(Image credit: Adobe Stock.)
Blockchain has featured in insurance technology news more as an interesting subject for speculation than a source of compelling case studies. However, there is nothing speculative about AIG’s (New York) new blockchain-driven policy piloted with Standard Charter (London) and built by IBM (Armonk, N.Y.). The “smart contract” based insurance policy suggests where distributed ledger technology is likely make a huge impact in insurance—as well as where it’s not.
“Our pilot proves blockchain has a powerful role to play in the future of insurance,” asserts Rob Schimek, CEO of Commercial, AIG. Any technology, including blockchain, that can increase trust and transparency for an industry whose pillars are built on that, should be fully explored. We’re excited to be delivering innovation that matters to our clients, and co-developing key components of this new technology together.”
AIG, Standard Charter and IBM report in a joint statement their conversion of a multinational, controlled master policy written in the U.K., along with three local policies in the U.S., Singapore and Kenya, into a “smart contract” that provides a shared view of policy data and documentation in real time. The solution, built by IBM, is based on Hyperledger Fabric, a blockchain framework and one of the Hyperledger projects hosted by The Linux Foundation (San Francisco).
The companies’ relate that this achievement allows visibility into coverage and premium payment at the local and master level, as well as automated notifications to network participants following payment events. The pilot also demonstrates the ability to include third parties in the network, such as brokers, auditors and other stakeholders, giving them a customized view of policy and payment data documentation commensurate with their credentials.
The multinational “master policy” is written out of London, and for purposes of the pilot, three local policies were chosen, according to the joint statement. The jurisdictions were chosen because the U.S. is a large and complex market, Singapore is a growth market for Standard Chartered, and Kenya has a specific regulatory provision known as “cash before cover,” which requires that coverage must be paid for before it is valid.
“As a global bank we have to ensure consistent, trustworthy and secure financial transactions, be that as part of our business or as customers ourselves,” comments Emily Jenner, Head of Insurable Operational Risk, Standard Chartered. “By creating a process by which we can arrange multinational insurance contracts through blockchain we not only have transaction security but contract certainty across multiple business locations.”
Where Blockchain Does and Doesn’t Fit in Insurance
Complex multiparty contracts—especially those that cross national and regulatory boundaries—are the most promising opportunity for insurers to find a strong business case for blockchain, suggests Jeff Goldberg, senior VP, Research and Consulting, Novarica (Boston). Many vendors and insurers are struggling to find opportunities to use blockchain, but it’s often not the right fit. Many of the proposed use cases for building smart contracts on the blockchain would be better served by an insurer focusing on increased automation and accessible status updates from their existing systems, Goldberg cautions.
“It’s not usually necessary to utilize blockchain’s ability to create a trusted network because the insurer is already serving as the central trusted partner in a risk transfer relationship,” Goldberg notes. “But with the AIG/Standard Chartered bank use case, there are many parties involved who need to be able to work in concert in a trusted manner, meaning blockchain is not just used because it’s a new technology but because it brings some key capabilities that can’t be found elsewhere.”
The IBM-built solution is likely to be a bellwether for blockchain use in the commercial insurance industry, opines Karen Pauli, Principal, SMA (Boston). “Blockchain will enable large commercial insurers to execute very complex coverages very quickly,” she comments. “Instead of having to pass emails and document attachments all around the country in separate handoffs, insurers will be able to move complex products swiftly and securely to the people who need the contracts and pay for them.”
Blockchain will transform reinsurance and other complex insurance contracts, Pauli predicts. “These are complicated transactions involving many parties and a great deal of money—where mistakes can have a very serious outcome,” she says. The ability to orchestrate these transactions with a single version of the truth, with appropriate visibility and an ironclad audit trail is key, and AIG’s pilot with Standard Charter marks “very significant instance of execution and a very big deal,” Pauli adds.
A New Capacity for Change in Insurance
In addition to demonstrating the viability of blockchain—at least for complex risks—the AIG/Chartered/IBM pilot also demonstrates a burgeoning capacity for insurers to adopt new technology, Pauli notes. “People talk about the insurance industry changing at a glacial pace, but this shows otherwise,” she says. “With blockchain, insurers have gone from talking about blockchain to forming consortiums to execution in a very short time.”