A year ago I shared my initial thoughts around our first blockchain efforts for insurance. Our work at Swiss Re and the blockchain insurance industry initiative (B3i) had just started. I am often asked whether it turned out as expected, so I will try to describe my main takeaways.
Clearly it was about much more than just technology. Despite its novelty, the core of distributed ledger technology has proven to be solid. It combines the best of distributed computing, consensus algorithms, cryptography and smart contracts. At B3i we keep assessing different platforms, the likes of Hyperledger, Corda, Quorum, and are now quite comfortable that technology will do the job. The much bigger revelation was that, creating an industry-wide, enterprise-grade distributed ledger solution for insurance, requires rock solid inter-company collaboration. The more technology takes care of the basics, the more people and co-operatives count. I would describe the keys to make this happen by "purpose", "passion" and "progress".
Purpose, Aristotle described this as 'logos', a clear and logical argument stating the cause for action. Many projects tinker with technology, without first addressing this point. For our insurance initiative it is a clear: we want to address the protection gap. Research has proven that 7.5 billion people on our planet have no or limited access to insurance or cannot afford it. This gap represents an untapped premium potential of 800 billion (USD) for our industry. In order to address this, we need to fundamentally rethink how we design, distribute and settle insurance contracts. Public, private partnerships installing innovative solutions, such as parametric based insurance solutions in new agricultural areas, are good examples of how technology can help. They accelerate how we go to market and bring a delightful customer experience. African farmers already today can scan a barcode on the bag of grain to buy insurance and collect a claim payment via e-currency on their phone. This is how people should experience insurance, not a lengthy, complicated process of paper pushing. This untapped potential is at the forefront of all we do. It keeps us 'hungry and foolish' to question our own processes. We reduce information asymmetries and obtain improved information at much lower cost. We will optimize the acquisition, intermediation and administration process and free up a much larger share of the insurance premium to be used for direct loss payments. This will pave the way for a wider adoption of insurance. Like bitcoin was designed to distribute wealth [not for greed of speculation], distributed ledger technology can enable wider access to insurance. Inspired by this great mantra, the B3i members worked hard to convert this into a solid business case. Eventually we got there and our recent study has shown that the platform will be able to create significant efficiencies and savings in this area.
Passion, or 'pathos' as the Greek philosopher coined it. It is so relevant on innovation projects, which are often an uphill battle. Bertrand Piccard, the great Swiss entrepreneur and adventurer, who master minded the Solarimpulse project, once told me the story of his grandfather. A pioneer high-altitude balloonist, he was looking for insurance on one of his flights, but found no cover. He departed uninsured. Upon successful completion of his mission, he was welcomed with a celebration ceremony, including the insurance companies lining up to insure him for his next flight. Piccard kindly declined: "I now know I can do it, so I no longer need insurance." This is the mindset and perseverance that we needed to demonstrate in B3i. If we had to wait until we were almost certain of everything, it would no longer be innovation. What may feel like eating glass during hard times, transforms into a network effect of growing enthusiasts when success emerges. It may be difficult to get as passionate about insurance, as about ballooning. Does it have to be that way? I remember when I decided to travel around the world after graduating from university. Once the shock effect subsided and at ease that I would secure the funds myself, my parents remained mainly worried about insurance. My itinerary was fairly loosely defined; I ended up crossing through three continents. We eventually found a great cover, thank God, as it paid for a few hospital visits along the road and an unexpected roundtrip home to attend the funeral of my godfather. So many intense moments, names, friends and memories remain of such a year, but I would not have remembered the name of the insurance company, had I not looked it up (it was Blue Cross Blue Shields and Europassistance, and their service was great). The insurance industry can capitalize much more on such experiences, in similar ways that other companies do. Smart use of technology can dramatically change this. Today I would probably carry their app on my phone, like them on social media and post their rescue operations. That desire to make insurance more attractive, is what makes the B3i group of people special, in ways that I have seldom seen in an industry or corporate project. Keeping this 'bigger cause' alive, will help us to continue attracting the new 'digital natives', whom our industry needs. We need something more compelling, than just telling them 'come work in insurance'.
Performance. Innovation projects don't survive just on big dreams and hard work, but must deliver results. Real credibility or 'ethos' only comes with performance and a track record. In its first year, B3i went from small in-house prototypes, to an industry wide proof of concept, to a market tested property Cat excess-of-loss application that is the largest insurance industry-wide distributed ledger network ever running. In 2018, B3i will transfer this in a self-sustaining entity to further develop and run the platform to settle legally binding contracts. In typical large corporate style, we would normally have designed a multi-year big plan, with multiple milestones and layers of governance. Instead, we executed short sprints, each completing with user review cycles, before proceeding to the next. We used open-source collaboration tools, to ease communication and collaboration. It greatly contributed to success and, as one member noted, that peer-to-peer exchange was probably as valuable as the technical blockchain development work. Keeping this agility remains part of our DNA, and embedded in the management and decision making of the B3i entity going forward.
Whilst much has been achieved, we have a lot of work ahead of us in 2018. Here are the main items on my wish list:
1) Building a strong counterparty. For a platform such as B3i to work, it must be a trusted counterparty to the market participants. This will require a solid investor base and strong capitalization to support the development of the product roadmap.
2) Regulatory approval. It is fairly clear that normal insurance licensing or oversight will not apply, as the platform will not take positions or hold insurance liabilities. Nonetheless, even as a financial intermediary or exchange, we will need an open exchange with auditors and regulators to gain their approval. This needs to balance data innovation with safety, and data usage with protection.
3) Identity and counterparty management. 'Distributed' does not mean 'unorganized' and for re/insurance companies to easily trade, they need be clearly identified, let's call it a BIC applied for insurance, as SWIFT does it in banking. In similar ways, the contracts settled, and their claims, transactions, will benefit from clear referential integrity. This is the time to fix this and the usual "tried it before" is no longer an excuse. Interesting e-government solutions are leading the way here.
4) Demystifying smart contracts. According to a 2016 study by the Geneva association, the biggest mismatch between what insurance customers want and what they get is easy to understand policies. We will need to make sure that legal wordings that are not understood are not replaced by computer code that is even less trusted. Much rather it has to be something as easy as using a vending machine, the great analogy used by Nick Szabo.
5) Interoperability. I do not believe that this will be a "winner takes it all" game. More likely will the technology see multiple sub-networks flourish, that focus on specific regions or segment of insurance. Interesting initiatives are being conducted in areas such as subrogation, marine insurance, multi-national commercial insurance programs. As risks get originated, pooled, reinsured or eventually securitized to the capital markets, we should think about how to inter-operate this with minimum frictional costs. We should prevent a similar disaster as with mortgage backed securities, where multiple re-packaging had completely lost track of the substance of the original underlying risk and counterparty.
There is much more to wish for but let us not get greedy. This has been a very gratifying experience and 2018 will not be an easy year but surely an exciting one, needing strong characters. As Isabelle Allende once said: "For great characters in my book I need mavericks, adventurers and rebels, who ask questions, bend the rules and take risks."
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Happy new year!
Head of Distributed Ledger Technology at Swiss Re