Insureblocks

It is widely recognised that there is a growing trust deficit in our societies’ institutions, particularly in insurance. This isn’t confined solely to the question of claims on whether or not an insurance company will pay out or whether the insured is trying to defraud the insurance company. To help guide us through those issues and explain how blockchain can help restore trust we were privileged to have Dante Disparte Founder and CEO of Risk Cooperative, live from Washington DC on our show.

 

2 Minute Definition of Blockchain

If the internet created a world of low friction communication, blockchain is creating a world of low friction transfer. How it works is by storing and decentralising information on anything from transactions to supply chain interactions. Blockchain is a way of scaling trust without having to have a centralised authority and providing transparency with high levels of confidence in those types of exchanges.

 

The Blockchain Journey

Through a friend and colleague, Dr. Tomicah Tillemann, who runs the Bretton Woods II initiative, Dante was invited to the first ever global blockchain business council event during the annual Berkshire Hathaway shareholders meeting in Omaha. That one meeting led him to become an early mover in the insurance and blockchain community. That evolved into going to Nectar Island for the Third Blockchain Summit, hosted by Sir Richard Branson and BitFury, and most recently to Davos where Dante saw that blockchain was moving out of beta. It is important to recognise the importance of bitcoin and other cryptocurrencies in pushing blockchain out of beta on the world stage, through international corporation between individuals without central institutions.

 

Insurance, the very first blockchain sector?

When you look back at the history of insurance you quickly realise that it hinges on the concept of upmost good faith and mutualisation. The Lloyd’s market works by syndicating risk and syndicating trust. That engine works right now but what blockchain provides us with, is the opportunity to enhance this engine of syndication and trust onto a massively scalable platform. In it you can code in the behaviours, the conduct, the trust and you can remove friction, opacity, asymmetry, and agency issues that weigh down our industry. Because of those reasons Insurance can be the winners of that digital transformation.

 

Declining trust, a blockchain opportunity?

What underpins a currency, an insurance policy, or democracy is the expectation, in a binary manner, that if I voted for you it is counted, if a have a dollar bill it has a value, and in the insurance example that if I have a, a million dollar life insurance interest for my beneficiaries it is paid out when I pass away. This is critical because the user isn’t around to use it and there is no way of enforcing that trust in an environment that isn’t transparent where there are huge asymmetries of information.

The trust deficit is one of the biggest market drivers as to why blockchain is coming out of market beta. You see it everywhere, from where it is measured in the Edeleman Trust Barometer which shows a mark decline in trust in public and private institutions. You can see this in our streets and in our ballot boxes in some really profound ways.

R3 – the blockchain banking consortium

For this 6th episode we are going to move a little away from insurance by visiting R3 – the blockchain banking consortium, to hear about their blockchain journey. For this episode I was privileged to have Ryann Rugg, Head of North America at R3, chat to me straight from New York. Ryan is spearheading North American Business Development and Insurance for R3, focused on building and empowering blockchain solution for her clients.

 

2 minute definition of blockchain

For Ryan, there is no formal agreed definition which what makes it difficult to define in 2 minutes. In its most simplest form, blockchain is about getting to reach consensus on a replicated shared database across multiple sites / entities / institutions with no central institution. To be able to bring untrusted entities within a trusted environment.

The difference between DLT (distributed digital ledger) and blockchain. Blockchain is a data structure which is a form of DLT and it is comprised of immutable digitally recorded data called blocks.  A blockchain is a way of implementing a DLT. But not all DLT are blockchains.

 

What is R3?

September 2015, a group of nine banks got together with the founders of R3 as they were spending hundreds of millions of dollars on building PoCs (proof of concepts). They realised that it was an emerging technology and they wanted to mutualise the resources. One of the first projects they started working on was project Genesis who aim was to test out all the different blockchains out there such as Ethereum and Hyperledger Fabric to name a few, to see which one would fit for financial institutions.

As none were fit for purpose from a scalability and security standpoint they decided to build their own blockchain, called Corda, from the ground up by their members for their members. Since those days R3 has rapidly grown from the original nine banks to now over 200 banks, financial institutions, regulations and trade associations.

 

The R3's secret sauce… being a start-up!

Being to fail fast is key. They have run 100-150 use cases and PoCs. Several of them were just PoCs for their members to learn from. They use a lot of agile development, with most projects running for 6 – 12 weeks. At the end of the PoC it is determined if it goes into production and what resources are required to enable that. If it is not put into production then the learnings are mutualised, put into white papers and shared within the ecosystem as to the reason why this PoC wasn’t put into production.

Close to 85% of the PoC’s code is open sourced to its members to help accelerate its members understanding and developments with blockchain.

