed description of the company’s reinsurance management processes and identify potential gaps between those processes and the proposed solution. The study should also identify the contracts and financial data needed, establish interface specifications, define the data-conversion and migration strategy and gather all reporting requirements.

See also: Catastrophe Bonds: Crucial Liquidity  

Besides connecting the data in the upstream PAS to the reinsurance management system, you will need to integrate ceded reinsurance data to other applications such as the general ledger, the claims system and business-intelligence tools.

These are important details. But always remember the ultimate goal: giving the people who manage reinsurance the technology they need to do the job efficiently and effectively, especially when managing high-stakes catastrophe claims.

Heading Toward a Data Disaster

On July 6, 1988, the Piper Alpha oil platform exploded. 167 people died. Much of the insurance was with what became known as the London Market Excess of Loss (LMX) Spiral, a tightly knit and badly managed web of insurance policies. Losses cascaded up and around the market. The same insurers were hit again and again. After 14 years, all claims had finally been settled. The cost exceeded $16 billion, more than 10 times the initial estimate.

The late 1980s were a bad time to be in insurance. Piper Alpha added to losses hitting the market from asbestos, storms in Europe and an earthquake in San Francisco. During this time, over 34,000 underwriters and Lloyd’s names paid out between £100,000 and £5 million. Many were ruined.

Never the same again

In the last 30 years, regulation has tightened, and analytics have improved significantly. Since 1970, 19 of the largest 20 catastrophes were caused by natural hazards. Only one, the World Trade Center attack in 2001, was man-made. No insurance companies failed as a result of any of these events. Earnings may have been depressed and capital taken a hit, but reinsurance protections behaved as expected.

But this recent ability to absorb the losses from physically destructive events doesn’t mean that catastrophes will never again be potentially fatal for insurers. New threats are emerging. The modeling tools of the last couple of decades are no longer sufficient.

Lumpy losses

Insurance losses are not evenly distributed across the market. Every year, one or more companies still suffer losses out of all proportion to their market share. They experience a “private catastrophe.” The company may survive, but the leaders of the business frequently experience unexpected and unwanted career changes.

See also: Data Prefill: Now You See It, Now You Don’t  

In the 1980s, companies suffered massive losses because the insurance market failed to appreciate the increasing connectivity of its own exposures and lacked the data and the tools to track this growing risk. Today, all companies have the ability to control their exposures to loss from the physical assets they insure. Managing the impact of losses to intangible assets is much harder.

A new class of modelers

The ability to analyze and manage natural catastrophe risk led to the emergence of a handful of successful natural catastrophe modeling companies over the last 20 years. A similar opportunity now exists for a new class of companies to emerge that can build the models to assess the new “man-made” risks.

Risk exposure is increasingly moving toward the intangible values. According to CB Insights, only 20% of the value of the S&P 500 companies today is made up of physical assets. It was 80% 40 years ago. The non-physical assets are more ephemeral, such as reputation, supply networks, IP and cyber.

Major improvements in safety procedures, risk assessment and the awareness of the destructive potential of insurance spirals makes a repeat of the type of loss seen after Piper Alpha extremely unlikely. The next major catastrophic losses for the insurance market are unlikely to be physical. They will occur because of a lack of understanding of the full reach, and contagion, of intangible losses.

The most successful new analytic companies of the next two decades will include those that are key to helping insurers measure and manage their own exposures to these new classes of risk.

The big data deception

Vast amounts of data are becoming available to insurers. Both free open data and tightly held, transactional data. Smart use of data is expected to radically change how insurers operate and create opportunities for new entrants into the market. Thousands of companies have already emerged in the last few years offering products to help insurers make better decisions about risk selection, price more accurately, service clients better, settle claims faster and reduce fraud.

But too much data, poorly managed, blurs critical signals. It increases the risk of loss. In less than 20 years, the industry has moved from being blinded by lack of data to being dazzled by the glare of too much.

