Practical application of Blockchain

Richard Phipps, Solution Design & Delivery Lead for DLT, Swiss Re London, 26th April 2018

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Blockchain is big news…

“Reinsurers are in line to build some of the biggest Blockchain applications outside

the payments sector, which will enhance risk understanding and open up a $5-10

billion cost saving opportunity through faster, more efficient and more accurate

placement, claims settlement and compliance checks such as sanctions.” PWC,

2016

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Source: https://www.pwc.com/gx/en/industries/financial-services/publications/blockchain-the-5-billion-opportunity-for-reinsurers.html

Blockchain basics

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What is blockchain?

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• There is no single description of Blockchain

• Blockchain is the name for a technology solution that enables a ‘Distributed Ledger’ to be used by multiple parties

• Transactions are captured in a chronological ‘chain’ and these entries cannot be edited. The chain is shared amongst participants and automatically synchronises.

• The chain is encrypted & access can be public or permissioned

• The chain can contain transactional data and/or programmed logic ‘Smart Contract’

• It’s a tamper proof, chronological, shared database!

• Blockchain technology stacks & the big name backers…

– Ethereum (incl. Microsoft, JP Morgan, …)

– Hyperledger Fabric (incl. IBM, SAP)

– R3 Corda (a number of banks own R3)

– Ripple

– …

– Features can be quite

different by solution…

Blockchain/Distributed Ledger Technology (‘DLT’) platforms

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Some myths about enterprise DLT solutions

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• Every participant sees everything

• ‘Proof of Work’ is used for consensus, using large amounts of energy

• Solutions cannot be GDPR compliant

• Smart contracts self execute and automatically pay claims

• Solutions must use a cryptocurrency

• DLT solutions are more vulnerable to hacking that traditional solutions

• To use a Blockchain/DLT solution requires my company to host a ‘node’

Different types of DLT solution

• Distributed Ledger i.e. a shared database

• Tokenised asset exchange i.e. a digital form of asset

DLT for enterprise use

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• Hundreds of blockchain/DLT projects going on across many industries for example…

– Supply chain (diamonds, food, automotive,…)

– Shipping (automation)

– Banking (eliminate 3rd parties, lower cost settlements, cryptocurrencies)

– Medical (supply chain, data privacy)

– Aerospace (safety systems)

– Manufacturing (supply chain)

– Technology (link with Artificial intelligence, file storage, …)

– Social (data privacy, protection of vulnerable, border security)

• These use cases are helping the technology stacks to mature.

• v1.0 platforms are available. Production operations are not far off (2018)

Blockchain/DLT impacts many industries

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• Examples of non-Insurance blockchain/DLT use:

Blockchain/DLT in action outside of Insurance

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https://www.maersk.com/stories/maersk-and-ibm-launch-digital-joint-venture

• What has the insurance industry been doing with blockchain/DLT?

• A new project each week!

Blockchain/DLT & the insurance industry

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https://investors.cognizant.com/2018-04-16-Leading-Indian-Life-Insurers-Partner-with-Cognizant-to-Develop-Industry-Wide-Blockchain-Solution-for-Secure-Data-Sharing-and-Improved-Customer-Experience,1

An example from history…

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Standardisation and Innovation

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Malcolm McLean

By Maersk Line - Malcolm McLean at railing, Port Newark, 1957, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=27640875

Shipping Insurance

The Problem High goods conversion costs High frictional costs

The Challenger Trucking entrepreneur Blockchain Insurance Industryinitiative (B3i)

A Standard The Container Data Language on Distributed Ledger

Customer benefit Global trade Affordability of protection

Mission Easier transport and trade of goods Easier handling and trading of risks

Implications for Insurance

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Unlocked potential

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Across the Re/Insurance Value Chain

Policy Holder

Insurer ReinsurerRetrocessionaire

Efficiency potential

• Automation and digitisation

• Data standards

• Digital signoffs

• Reduced waiting times

• Reduced reconciliations

Risk reduction

• Credit risk

• Cash flow inefficiencies

• Operational risk

Establishes a ‘Single version of the truth’

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Traditional ledger Shared ledger

Reporting

Reconciliation

Reporting

Reconciliation

$$

Data Input

AutomaticValidation

AutomaticValidation

AutomaticValidation

AutomaticValidation

AutomaticValidation

AutomaticValidation

ReportingReporting

Reporting

Sharedledger

B3i – “Blockchain Insurance Industry Initiative”

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B3i Trajectory - strong and growing industry collaboration, now an independent company

B3i Development

Oct 2016 – Foundation meeting at Swiss Re

Jan 2017 – Expansion to 15 members, representing about ~60% of the reinsurance market

Mar 2017 – First product identified

Sept 2017 – First industry grade Prototype for Property Cat XL reinsurance contracts unveiled at Monte Carlo RVS

Sept 2017 – 23 new market participants join B3i for the market testing of Prop Cat XL contracts on blockchain

Oct 2017 – Successful testing of the prototype completed by active testing from 23 market participants

Mar 2018 – B3i Services AG in Zurich has been incorporated

Priorities 2018 – Raising additional funds from a wide spectrum of insurance industry participants, Going live with Prop Cat XL contracts, and establishing use cases beyond reinsurance

Market Testers B3i Founding Members

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• Costs are multiple human-lead processes within the Insurance value chain e.g. reconciliation, cash matching etc.

• Efforts to date have included centralised data ledgers operated by third parties and electronic messaging to share data bilaterally.

Why Blockchain?

• Blockchain enables a secure, ‘shared version of the truth’ for contract terms and financials that result from the contract.

• Standardise administration process, without standardising the product offering.

• Participants continue to own their data, rather than relying on a third party to operate a centralised ledger. A significant step beyond electronic messaging!

Problem Statement for B3i

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• Reinsurance transaction costs are often up to 40% of the premium. Expensive for existing customers and not cost effective coverage for new products.

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Reduce industry friction by standardized data exchange

Risk underwritingPolicy /

Premium Management

Claims Handling

Financial Settlement

Insured Insurer ReinsurerRetro-

cessionCapital

Markets

• Contract certainty

• Counterparty data and risk

• Manual processes• Pairing • Latency

• Data duplication and inefficiency

• Fraud risk

• Settlement and reconciliation latency

Typical Challenges

Simplified Industry Value Chain

The Insurer - Reinsurer Interaction

Current focus

B3i - Blockchain Insurance Industry Initiative

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How will B3i use standardized data exchange?

▪ Shared Master data e.g. Legal entities details, Loss Event data, ..

▪ Shared view of the Contract Terms & Common ledger view per contract participants

▪ One integration necessary to B3i, rather than numerous

▪ Contract cashflows have common references and payables / receivables

▪ Use of Smart contract elements to pre-agree key aspects

Source: https://b3i.tech/our-product.html

This solution has been demonstrated during the Swiss Re ‘IGR’ prototype in 2016 and by B3i during their ‘Market testing’ phase in October 2017

Summary

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• The impact and scope of Blockchain and Distributed Ledger Technology is still being explored

• DLT platforms are immature, but need business cases to develop

• Features of the technology are challenging status quo economic models

• Many areas of personal and corporate life can benefit …although it’s likely that the technology will be ‘behind the scenes’

• I encourage everyone to be prepared by learning a little about the basics

Summary

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• Good blockchain materials →

– Alex Tapscott ‘Blockchain revolution’ book & film

– ‘The Blockchain and us’ film

Recommended watching

Q&A