Additionally, R3 partners with numerous startups including ChainThat, to help accelerate R3’s growth by building apps on top of R3’s platform. For this year, R3 expect to have five apps onto their platform.

 

Working with Acord

A lot of the pain points that insurers are facing are very similar to the ones of  banks in terms of identity, KYC (know your customer), AML (anti-money laundering), reference data issues, trade life cycle and codifying contracts. R3 quick realised that for them to work alongside the insurance industry on a blockchain they needed a set of standard. So R3 partnered with Acord to launch the insurance industry centre of excellence for DLT in April 2017. Acord was a way to accelerate working with insureds and optimise the messaging and reconciliation for insureds onto blockchain.

In addition to insurance, R3 is interacting with other industries such as supply chai...

Legal & regulatory framework of blockchain & smart contracts

Over the last few weeks I’ve often been asked questions regarding legal or regulatory issues regarding smart contracts and blockchain. To help me answer these questions I am priviledged to have had the participation of Nick Pester from Capital Law and Lee Bacon from Clyde&Co for this 5th episode on Insureblocks.

 

2 minute definition of blockchain

Lee – blockchain is a form of distributed ledger, built on encryption, which allows each person or entity to have access to the same information at the same time and allows the transfer of information and possible assets between the participants.

Nick tackled this challenge by using an example to illustrate what is blockchain. For example, if you were to share an excel spreadsheet between ten different participants you often will end up with multiple copies of the same spreadsheet which may lead to errors in terms of reconciliation. With blockchain that spreadsheet is automatically updated, reconciled, append only, with each append validated by the participants of the system. This leads to all the parties agreeing to a single source of truth.

 

Smart contracts – legal standpoint

For Nick, smart contracts on a blockchain introduce efficiencies and are less time consuming for all parties in the contractual process. For example, in property purchases, smart contracts introduce a set of agreed parameters between the parties for payment or transfer of value to be made when certain triggers are activated.

Lee sees smart contracts as nothing more than automating, by the way of code, either in part or in full the traditional written contract.

With the immutability and irreversibility of the blockchain how do we address the issue of a wrong trigger that the parties want to reverse?

* Live with the fact that you can’t

* A few clients introduce in smart contracts a pause mechanism that allows the two parties to reflect before something is automated. That seems to defeat some of the purposes of smart contracts and automation

* Understand that smart contracts are an automation mechanism and if something goes wrong due to bad code for example that you have an agreed mechanism to who is responsible for that and how to make the necessary changes

In last week’s episode, Smart Contracts 101, Olivier Rikken spoke also spoke about smart contracts having an auto destruct button when something goes wrong or ultimately having the option of going offline and take this matter to the courts.

Nick mentioned a fascinating quote that up to £80 billions of premiums are locked up in contract settlement disputes due to reconciliation issues. Smart contracts on the blockchain can help reduce those disputes through auto pay out of commissions to multiple parties.

 

Regulatory issues for smart contracts & blockchain

FCA (Financial Conduct Authority), the UK’s regulator has adopted a technology neutral position and hasn’t adopted any special kind of rules applying to DLT (distributed ledger technology) technology whether for a public or private ledger.

Smart contracts 101

In this exciting episode I was very pleased to conduct my first remote podcast with Olivier Rikken, Director of Blockchain and Smart Contracts at Axveco, in Holland. Olivier has been working in this space for the last few years and will give us an introduction to smart contracts.

 

2 minute definition of blockchain

Blockchain in its purest form is a shared database where everyone can read and write on it. Where the integrity of its content is always guarded through cryptography thus removing the need for trusted third parties.

 

The blockchain journey

Olivier’s journey to blockchain started a few years ago when he was working on a concept for a peer to peer insurance company. Through the course of that work he wrote a white paper that illustrated that you could build an insurance company based on blockchain and smart contracts. He presented that white paper to the Dutch National Bank and authority for the financial markets. What intrigued the regulators was his point that technically speaking that insurance company wouldn’t need to adhere to solvency 2 regulation as there was no financial risk of not paying out to the customers in the case of a valid claim. This is possible thanks to blockchain and smart contracts. The regulators were quite interested in this idea as they believed this could be quite disruptive.

Around the same time Olivier was involved in the foundation of the predecessor of the Dutch Blockchain Collation a public / private partnership in the Netherlands set up to ensure that the Netherlands is the front runner in the field of blockchain in the world. However as there was a fair amount of confusion around what are smart contracts between its members who had either a technical or legal background, Olivier created a smart contract workgroup. Over the course of 18 months that workgroup composed of 20 organisations researched the legality of smart contracts and their future knowledge needs and presented that report in December 2017. You can download the report in English here: Smart Contracts – as a specific application of blockchain technology.

