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Blockchain could slash settlement times for reinsurance contracts

Blockchain could dramatically shorten the time it takes insurers and reinsurers to settle premiums and claims, but a reluctance by firms to give up control of processes could hinder its adoption.

The technology, also known as distributed ledger, uses time-stamped "blocks" of electronic records shared between parties on computer servers, without the need for a central authority. If applied to the insurance industry, it could eliminate the need for insurers, clients and brokers to build their own individual records.

This could speed up key functions such as brokerage, claims management and settlement, and reduce the need for expensive manual data entry work, according to Michael Mainelli, chairman of commercial think tank Z/Yen. A 2016 report by professional services firm PwC estimated that blockchain could cut reinsurers' costs by as much as 25% and deliver cost savings of between $5 billion and $10 billion.

Insurance take-up lagging

Within the wider financial services sector, blockchain is gaining traction. Deutsche Bank AG, HSBC Holdings Plc and five other banks announced a plan Jan. 16 to develop a shared platform using blockchain for transactions by small European companies, and Deutsche Börse AG on Jan. 23 outlined a concept for risk-free cash transfers for commercial banks.

Take-up has been slower in the insurance sector, where firms prefer to use their own processes rather than give up control to a separate system, Mainelli said in an interview. The difficulty is not the technology itself, he said, but rather the risks that some industry participants imagine exist in trusting to a shared database of information.

In a July 2016 Long Finance/PwC study, Mainelli said insurers are less likely to be familiar with blockchain technologies and applications than other financial services companies. The natural conservatism of the insurance industry, which is still struggling to face up to new risks such as cyber, is thought to play a part.

But there have been some developments. In October 2016, AEGON NV, Allianz Group, Munich Re, Swiss Re Ltd. and Zurich Insurance Group Ltd. launched an insurance industry blockchain initiative called B3i in order to explore the technology's potential for eliminating waste.

"We tend to set up the contracts, me on my system, you on your system, and we spend a lot of time every quarter exchanging data and cash," said Swiss Re's head of finance and treasury services, Paul Meeusen, who is working on the project, in an interview. "In the new world, we would set our joint contract up in this shared environment and it would be much easier to settle the contract premiums and claims."

Meeusen believes blockchain could halve the time spent on the quarterly settlement process between the parties of a reinsurance contract — a process that, today, can easily take more than a month.

Commitment is key

But the B3i participants conceded that the technology would only be truly effective if implemented in a consistent way, based on minimum standards of data exchange. The multiplier effect, here, is key, with savings proportionate to the number of participants willing to use blockchain.

And commitment to yet-to-be-proven technologies can be fickle. The most high-profile blockchain consortium in the banking sector, R3, ran into trouble in November 2016, when a top bank left after being asked to contribute more cash, the Financial Times reported at the time. The bank had apparently also wanted more operational control.

Meeusen acknowledged that there is still some way to go before many in the insurance industry become convinced of the value of blockchain. The B3i project, at only three months in, is still at "phase zero," he said. But he is hopeful for fast progress.

"Is it too simple and altruistic a view that the industry actors can come together for something that may not bring competitive advantage to any single participant?" he asked in a blog post for Swiss Re. "Insurers, brokers and reinsurers will have to choose their act in this play."

The benefits of blockchain are likely to break down the industry's resistance sooner rather than later, according to Shân Millie, the founder of technology consultancy Bright Blue Hare. In an interview, she predicted that it would be widely accepted within three years.

Such benefits could extend beyond efficiency improvements, according to PwC's U.K. insurance leader, Jonathan Howe. He said the use of "smart" contracts — with terms and conditions encoded within the blockchain, guaranteeing fast claims payouts — could help improve customer relationships and even lead to lower capital requirements.

Eventually, sensors in people's homes could detect accidents or problems that would immediately trigger a payout by the insurer, according to a 2016 study by professional services firm Deloitte. The blockchain could also cut down instances of fraud, as data held in common could more easily be mined to detect claims made to multiple insurers for the same loss.