The introduction of data governance processes and compliance officers became widespread in banks after the 2008 credit crunch. Most major insurance companies have risk committees and all are required to maintain a risk register. Yet ensuring that data management processes are of the highest quality is not always a board-level priority.

Looking at the new companies attracting attention and funding, very few appear to be offering solutions to help insurers solve this problem. Some, such as CyberCube, offer specific solutions to manage exposure to cyber risk across a portfolio. Others, such as Atticus DQPro, are quietly deploying tools across London and the U.S. to help insurers keep on top of their own evolving risks. Providing excellent data compliance and management solutions may not be as attention-grabbing as artificial intelligence or blockchain, but they offer a higher probability of being successful with innovations in an otherwise crowded space.

Past performance is no guide to the future, but, as Mark Twain noted, even if history doesn’t repeat itself, it often rhymes. Piper Alpha wasn’t the only nasty surprise in the last 30 years. Many events had a disproportional impact on one or more companies. The signs of impending disaster may have been blurred, but not invisible. Some companies suffered more than others. Jobs were lost. Each event spawned new regulation. But these events also created opportunities to build companies and products to prevent a future repeat. Looking for a problem to solve? Read on.

1. Enron Collapse (2001)

Enron, one of the most powerful and largest companies in the world, collapsed once shareholders realized the company’s success had been dramatically (and fraudulently) overstated. Insurers lost $3.5 billion from collapsed securities and insurance claims. Chubb and Swiss Re each reported losses of over $700 million. Jeff Skilling, CEO, spent 14 years in prison. One of the reasons for poor internal controls was that bonuses for the risk management team were influenced by appraisals from the people they were meant to be policing.

2. Hurricane Katrina and the Floating Casinos (2005)

At $83 billion, Hurricane Katrina is still the largest insured loss ever. No one anticipated the scale of the storm surge, the failure of the levies and the subsequent flooding. There were a lot of surprises. One of the large contributors to loss, from property damage and business interruption, were the floating casinos, ripped from their moorings and torn apart. Many underwriters had assumed the casinos were land-based, unaware that Mississippi’s 1990 law legalizing casinos had required all gambling to take place offshore.

3. Thai Flood Losses (2011)

After heavy rainfall lasting from June to October 2011, seven major industrial zones in Thailand were flooded to depths of up to 3 meters. The resulting insurance loss is the 13th-largest global insured loss ever ($16 billion in today’s value). Before 2011, many insurers didn’t record exposures in Thailand because the country was never considered a catastrophe-prone area. Data on the location and value of the large facilities of global manufacturers wasn’t offered or requested. The first time insurers realized that so many of their clients had facilities so close together was when the claims started coming in. French reinsurer CCR, set up primarily to reinsure French insurers, was hit with 10% of the total losses. Munich Re, along with Swiss Re, paid claims in excess of $500 million and called the floods a “wake-up call.”

See also: The Problems With Blockchain, Big Data  

4. Tianjin Explosion (2015)

With an insured loss of $3.5 billion, the explosions at the Tianjin port in China are the largest man-made insurance loss in Asia. The property, infrastructure, marine, motor vehicle and injury claims hit many insurers. Zurich alone suffered close to $300 million in losses, well in excess of its market share. The company admitted later that the accumulation was not detected because different information systems did not pick up exposures that crossed multiple lines of business. Martin Senn, the CEO, left shortly afterward.

5. Financial Conduct Authority Fines (2017 and onward)

Insurers now also face the risk of being fined by regulators and not just from GDPR-related issues. FCA, the U.K. regulator, levied fines of £230 million in 2017. Liberty Mutual Insurance was charged £5 million (failure in claims handling by a third party) and broker Blue Fin £4 million (not reporting a conflict of interest). Deutsche Bank received the largest fine of £163 million for failing to impose adequate anti-money laundering processes in the U.K., topped up later by a further fine of $425 million from the New York Department of Financial Services.