 

2 minute definition of smart contracts

Blockchain smart contracts in their most simplistic form are accounts that hold a piece of logic (a deterministic computer program) that we can deploy on a blockchain. That deterministic computer program, or code, sits on the blockchain waiting for a message to come in. When that message comes in, the code determines what output to produce. Smart contracts can have a legal meaning but doesn’t necessarily need to have one. They aren’t particularly smart as they are only reactive as they will only do what they are programmed to do. So the term “smart’ is poorly chosen.

 

Can smart contracts be legally binding?

Olivier described how he would often find himself in situations where you had lawyers on one side and developers on the other all using the words “smart contracts” but each with a completely different view on what they actually were. The mix-up really came down to language. Once a common language was agreed between the two parties it was recognised that most smart contracts weren’t legally binding but in some circumstances they could. So an analysis was done of the most common legal agreement forms in the Netherlands to determine whether or not can they be replaced by a blockchain smart contract. The answer was in most of the cases given the right circumstances the code can be the legally binding agreement.

The reason that smart contracts can be legally binding in its forms itself is that the Du...

Blockchain in the London Market

For this 3rd episode I had the pleasure of chatting to Steve Webb, Partner at PWC and UK Financial Services lead for blockchain. Steve has been leading PWC's financial service practice around blockchain for over two and a half years now. In this episode we explore some of the work Steve has done with the London Market Target Operating Model (TOM) and some of the other blockchain work PWC has done in the insurance space.

 

2 minute definition of blockchain

Essentially at its heart blockchain is a mechanism for distributing data amongst multiple parties and where all parties have their own copy of the data and can see the same information. Updates to the data are managed through cryptographic computer driven consensus between computers on the network rather than through any individual parties acting as a central authority for managing and updating the data. In addition, it has elements of audit history, so you can see all of the updates that have happened on the chain. It works through peer-to-peer networking.

 

The blockchain journey

Having done had a career in financial services, an industry mired in inefficiency for information transfer, it is easy to see that any service applications whether in banking or in insurance has to contend with silos of information. They send each other messages either electronically or through some other imperfect form to achieve an update and reconcile each other at enormous costs due to their inefficiencies. (eg. paper base for the insurance industry). For Steve, blockchain provides an extremely elegant solution to a problem which he has had to contend throughout most of his career.

PWC did a piece of work in 2017 that estimated the savings from administrative costs reduction for the global reinsurance industry alone to be to the tune of 5 billion US dollars per annum!

 

The London Market Target Operating Model (LM TOM) blockchain proof of concept (POC)

Steve worked with the LM TOM innovation team at the end of 2016 / early 2017 to help them understand what the possibilities were of blockchain. They ran a of proof of concept that looked at removing the inefficiencies in the claims managements. Along with a number of insurers, risk takers, brokers and third-party administrators they reviewed the existing claims management process and mapped out what an ideal process would look like. A set of requirements were identified over a period of a week to set up the POC and then over a period of six weeks and three sprints they built out the POC on an Ethereum private blockchain.

The POC demonstrated a third-party administrator raising a claim, the claim grievance party looking at the claim, assessing it and agreeing it. The broker was given access to the blockchain to view the process so they could report back to the insured and a regulatory node was also added to the blockchain to be able to view the entire claims process.

Smart contracts were included within the POC to enable business rules that stipulated that under certain conditions: (a) a claim will automatically be approved when these conditions are met and (b) a claim can automatically be approved even if the claim agreement party is not actually active at that moment on the chain. That second element demonstrated the chains resilience that if for whatever reason a party is offline, those smart contract rules are still in operation as the business rules of that smart contract would have been previously agreed.

As the POC increasingly took shape the participants to the POC could see the benefits of automation and inefficiency reduction. Additional ideas were generated such as adding documents to support the claim (Eg.

B3i the blockchain insurance industry initiative

In our 2nd episode I had the pleasure of chatting to Greg Crow, Global Head of Architecture at XL Catlin. Greg, is XL Catlin’s representative at B3i which stands for Blockchain Insurance Industry Initiative. For this episode we explore what is B3i, its journey in discovering the potential of blockchain for the insurance industry and we also discussed the choices insurers who haven’t joined B3i can make.

 

2 minute definition of blockchain

The Greg Crow version of blockchain is all about the ability for everyone to see the same data and to have a copy of it in a certifiable and immutable way. Having a copy of that data is a real game changer as are smart contracts. For Greg, smart contracts are here to replace contractual paper documents into code. The code sits on the data on the blockchain and is triggered by a certain set of rules which can mean executing a claims payment or collecting a premium for example.

