Why Insurance Broking & Blockchain Go Hand in Hand
Blockchain technology could help brokers maximize their operational efficiencies by using smart contracts to automate key processes, freeing them to focus on value-added services that drive customer loyalty.
Rather than simply selling insurance, insurance brokers are now risk advisors, counseling their wholesale clients throughout the lifecycle from purchase through claims settlement and beyond. But the evolution from seller to risk manager hasn’t been easy for most brokers, especially when it comes to large and complex deals that involve multiple brokers, carriers and geographies. These complex deals are often still managed on Microsoft SharePoint servers and Excel spreadsheets, and information must be sent to numerous parties involved.
These outdated processes result in higher operational costs and slow each step in the insurance lifecycle. More importantly, operational inefficiencies distract brokers from focusing on providing value to their clients through effective risk management.
The advent of blockchain technology can dramatically streamline the insurance lifecycle by allowing multiple parties to conduct and record transactions through a peer-to-peer network. Although some blockchain platforms are public (i.e., permissionless) like Bitcoin, brokers can leverage the power of private (i.e., permissioned) networks, in which only authorized participants can share and validate information. Blockchain networks also enable “smart contracts” that execute automatically once their terms are met, without the need for human intervention. (For more insights on how blockchain works, see our ebook “Demystifying Blockchain.”)
Insurance Broking’s Pain Points
At each stage of the lifecycle of complex wholesale deals, brokers struggle with the operational challenges of coordinating and exchanging information with multiple carriers, brokers and regulatory authorities, as well as having to rekey the same information, reducing productivity. These challenges include:
Placement process. Exchanging information traditionally to multiple parties through the lead broker, as well as carriers having to duplicate know your customer (KYC) and anti-money laundering (AML) investigations, creates delays and unnecessary overhead.
Binding process. Significant delays exist between the lead broker relaying information to the carrier who is placing the order and the binder document being received; last-minute changes in one carrier’s risk or participation can further slow the process.
Settlement process. Thefrequent exchange of information — between underwriters and brokers and between brokers and clients — to establish the technical and financial agreement drives up costs and creates further delays. Clients and brokers cannot easily obtain a view of claims pending when the premium is to be paid during renewals.
Claims process. The same claim information is shared multiple times with all carriers for an individual response, while brokers and carriers have little visibility into outstanding installment premiums.
Streamlining the Process through Blockchain
Blockchain’s distributed ledger technology could dramatically streamline the process by having a single copy of the information regarding an insurance contract housed in a virtual “deal room” where the parties involved could access it. Yet, the parties would retain the flavor of face-to-face negotiations.
Each party involved in a deal could access an appropriate level of information based on their role. For example, brokers and clients could view all the information. In contrast, a carrier would only be able to view the information relevant to the piece of the deal they were involved in, but not the information provided by other carriers. However, carriers would be able to see the written percentage and the signed percentage of every other carrier within the same deal room under an encrypted name so that all parties are aware of how the risk on a layer is progressing.
Smart contracts can be used to automatically trigger allocation of risk, premiums and, ultimately, claims. A smart contract would provide validations that trigger an automatic selection of the appropriate quotes for the placement when certain business rules are met during the negotiation phase.
By creating a single copy of deal information that all parties can access, a blockchain solution could dramatically lower costs and increase speed as well as increase visibility. A blockchain network would also provide the ability to seamlessly add new parties to the process, such as loss adjustors or litigators, or to add new risk codes when a new risk territory is added to the policy. Regulators would be included and able to see all the information on a deal, allowing them to raise any red flags early in the process, rather than waiting until after the deal closes.
Perhaps the most important benefit to brokers is that they will be freed from the operational challenges and inefficiencies of exchanging information with multiple carriers and other brokers. Instead, they could focus on providing value-added services to their clients that will allow them to better manage risk.
Blockchain technology promises to solve many of the operational challenges that brokers currently face on wholesale broking deals. Clients and carriers will also realize substantial benefits in increased speed, visibility and productivity. Blockchain solutions could therefore be a win-win scenario for all parties in the value chain.
While the benefits are substantial, blockchain solutions bring their own challenges. Brokers will need to integrate blockchain technology with existing systems, monitor evolving regulations with respect to the technology and be prepared to make the necessary investment. In addition, cultural change will also be required. Most brokers are not accustomed to the tight collaboration with clients, carriers and other brokers that will be required in blockchain solutions.
Blockchain technology is still in a nascent stage, and enterprising brokers have the opportunity to capture a first-mover’s advantage. This will afford them a competitive edge by offering important benefits to clients in increased speed and efficiency, as well as the ability to influence the development of blockchain solutions in insurance.
Brokers that move aggressively to adopt blockchain solutions will not only benefit from reduced operating costs and more responsive customer service, but also from the ability to focus on what really matters — providing better risk management for their clients.