Looking ahead

“We’re more fooled by noise than ever before,” Nicholas Taleb writes in his book Antifragile.

We will see more data disasters and career-limiting catastrophes in the next 20 years. Figuring out how to keep insurers one step ahead looks like a great opportunity for anyone looking to stand out from the crowd in 2019.

Will Blockchain End Up Like 3DTV?

When technology is baked into a device, we rarely give it much thought. We buy a smartphone for its utility – not its operating system. Sometimes a new technology dramatically changes how everyone does things; the internet is a good example. Some plausibly great innovations, such as 3D television, just never gain traction. Which of these outcomes will blockchain have?

Recently, blockchain has emerged as a technology that will potentially transform industries in a way similar to what the Internet did a couple of decades ago. Still a nascent technology, its many uses have not yet been discovered or explored.

Most people know a little about blockchain:

    • It lets multiple parties agree on a common record of data and control who has access to it.
    • Its platform makes cryptocurrencies like bitcoin possible.
    • Movement of cryptocurrency verified by blockchain allows peer-to-peer cash transfers without involving banks.
    • Blockchain is a permanent, auditable record, so any tampering with it is obvious.

Some people think blockchain will transform security in financial services and fundamentally reshape how we deal with and trust complex transactions, though this could be a response to hype or a fear of missing out. Many other people ask why and how they should use blockchain.

On the face of it, using a shared (or distributed) ledger to process multiple transactions doesn’t seem so revolutionary. Blockchain is essentially a recordkeeping system. Perhaps its association with cryptocurrency – such as bitcoin – lends it a darker, more enigmatic edge than the software traditionally used for processing multiple transactions. One way or another, insurers face pressure to update antique systems with new ones that can compete with the demands of a digital world, and that means incorporating blockchain technology.

A distributed ledger of transactions

A blockchain can be seen as an ever-growing list of data records, or blocks, that can be easily verified because each block is linked to the previous one, forming a chain. This chain of transactions is stored on a network of computers. For a record to be added to the chain, it typically needs to be validated by a majority of the computers in the network. Importantly, no single entity runs the network or stores the data. Blockchain technology may be used in any form of asset registry, inventory and exchange. This includes transactions of finance, money, physical property and intangible assets, including health information.

Because blockchain networks consist of thousands of computers, they make any effort to add invalid records extremely difficult. Every transaction is secured using a random cryptographic hash, a digital fingerprint that prevents its being misused. Every participant has a complete history of the transactions, helping reduce the chance of transactions being corrupted. Simply put, a blockchain is a resilient, tamper-proof and decentralized store of transactions.

Complex processing and automation with smart contracts

Blockchain ecosystems enable a large number of organizations to join as peers to offer services, data or transactions that serve specific customers or complex transaction workflows transparently. These ecosystems can automatically process and settle transactions via smart contracts that encapsulate the logic for the terms and triggers that enable a transaction.

Smart contracts are created on the blockchain and are immutably recorded on the network to execute transactions based on the software-encoded logic. Transparency through workflows recorded on the blockchain facilitate auditing. Peers and partners within a blockchain ecosystem independently control their business models and the economics without the need to use intermediaries.

Self-executing smart contracts can be used to automate insurance policies, with the potential to reduce friction and fraud at claim stage. A policy could be coded to pay when the conditions are undeniably reached and decentralized data feeds verify that the event has certainly occurred. The blockchain offers enhanced transparency and measurable risk to this scenario.

Parametric insurance, which operates through smart contracts with triggers that are based on measurable events, can facilitate immediate payments while decreasing the administrative efforts and time. Effectively, the decision to pay a claim is taken out of the insurer’s hands. Other possible models are completely technology-based without the need for an actual insurance company. The decentralized blockchain model lends itself well to crowd-sourced types of insurance where premiums and claims are managed with smart contracts.