 

The blockchain journey

What prompted XL Catlin to explore blockchain in 2016 was the desire to make it easier to administer contracts, especially reinsurance contracts. In Q1/Q2 2016 they partnered with a blockchain start-up called ChainThat to build a PoC (proof of concept). ChainThat blew them away at the speed at which they worked at in helping XL Catlin demystify blockchain technology.

In November 2016, XL Catlin joined B3i by becoming its sixth founder and worked on numerous other blockchain initiatives including one with Maersk. By January 2017, B3i now had 15 core members and in September 2017 another 23 members joined including three brokers at the Monte Carlo RVS conference celebrating the launch of its prototype market testing phase named Codex1. Codex1 is a platform that enables a distributed ledger smart contract management system for Property CAT XOL contracts. Market participants will be able to more easily cede, handle and trade risks.

B3i Monte Carlo RVS Conference

Why B3i?

As Greg says, members who join B3i have a range of reasons. Some wanted to learn more about blockchain, others wanted to take costs out of the industry and some heard about blockchain and wanted to be involved in it without knowing exactly how or why.

B3i is here to build a blockchain platform for the industry, not necessarily to give its members a competitive advantage, but a platform for all market participants. However as in any consortiums, especially one with 15 insurance companies around the table, making decisions can be challenging. It is for this reason that B3i is reinventing itself from a consortium into a start-up with a start-up feel and start-up speed in the hope it can now scale up to generate the kind of value needed for the industry.

To the question on whether or not a large insurance company should join B3i or attempt to build their own blockchain system, Greg advised that they should do both. They should both join B3i and try building your blockchain platform to increase your learnings. It is evident that at this early stage that there isn’t going to be one blockchain to rule them all.

What’s next?

Greg’s view on the big opportunity for blockchain in the insurance industry is:

Welcome to the first Insureblocks episode!

In this "genesis" episode (a punt to the blockchain community, regarding the first block of a chain often referred to as the genesis block) we have a chat with Gary Nuttall, managing director of Distlytics., who explains to us the basics of blockchain. Have a listen to our podcast above or read some of the show notes below.

2 minute definition of blockchain

A good starting point is to try and define what is blockchain? Gary takes a very pragmatic approach which recognises that there isn't a formally agreed definition on what is blockchain as there are many different types of blockchains. He tends to describe blockchain in two ways:

* A protocol - essentially an agreed way of doing business or transactions. So blockchain is a protocol as much as TCP/IP is a technology protocol for the World Wide Web

* The second and probably easier one to digest, is that blockchain is a write only database which is decentralised, distributed, time-stamped and cryptographically secured

I hear you! What do you mean by "cryptographically secured"? All it is, is the application of computer generated algorithms (mathematical formulas) that transform the data in a manner that it can be securely shared between people.

Smart Contracts

I loved Gary's quote regarding smart contracts as being "the most misnamed thing I've ever heard".

"smart contracts... the most misnamed thing I've ever heard"

The fascinating thing about smart contracts is that they're neither smart nor a contract. All they are is effectively a computer program that enables a blockchain to interact with external activities or triggers. So for example with a flight delay insurance policy a smart contract can be used on a blockchain to determine whether or not your flight is delayed. If it is delayed then an automatic payment is made to your bank account without the insured having to make a claim.

Here is an example of such a flight delay policy by Axa insurance with Fizzy:

 

Blockchain in the insurance space

Having analysed the entire insurance value chain for commercial insurance, Gary has identified around 88 potential use cases for blockchain. Ultimately his view is that anywhere you've got data that is shared between multiple parties, with a need to prove the accuracy and completeness of it all in an efficient manner, is an opportunity for blockchain. Of course for the insurance world this means reducing the inefficiencies in the bordereau process, claims process, and even managing your KYC checking for on-boarding an organisation to name a few. By reducing those inefficiencies and costs you open up the opportunity for truly innovating product developments with other emerging technologies from Internet of Things (IoT) to artificial intelligence (AI). When combining these new technologies with blockchain you open yourself to some very exciting opportunities.

One of the qualities of blockchain is that it helps to remove intermediaries. As we all know there are numerous intermediaries in the insurance ecosystem and everyone wants to make sure that they're not the one who will be disintermediated. As Gary found out that depending on who you speak to, brokers will say there will be no need for underwriters in the future, underwriters say there will be no need for brokers in the future and when you get them both in the room they'll say that it's the likes of the bureau that won't be needed in the future. So everyone's just trying to protect their own turf in some way. What we can all agree is that it is unclear what will happen in the future but it will definitely be very different in a few years.

Your turn!