Opinion: what does Blockchain really mean to reinsurance?

Insurance and reinsurance practitioners are known to love new advancements. The latest to hit Lime Street is Blockchain. PWC has opined that Blockchain technology will have a positive impact on the reinsurance market to the tune of $5 - $10 Billion. Certainly attractive enough numbers to promote employment of one of the big public consulting outfits to recommend how this will fit into “your” operations.

But what does Blockchain mean in the context of reinsurance. It originates with bitcoin – where the problem is that having created (mined) a unit of cryptocurrency you have to be able to authenticate it as it is exchanged between parties over an extended time. This authentication is provided by maintaining an undeniable chain of custody that proves that this virtual coin is the same virtual coin originally created.

The chain of custody can be built up from a number of bits of evidence: authenticated users of the system that creates the evidence, information that is passed between them as transactions occur (an audit trail), and safe storage of all this aggregate information where it can avoid the risk of tampering. Generally Blockchain assumes that the information will be stored in an encrypted form in multiple public ledgers providing market transparency and non-repudiation.

When an asset might have a very long life, a painting for example, the provenance is very important in proving value and must be both unequivocal and immune to manipulation over time. Even a security such as a 100 year bond must have very robust proof of value. So take all the bits of digital evidence and calculate a checksum and store that in multiple places where market participants can access the checksums and compare them to make sure they have the real thing.

if insurance and reinsurance doesn’t have to be at the bleeding edge of Blockchain to demonstrate value through provenance of a financial instrument, what is the significant value that should encourage us to chase this Blockchain promise?

Insurance and reinsurance policies are similar to bitcoin in that they are intangible assets. Like a financial instrument or fiat money, they are a promise to pay under certain circumstances. Unlike money, or paintings for that matter, P&C insurance and reinsurance policies typically don’t have a very long life. Life insurance involves longer durations but generally less difficulty in verifying an authentic user and body of information. So Blockchain technology can certainly be used to identify provenance for the purposes of insurance and reinsurance contract certainty but doesn’t need to be too complex. For example in the eReinsure negotiation platform we have implemented our patented technology to maintain and access a negotiation history – satisfying the Blockchain idea by authenticated users and an audit trail that supports provenance of the transaction and contract certainty.

Specifically the patent refers to: “an interface for facilitating the negotiation, the interface providing access to a stored negotiation history, including information exchanged during the various stages of the negotiation” – US patent 7,565,302 Negotiating reinsurance for a risk.

So if insurance and reinsurance doesn’t have to be at the bleeding edge of Blockchain to demonstrate value through provenance of a financial instrument, what is the significant value that should encourage us to chase this Blockchain promise? Most likely it is going to be in the area of process, supporting the authentication of settlements between parties without the need for an intermediary – bank or broker – to be a trusted third party in this activity. As alternative approaches to insurance and reinsurance begin to shorten the distance from risk to capital and eliminate the endless duplication of information in the value chain, the automated settlement of payment for units of risk can be validated by Blockchain. Embedded within that Blockchain can be the risk information that should be carried along through the lifecycle of the risk – being used by interested parties to price and distribute risk in the market.

As always, there are caveats. One area where Blockchain may have to be adapted for the commercial arena is information privacy. Although multiple public ledgers may benefit transparency for cryptocurrencies, there will be questions about protecting personally identifiable information (PII) that will cause anxiety for insurers and reinsurers. As is already the case with eReinsure’s engagement platform it will be best to provide a single version of the “truth” accessible by contracting parties through limited and specific roles and permissions. Although Blockchain has “buzz word” appeal, its value for reinsurance comes with the adoption of systems, like eReinsure, that are already transacting the digital records of billions of dollars of reinsurance.