A lot has already been written about blockchain and what it is, but for those who need a quick refresher, Marco Iansiti and Karim R. Lakhani provided this summation in the January-February 2017 issue of Harvard Business Review, “The Truth About Blockchain”: “The technology at the heart of Bitcoin and other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.”
What we’re seeing in the industry today, though, is that many insurers are moving away from foundational questions about the technology and progressing towards questions about real-world implementation into their businesses. Helping in that transition is The Institutes-backed RiskBlock Alliance, which first kicked off its efforts in July 2017 with the goal of creating blockchain applications and demonstrating use cases. What will the technology look like in claims, where are the opportunities for insurers, and what kinds of gains can be achieved? We sit down with Christopher McDaniel, executive director of RiskBlock, to see how this industry-led consortium is working to answer those questions.
Why should insurers care about blockchain?
McDaniel: There are three components that make blockchain attractive to the insurance industry. The first, which really sets it apart from other technologies, is that blockchain has the potential to completely eliminate the entire concept of transactions. That means any time data is moved between point A and point B—such as between carriers, salespeople, and distributors—that transaction can go away with blockchain. It feels almost like magic, how the data is instantly there for everybody regardless of who put it there. A broker may be the one who puts the information on the blockchain, but it would instantly show up to the carrier’s blockchain access “node,” so to them, it feels like there is nothing in between; everything is instantaneous. In an industry like insurance, the efficiency that you can get from blockchain in eliminating or minimizing the number of transactions cannot be understated.
The second benefit is that information written to a blockchain cannot be deleted; it’s immutable. That is important because in things like contract negotiations or finalized contracts between entities like reinsurers and primary insurers, you need one
source of truth. Blockchain gives you that capability because nothing can be deleted. It has a built-in audit trail of information written to it, so everyone can be confident that the information is accurate and hasn’t been tampered with.
Lastly, blockchain has something called smart contracts built into it. Smart contracts are not contracts exactly; they are just a way of automating different functions. So you can say, “If this situation occurs, then do this.” It’s literally that simple. It provides insurers the ability to take different manual transactions and automate them.
Can you provide an example of a smart contract execution from a claims perspective?
McDaniel: Let’s say that you have rain information from a hurricane on the blockchain. Every user agrees that the source of the rain data is the approved source of truth. Using the “if this, then that” approach, you could say that if rain information from this source says there is three feet of water in a particular ZIP code, then it kicks off a smart contract that automatically starts the process for a claim without a human being ever having to touch anything. This use case, called parametric insurance, is something RiskBlock is working on.
What is guiding the development of RiskBlock?
McDaniel: Our consortium members are very much involved with everything that we do. We’re not sitting over here developing it ourselves and reporting back to them on our progress; they are involved at a deep level based on our governance model.
What this consortium realized is that when it came to blockchain use, everybody was recreating the wheel by developing new blockchains over and over. For example, if somebody had an application and they needed policy information, they created a policy blockchain. If 30 days later, somebody created a different application and they needed the same policy information, they created another policy blockchain.
From an enterprise perspective, that doesn’t make a whole lot of sense, so RiskBlock includes something called Canopy. Canopy is a standardized, reusable blockchain framework for the insurance industry with one policy blockchain, one claims blockchain, and so forth, but with multiple applications reading and writing those same sets of blockchains. It’s much more efficient because everybody is using the same data set. But even more important is that it enables companies to create even more innovative applications over time because more and more data is available. The blockchain grows and gets stronger and stronger over time.
RiskBlock also has a software “factory” that can create anywhere from 15 to 20 applications on top of Canopy a year. The Canopy framework was built in such a way that others can build applications to plug into it, too. It’s made to be an ecosystem that other organizations and vendors can plug their solutions into. Think of Canopy like Apple’s App Store.
Are insurers already using RiskBlock and developing applications for Canopy?
McDaniel: We implemented our first-use case back in December 2017, which was proof of insurance for personal auto, piloted by Nationwide. We’re building out the 2.0 version of Canopy right now, which is scheduled to roll out around Labor Day 2018. That’s also when stage two of the proof of insurance will roll out, as well as our first-notice-of-loss application. We test the data on test blockchain nodes to make sure everything is working before the members actually sign up for production, so it gives them ample opportunity to test with dummy data in a pseudo real-world environment before they go live with it.
It’s not a one-size-fits-all proposition, though. For instance, small companies just want basic data testing to ensure that everything works the way it’s supposed to. Some of the larger companies, however, have very strict requirements for things like SOC 2 compliance from an audit standpoint and other more stringent requirements. Obviously, we don’t put anything into production without thoroughly testing it, but some of the larger companies have more arduous testing requirements than some of their smaller counterparts.
The whole point of blockchain is that it makes business much more efficient. Can you give an example of how this plays out?
McDaniel: From the standpoint of streamlining payments, one of the use cases that we’re building involves subrogation, which I’m sure you know is an arduous process on the money settlement side. If there are a thousand claims to settle between Carrier A, Carrier B, and Carrier C, then there are a thousand checks being written out for each one of them.
What we’re doing from a settlement standpoint with subrogation is basically netting all that out so that there is one check that goes to Carrier A, one check that goes to Carrier B, and one check to Carrier C—and it’s all done via an electronic payment. No paper checks.
Are there other applications on the horizon that you can cite as examples?
McDaniel: One of the use cases that we’re working on right now is creating a commercial trucking version of proof of insurance. For example, when a truck driver goes to a depot to pick up a load, there is a 30-minute manual process that has to be completed every time to verify that they have the proper insurance to pick up that load and take it away. With RiskBlock’s commercial proof of insurance, it can make that 30-minute process instantaneous because it can be verified off the one source of truth in the blockchain. Consider that a typical large trucking firm completes this 30-minute process 200,000 times a day, and you can see how the efficiency numbers gained can be staggering.
Given the emphasis on decisions based on data, how do you account for inconsistencies?
McDaniel: Unfortunately, for a variety of reasons, the data in back-office systems are neither “pure” nor normalized between different insurance companies. In order to put policy and claims data on blockchains, we have to clean it up and normalize it so that the use cases we build are all accessing uniform data. We have a separate group called Implementation Services that works with carriers to create that connectivity to their back-office systems through application programming interfaces, working through the cleanup requirements needed in order to get their data on the blockchain.
With all THIS data, are there any cyber liability or breach concerns when it comes to using blockchains?
McDaniel: Blockchain is one of the most secure platforms out there; it hasn’t been hacked and would likely require a quantum computer to do so. Bitcoin and its exchanges, which use blockchain technology, is what you hear about when hacking occurs, but it’s the exchanges getting hacked, not the blockchain itself.
But to us, that’s not enough. Very early on, we contracted with Ernst & Young, and they are continuing to create a world-class security process, platform, and controls for everything that we apply to Canopy and RiskBlock. When we go in front of a potential new insurance carrier, one of the first things out of their mouth is, “How secure is this?” and we basically drop the book on the table and say, “We did our homework, we made sure that this thing is super tight right from the beginning.”
The Institutes’ RiskBlock initiative is backed by growing list of insurers, brokerages, and reinsurers, including:
• American Agricultural Insurance Company
• American Family Insurance
• Erie Insurance
• Farmers Insurance
• The Hanover Insurance Group
• Horace Mann Educators Corporation
• Liberty Mutual Insurance
• Munich Reinsurance America Inc.
• Nationwide Insurance
• Ohio Mutual Insurance Group
• Penn National Insurance
• State Automobile Mutual Insurance Company
• United Educators