1. Smart Contracts, Smarter Insurance: Blockchain
5 October 2016
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2. Insurance Digitalization
Online customer acquisition – Google AdWords replaces the agent
Underwriting with no-human interaction
Fast-tracked claim settlements for your best customers
‘Internet of Things’ (IoT) sensors that transmit loss event data
These are the benefits we always hear about … but what else is there?

3. What Else Can Digitalization Do?
Provide a perfect audit trail
Reduce the risk of record-tampering, fraud
Streamline administration and management of policies and claims
Accelerate post-event activity for non- underwritten covers (parametrics, industry loss, ILWs)

4. Blockchain: Purpose and Objective
Secure, distributed and immutable record of transactions
Enables safe transaction of value between two parties
New transactions aggregated into block which is added to previous blocks, hence ‘block-chain’ is linked list of blocks of transactions.
Content courtesy of Crowdaura

5. Blockchain Basics Distributed Ledger Smart Contract
Immutable, append- only database
Cryptographically secured
Distributed, massively replicated
Smart Contract
Self-enforcing terms and conditions
Execute administrative actions automatically
The code is the contract!
Content courtesy of Symbiont.io

6. Blockchain in Action: Ethereum
Inspired by Bitcoin, Ethereum is a programmable blockchain
Enabling the creation of decentralized applications (dapps) using smart contracts
Automate processes with extreme fault tolerance and zero downtime
Content courtesy of Crowdaura

7. Who Uses Blockchain? Bitcoin – this is the one most people talk about
Cryptocurrency through distributed-ledger technology
Perhaps the largest application of blockchain so far
Fintech/insurtech are catching on as well
Insurance has been watching
Several pilots are in progress with high-profile re/insurers worldwide
Still considered to be in its infancy

8. Why Do Insurers Need Blockchain?
Insurance enterprise systems are designed around the manual business processes
Replacing/augmenting them means replicating paper workflows digitally (sacrificing true benefits of digitalization)
Commercial insurance, in particular, suffers from the fact that paper-based workflow logic still underlies their automation
(Courtesy of Mike Fitzgerald, Senior Analyst, Celent)

9. New Technology, New Processes
Successful digitization of insurance involves replacing paper-based processes with ones that leverage new capabilities and deliver higher quality outcomes at lower costs. Recent advances in digital technologies, and one technology in particular — blockchain — offer the potential to fundamentally change the insurance business paradigm. The ability to add information which cannot be altered into a single, shared, immutable, global source promises to reduce costs, collapse wait times, and increase service levels. -Mike Fitzgerald, Senior Analyst, Celent

10. Insurer Benefits from Blockchain
Operational efficiency
Reduced dispute resolution
Improved transparency
Reduced latency
Reliable audit trail
No reconciliation
Better cyber security
(Courtesy of Symbiont.io)

11. What’s a ‘Smart Contract’?
The contract terms and conditions become rules in the blockchain platform
Third-party data source (the ‘oracle’) indicates when the conditions of the contract have been met
Execution automatic based on the coded contract terms and inbound data
Imagine a contract that does all the work itself. This is it.

12. (Courtesy of Symbiont.io)
Example: ILW Contract
Trigger terms:
US ANP $20 bn
Annual aggregate loss
$3 bn franchise
$10 mn in protection
Reporting agent: PCS
(Courtesy of Symbiont.io)

13. Smart Contracts and Cat Swaps
ILWs (cat swaps and reinsurance) among most popular areas of exploration
Simple structure, non-underwritten cover
Use of a third-party oracle rather than re/insurer workflow reduces time and admin
Third-party oracle also removes bias from the transaction
Reduced dispute risk as there’s effectively no claims process (the way there is with traditional cover)
Parametrics (like Bosphorous Re) would also fit into this category

14. (Courtesy of InsuranceLinked.com)
But, ILWs Aren’t Enough
Small market: only $4 bn in notional, 2/3 of which is the US market
Limited growth given current soft reinsurance market conditions
Trading is volatile from year to year based on retro market trends
Ultimately serves only a small portion of the global $400 bn prop-cat market, let alone global primary insurance
(Courtesy of InsuranceLinked.com)

15. Commercial Claim Management
Indemnity cover obviates need for a third- party oracle
However, still plenty of benefits to blockchain in commercial insurance
Advantages include:
Permanent record of all discussions – time- stamped and tamper-proof
‘Single version of the truth’
Reduced dispute risk
Reduced cycle time as a result of above
Lower overheads, lower LAE because of reduced cycle time

16. Parametric Primary Insurance Covers
Already gaining traction for some prop-cat business in the US
Primary insurance triggers on event magnitude rather than paying out based on the insured’s loss
Potential examples:
Earthquake (magnitude, USGS or local sensors)
Flood (floodwater depth at various locations)
Terror (fatalities/casualties/hostages, incident/weapon type, event duration)

17. IoT and Automatic Triggers
Embedded sensors
Automatic payment on event magnitude
Data aggregation for dynamic catastrophe definition
Sensors serve as the oracle
Send event threshold/magnitude data to the blockchain
Data sent initiates smart contract execution
From sensor to payment, human interaction becomes entirely unnecessary

18. Questions?