Blockchain Breakthrough for Facultative Reinsurance
All is not well in the reinsurance industry, but blockchain thinking and technology hold the key to alleviate the industry’s ills. The reinsurance field — an essential component of the insurance ecosystem that keeps the industry intact by smoothing out the effect of claims on insurers — is facing growth, legacy systems and process inefficiency challenges, including high turnaround times, fragmented data sources, high administrative overhead and claims leakage. The industry lacks a central repository where all the stakeholders can view the latest reinsurance contracts.
Blockchain offers the ability to handle secure, multiparty transactions across geographies, automate rules through smart contracts and bring counterparty transparency while maintaining an immutable audit trail of transactions. These attributes could set a standard for regulatory compliance and prove to be a game-changer for the reinsurance industry by revamping the contract management process, automating and streamlining inefficient manual processes and addressing key pain points across the value chain.
A Blockchain Solution
In facultative reinsurance, a “chain of trust” is the central theme between cedent, broker and reinsurer. This is based on an intangible promise to pay, to disclose authentic and accurate data that describes the insurable interests of the cedent and to pay in a timely fashion. Due to the level of risk involved, the agreements need to be carefully drafted, with real-time transparency and collaboration essential for all parties. This process can be very complex and operationally inefficient; existing options to monitor such agreements require the adoption of complex technological solutions. Cedents, brokers and various reinsurance companies discuss and agree to indemnify a ceding company against all or part of its loss. Among them, the broker plays a crucial role by acting as an intermediary between various parties.
We envision a permissioned consortium-based blockchain including cedents, brokers and various reinsurers to help reimagine the current facultative reinsurance workflow. The proposed solution can reduce turnaround times and automate processes through predefined smart contracts.
Contract management is among the key areas for a reinsurance firm, and blockchain can help reduce manual administrative overheads in the current process. The access to risk-related documents (i.e., the hashed location of the documents) can be shared by the cedent over a blockchain network, which can be used by the broker to create a digital facultative slip. The broker can then share the slip with multiple reinsurers simultaneously, and also provide the reinsurers with specific documents to underwrite the risk.
See our accompanying infographic for a depiction of the blockchain-enabled process flow in a facultative reinsurance contract transaction.
Based on their assessment of the risk details, reinsurers can update the facultative slip on the blockchain with the percentage and premium at which they are willing to reinsure. Post negotiations, the broker can draft the reinsurance agreement and update it on the blockchain for all parties to review. Each party can then digitally sign this agreement, after which a smart contract becomes effective, to handle periodic premium payments, endorsements intimation, claim notifications, etc.
Blockchain enables all relevant parties to collaborate with each other simultaneously in real time and to avoid duplication of data across multiple systems. Digitally-created contracts reduce the manual effort and heavy administrative burden of contract sharing and execution. All parties would then be looking at a single version of the contract, with no possibility of version mismatch or misinterpretation, even after multiple endorsements, thereby eliminating the need for reconciliation. Each stakeholder would have access to an integrated dashboard that would give them a bird’s-eye view of its reinsurance contracts and their corresponding status.
In sum, this approach could help brokers reduce time spent on mundane activities, enabling additional efficiencies around core activities such as placing and negotiating risks.
We estimate that blockchain can help save about $100 million annually across the facultative reinsurance industry: $42 million from contract management (with an average of three man-hours saved per contract), $30 million in administrative expenses and $25 million in insurer claims leakage.
Further Blockchain Horizons
Other potential applications of blockchain thinking and technology in the reinsurance space include the following:
Claims administration could become more efficient by reducing the time and cost involved in sharing and validating claims for administering and approving claims and providing services (insurers, reinsurers, brokers, service providers/vendors and regulators). This would allow all stakeholders to collaborate and share details over a common shared platform.
Smart contracts are parametric contracts that initiate transactions when there is change in a certain parameter designed into the contract. Thus, when a loss notification is received, smart contracts can trigger the FNOL process, notify relevant stakeholders and also eliminate information gaps through the claims process.
Cedent’s periodic premium bordereaux reporting process could be automated by leveraging smart contracts. When a reinsurance contract is finalized, the premiums and other contract details are codified and the smart contract initiates triggers periodically and uses premium data to generate the reports.
Blockchain maintains a complete audit trail of each of the transactions performed by different actors, which ensures absolute transparency. In the future, it could become a regulatory best practice, with regulators also joining the network with read-only access to monitor risks in real time.
Insurers have only recently started to explore the potential of blockchain, which in our view could help to significantly improve stakeholder communication, streamline processes, reduce paperwork and improve auditability. Blockchain is just now generating democratized value transfer, a state similar to where the Internet was in the pre-e-commerce days of the early 1990s.
We believe reinsurance companies should examine their existing processes, understand what blockchain can do for them, and develop potential use cases that optimize key business activities. Doing this will require all players to make a concerted effort to collaborate and test relevant use cases. This is critical since blockchain, as a shared infrastructure, generates maximum value when used at scale across an industry.
Encouraging signs of collaboration have emerged among major insurance/reinsurance players such as Aegon, Allianz, Munich Re, Swiss Re and Zurich, which recently launched a blockchain insurance industry initiative known as B3i. These players have recently agreed to cooperate on a pilot blockchain project, using anonymized transaction information and anonymized quantitative data, to test proof-of-concepts on inter-group retrocessions. This is a great starting point for the industry to build on to create blockchain technology and process standards that will catalyze efficiency gains.