See also: Blockchain’s Future in Insurance  

Blockchain-based insurance

New insurers using blockchain are emerging and offering increased transparency and faster claims resolution. Here are some examples:

    • Peer-to-peer property and casualty insurer Lemonade uses an algorithm to pay claims when conditions in blockchain-based smart contracts are met.
    • Start-up Teambrella also leverages blockchain in a peer-to-peer concept that allows insured members to vote on claims and then settles amounts with bitcoin.
    • Dynamis provides unemployment insurance on a blockchain-based smart contract platform.
    • Travel delay insurer insurETH automatically pays claims when delays are detected and verified in a blockchain data ledger.
    • Etherisc is another new company building decentralized insurance applications on blockchain that can pay valid claims autonomously.

Traditional insurance companies, such as AXA and Generali, have also begun to invest in blockchain applications. Allianz has announced the successful pilot of a blockchain-based smart contract solution to simplify annual renewals, premium payments and claims submission and settlement.

Blockchain has the potential to improve premium, claim and policy processing among multiple parties. For example, in the last year the consultancy EY and data security firm Guardtime announced a blockchain platform to transact marine insurance. This platform pulls together the numerous transactional actions required within a highly complex global trade made up of shipping companies, brokers, insurers and other suppliers.

A consortium of insurers and reinsurers, the Blockchain Insurance Industry Initiative (B3i), has piloted distributed ledger technology to develop standards and procedures for risk transfer that are cross-market compatible. Whether or not the outcome is adopted industry-wide, it seems important for digital solutions to be created with this transparency and inclusiveness in mind.

There is clear potential for blockchain in reinsurance where large amounts of data are moved between reinsurers, brokers and clients, requiring multiple data entry and individual reconciliation. Evaluating alternative ways of conducting business is one reason for the collaboration of Gen Re with iXledger, which can explore ideas while remaining independent.

Handling of medical data and other private or sensitive information

Individuals will generate increasing amounts of personal data, actively and passively, from using phones and Internet of Things (IoT) devices, and processing digital healthcare solutions. Increasingly, consumers will want control of this scattered mass of digital data and share it with whomever they choose in exchange for services. This move aligns perfectly with the concept of a “personal data economy.” Think of information as currency and think about using blockchain to secure private data and reveal it in a secure and trusted manner to selected parties, in exchange for something.

Electronic health records are now common. Several countries use blockchain to secure patient data held digitally. This helps counter legitimate concerns about how sensitive personal data can be kept secure from theft or cyber-attack. Code representing each digital entry to the patient record is added to the blockchain, validated and time-stamped. A consortium of insurers in India is using blockchain to cut the costs of medical tests and evaluations, and to ensure the data collected is kept secure, along with other benefits including identification of potential claims fraud.

Looking to leverage the data economy, companies may employ innovative insurance propositions to engage people. Because the propositions will rely on shared data, people may be put off, fearing a loss of control over their personal information. While this fear poses a huge challenge for an industry seeking to improve its reputation for trust, blockchain technology may help insurers to reassure customers the digital data they share with them is safe.

Verification of documents

Verification of the existence and purpose documents in banks and insurance companies relies on storage, retrieval and access to data. A blockchain simplifies this process with its open ledger, cryptographic hash keys and date-stamped transactions. Actual hard copies of documents are not stored; instead, the hash represents the exact content in a form of scrambled letters and numbers. A change in a document will be exposed because it will not match the encoded one. The effect is an immutability that proves the status of the data at an exact moment and beyond doubt.

Blockchain technology is a “trustless” system because nobody has to trust anybody else for the system to function; the network of users acts together to vouch for the accuracy of the record. Examples of blockchain protecting patient records demonstrate its potential to implement other trusted and secure transactions with less bureaucracy.

There are other opportunities for insurers to move to a digitized paradigm and catalyze efficiency gains; blockchain need not be reserved for cross-industry platforms, and it’s not only useful in multiparty markets with high transaction volumes and significant levels of reconciliation; smaller-scale solutions can bring benefits, too.

