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Blockchain in Insurance and Reinsurance

The reinsurance market is ripe for disintermediation and it is no surprise that it is one of the many sectors exploring how Blockchain technology can help enable efficiencies in what can often be a fragmented operating model. The insurance market is widely seen to be lagging behind banking in terms of technological innovation and adoption.

The insurance market as a whole is reliant on data supplied from multiple sources including the end client, broker, reinsurer and various service providers such as administrators and custodians. Analysis by PricewaterhouseCoopers (PwC) calculated Blockchain adoption in the reinsurance market, for example, would result in cost savings of up to $5 billion.

The PwC data highlighted that between 5% and 10% of premiums are derived from reinsurance expense ratios. The PwC study added Blockchain solutions could remove between 15% and 25% of expenses in the reinsurance industry. Integration of Blockchain could reduce the operational workload around data processing, by streamlining processing times and costs of placement.

It could also simplify compliance checks, particularly around sanctions. The technology would also help minimise claims as a result of leakage and fraud. A report in the Financial Times suggested up to 65% of fraudulent insurance claims went undetected.  This cost reduction would help make the insurance market cheaper for the end consumer ultimately, and could even permit more people in developing economies to attain insurance.

A single source of truth and deployment of smart contracts would render multiple data inputs by various counterparties obsolete.  Total transparency on a Blockchain enabled system would mean all of the relevant information and documents are held in a single repository, which is unchangeable. The security of Blockchain is also such that firms holding sensitive client data can better ensure that this information is protected from outside threats.

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The use of digital assets on a Blockchain could make it easier for investors to obtain exposure to insurance linked products. In fact, Blockchain is already being trialled in this space.  Allianz Risk Transfer and Nephila Capital recently used a Blockchain smart contract to transact a natural catastrophe swap, a financial instrument which transfers a specific risk – such as natural disaster risks like hurricanes or earthquakes from an insurer to investors or other insurers using triggers with defined parameters. The use of Blockchain could speed up the transactional and settlement process for such contracts.

It also negates human intervention during the transaction process, which can reduce the likelihood of clerical errors. More investors will likely pile into insurance linked products if the cost of trading is dramatically reduced. In short, this will bring further liquidity to the market by making it more accessible. This will – of course – permit insurers to underwrite more and spread risk further afield.

However, there are some challenges. A Norton Rose Fulbright legal briefing highlights that while automation of transactions is fairly simple, it can be highly complex to code a smart contract based on a scenario where one of the parties to that contract does not perform as expected, or is in breach of terms. The legal briefing added this issue is accentuated in the insurance market due to the nuances in many of its contracts. However, it is clear that once Blockchain matures and gains more widespread acceptance, such perceived shortcomings may be resolved.

The market is open to disruption, both in the processing of claims but also the trading of insurance linked products. By creating a simplified system on a Blockchain, reinsurers will see their operational costs drop. Allowing for increased use of Blockchain and smart contracts could also result in increased transactional volumes of insurance linked products.

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