Blockchain – a “Fosbury flop” for the insurance industry?

Athlete at high jump, silhouette

Jags Rao, from Swiss Re explores how a maverick mentality can turn the tables on tradition and have a global impact

Mexico City, 1968. The Summer Olympics. And the scene is the men’s high jump final. The whole stadium was stunned when a 21-year-old lanky American called Richard Douglas Fosbury took Gold that day with a record-breaking jump of 2.24 meters. That in itself wasn’t so much the point but the manner in which he did it was. Fosbury jumped with his face to the sky. Until then, everybody did what was called “straddle” jumping facing the ground. His technique has since been famously called the “Fosbury flop”.

The athletics coach for the American team announced at the time that those who followed Fosbury’s method risked breaking their necks. The only things that were broken were high jump records and the Fosbury flop has been almost universally adopted.

Uniquely, Fosbury challenged the status quo and adopted a style that contradicted the established convention. Decades later, his innovation is still discussed. And yet all he did, in fact, was to seek a better way of jumping over a high bar.

Fast-forward to January 2009 when a peer-to-peer electronic cash system called bitcoin network came into existence. This offered a unique way of moving currency from point A to B without any intermediaries. It demonstrated that “trust” could be generated digitally from within the system. It contradicted the traditional process of building trust externally through intermediaries such as correspondent banks, clearing houses and sidestepped legal and regulatory oversight.

Much like the Fosbury flop, blockchain, the underlying technology behind bitcoin, challenged the status quo by offering an alternative that was fundamentally opposed to the traditional way of building trust. After over nine years the market capitalisation of Bitcoin continues to soar to billions of US dollars, while the underlying blockchain technology continues to unravel its latent potential for the financial services industry and beyond.

So, what can blockchain do for insurance? In fact, the industry is financially healthy, but could operationally improve. It relies on multiple layers of counterparties generating “trust”, but with high frictional cost through their interactions. Over time, counterparties have improved operational efficiencies, but gains have been confined to “silos”. And the reality is that there still exists noise, friction, duplication, excessive paperwork and bureaucracy, with shared and common business processes leading to huge reconciliation costs and contract uncertainty. It is no surprise that this has contributed to the insurance industry’s not-so-customer-friendly reputation!

However, with the advent of cryptography, smart contracts and distributed ledger technology (blockchain), there are clear opportunities to tackle inefficient processes. The potential exists for commercial entities to track all their data-driven interactions securely on a smart-contracts resident on a blockchain without having to build different systems. Blockchain can enable the transaction flow across multiple layers of counterparties from original insured to brokers to reinsurers and all the way to capital markets. It could feasibly redefine the standard for digital transaction processing and deliver significant efficiency gains.

There are a number of experiments going on in the industry to test the hypothesis, validate the benefit and convert prototypes into production-ready states. B3i, the Blockchain Insurance Industry Initiative, remains at the forefront of approaching this innovative technology with a clear purpose to bring real business change to our industry. This spirit around rethinking insurance is brought to life by some B3i members and captured on video.

The formation and success to date of B3i is in itself breaking moulds. Formed initially by 15 insurers and reinsurers and later expanded to 38 market participants including brokers, the project has shown that where there is a common sense and purpose across the whole value chain, genuine collaboration is possible.

The project is an innovation and not just a dream. It has delivered hard results. In its first year, it moved from small in-house prototypes to an industry-wide global proof of concept and on to a market-tested property catastrophe excess-of-loss application in the largest industry-wide distributed ledger network to date. In 2018, B3i aims to transfer this into a self-sustaining entity to further develop and run the platform to settle legally binding contracts.

Nevertheless, there are a number of challenges ahead. Key issues such as collective standardisation, systems integration, legal and regulatory frameworks, privacy and confidentiality need to be addressed. However, the expected benefits in the form of reduced cycle time, cost and friction, as well as enhanced transparency, are hard to ignore as they are expected to create significant material savings. Sharing these savings with the ultimate insured could help to drastically reduce the global protection gap.

The fact that over 7.5 billion people on our planet have no or limited access to insurance or cannot afford it, as much as anything else, provides an incentive to close this gap especially when the untapped premium could be as much as USD 800 billion. So, it is not just about increasing margins or improving service but providing an opportunity for social good and for a just cause. Let’s not forget that our role is to share the misfortune of the few across the many.

Much like the Fosbury flop, blockchain technology is once-in-a-generation kind of innovation, which if applied with clear sense and purpose as postulated in a blog by Paul Meeusen of Swiss Re, can make insurance more affordable, accessible and attractive for millions of underprivileged across the globe and make our world more resilient.

Please note: this is a commercial profile

Ken Marke

Chief Marketing Officer

B3i

Tel: +44(0)7766 202 832

ken.marke@B3i.tech

www.B3i.tech

Twitter: @B3i_tech

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