Features that ensure privacy and data security

Beyond driving efficiencies, blockchain employs agreed standards for data care, which reduce the vulnerability of data that arises with the mass of sensitive data that digital connectivity creates. Other features that enhance privacy and data security include the contract process: Transactions are not directly associated with the individual, and personal information is not stored in a centralized database vulnerable to cyber-attack. Insurance companies, as well as technology companies, are accountable to their users for the security of their devices, services and software, and hackers are less likely to target enterprises with strong security.

Multiple participants and the removal of a central authority

Transparency, audit-ability and speed are standard requirements for any organization to successfully compete and transact in an increasingly complex global economy. Data is a valuable catalyst to that process and is complemented by blockchain’s ability to organize, access and transact efficiently and compliantly.

Trusted transactions require access to valuable data, and blockchain facilitates efficient access across multiple organizations. The economics for data usage will drive new business models fueled by micropayments, which will require efficiencies to scale. Business models based on data aggregation by third parties in centralized repositories with total control and limited transparency will be replaced by distributed blockchain-enabled data exchanges where data providers are peers within the ecosystem.

Decentralized peer organizations can use the blockchain for permission access, and for facilitating payments, to ensure total control of their economic models, without having a centralized authority. Data access and transactions are controlled directly by each member of the ecosystem, with complete transparency and immediate compensation.

Token economies

Ecosystems supporting peer organizations that transact or share data will require an effective mechanism for micropayments. These business models require efficiency, with less overhead than traditional account payable and account receivable workflows.

Event triggers, cryptlets that enable secure communication between blockchain, and external verification sources (oracles) will execute based on predetermined criteria, and token payments will be made simultaneously. Counterparty agreements may initially define the relationships between parties on the network, but payments are executed within the smart contract transactions.

See also: How Insurance and Blockchain Fit  

The elimination of a time delay in payments acts as a stimulant for economies; tokens earned can immediately be spent, increasing the speed at which organizations will earn and spend. Traditional delays and fees that occur throughout accounting workflows and through intermediary banks that process payments can be eliminated.

Cross-border processing

Currently, global payments involving foreign exchange introduce complexities in addition to time delays. Economic indicators and political events dramatically affect the exchange rates and profitability of transactions. Cross-border payments require access to the required currencies by intermediary banks, which can cause additional delays beyond the internal accounting workflows.

With blockchain technology, using a token-enabled economic layer simplifies the payments to support micropayment efficiencies. Participants on the blockchain network will be able to efficiently use the preferred fiat currencies to acquire or sell tokens without using intermediaries, banks or currencies.

Merging blockchain and data

Today, there are more connected IoT devices than there are people on the planet, and the data generated is growing at an exponential rate. Various sources have predicted that the number of connected devices will grow to more than 70 billion by 2025; the numbers are almost irrelevant.

IoT devices are used in homes, transportation, communities, urban planning, environment, consumer packaged goods, services and soon in human bodies. A number of insurance companies use these devices to assess driver habits and usage. Autonomous cars and changing ownership and usage models are creating a generation of insurance products that can be facilitated through IoT-collected data. Home devices can detect leaks, theft and fire damage – capabilities that reduce risk. Shipping companies use the IoT for fuel and cargo management, which offers operating efficiencies, transparency and loss prevention.

Merging the mass of IoT data with the blockchain is not without challenges, but this combination can provide a completely new way of creating an insurance model that is far more efficient and faster, and where data flows directly from policyholders to the insurer.


Interest in the trinity of bitcoin, blockchain and distributed ledger technology has significant momentum. However, the technology is not magic or a panacea for every corporate woe. It has disadvantages and limitations, and there are situations where it would even be the wrong solution. There is enough about it, though, to merit continued closer investigation – the many emerging cases of its application bear testament to that – but in place of hype we still need answers.