The author Douglas Adams once said, “We are stuck with technology when what we really want is just stuff that works.” Many of us can relate, especially with new technology such as distributed ledger technology (DLT), also known as blockchain, which is often perceived as a solution looking for a problem. Put another way, this technology has been talked about so much over the last couple of years that people are tired of the hype and are now impatiently looking for real and useful applications.
Invariably, you need to start somewhere, and experimentation and proofs of concept (POCs) will always play a role in demonstrating the art of the possible and revealing the sweet spot of a particular technology.
Ultimately, any new technology needs to deliver tangible returns to justify investment. This requires a detailed knowledge of the problem you are trying to solve. Only then can you make an informed appraisal of the benefits of a particular solution or technology.
In 2017, a proof of concept allowed B3i to learn more about the technology, test some assumptions and gauge the market response through a market testing program. The overwhelming positive response created the basis to commercialize the activities of B3i.
By year-end 2019, B3i customers will have commenced placing treaty renewal contracts on B3i’s production network for the January 2020 renewal cycle. Achieving this level of maturity in a relatively short space of time using an emerging, cutting-edge technology reflects the hard work of a motivated team, support from a growing number of shareholders and frequent customer feedback to develop solutions relevant to them.
[Editor’s note: B3i announced on Oct. 15 that it is releasing the latest version of its property catastrophe excess of loss (XoL) reinsurance application in time for the January 2020 renewals.]
The DLT technology being developed by B3i has a number of key features. Firstly, it allows B3i, a company owned by cooperative competitors, to operate a network where the data remains secure to the authorized users and is inaccessible to the network operator, B3i. Furthermore, the peer-to-peer network that is being developed will facilitate bottom-up change of business processes, historically difficult in the insurance industry that has required slow, top-down, consensus-driven change. These unique ingredients will allow B3i to reduce administrative costs at a market level that individual industry participants are not able to address alone.
Developing new software is a challenge, but when coupled with developing this on maturing technology, challenges are magnified. This is not unusual for a software development company, but with the evolution of new DLT platforms, a company needs to be agile and prepared to adapt very quickly.
Inevitably the uncertainty that comes with new technology, starting a new business, raising capital, managing a diverse group of stakeholders and building a productive team is not without a challenge, and at times this has caused unforeseen delays for B3i. This point is reflected, for example, in the switch in March 2017 from Hyperledger Fabric to R3 Corda, which we thought was a better fit for B3i’s needs and applications.
Moving from an analogue process to a fully digital solution isn’t trivial, and B3i needed to start somewhere. If ultimately the intention is to build DLT network infrastructure that addresses the entire insurance value chain, it made sense to start with the placement of the contract that articulates the rights and obligations of the respective parties and thereby determines the business logic and data processing that occurs downstream.
For this reason, a placement solution for Nat Cat XoL, a relatively simple reinsurance contract, is a logical first step. Given the relatively small number of material contracts, this also provided fertile ground to test some assumptions about the scalability of the DLT technology.
As you increase the number of parties involved, the interactions multiply, which offers further opportunities for errors. Time delays in receiving, reading and responding to communications also create issues, and the outcome inevitably leads to contract uncertainty. Even though many processes, transactions and communications are electronic, there is little in the way of an integrated and automated solution offering a clear audit trail. B3i’s testing revealed problems that must be resolved in these areas.
B3i’s Cat XoL POC, launched in October 2017, was tested by 38 insurers, brokers and reinsurers from the market and provided tangible evidence that a DLT application could ameliorate some of the problems at hand.
As a result of positive feedback from the testing, in March 2018, B3i set up a new company called B3i Services AG. Our team has grown to approximately 40 people across a number of functions, and we have successfully completed both a seed funding round with our founding shareholders and a second funding round with existing and new investors.
Solving a Business Problem
Beyond individual use cases, one of the key lessons learned on the ground by B3i was the importance of a business network, a group of parties, in realizing and scaling the benefit of DLT as an enabling technology. B3i as a collective, first a consortium and then a company, coalesced around solving known and significant inefficiencies within the insurance value chain.
Reinsurance panels and commercial insurance programs are syndicated multiparty transactions with significant administrative overheads, characterized by multiple exchanges of data, error-prone rekeying of information and subsequent reconciliations. It is not uncommon for there to be in excess of 30 parties to such transactions, and the administrative cost of this is ultimately born by customers.
Typically, the reinsurance contract involves a broker, an insurer and a panel of reinsurers. Our initial application is designed to connect these parties digitally via an interface that enables the broker to create the conditions for the contract based on an analysis of the insurer’s risk and share these with appropriate reinsurers in order to seek optimal terms and rates.
B3i’s focus is not on the technology itself but concentrates on using it to solve a business problem. In tackling the inherent issues with the reinsurance process, B3i has spent a lot of time and energy considering the full workflow and pain points as well as the user interface, provenance of all artefacts for the contract and auditability. The network, platform and application together provide dedicated infrastructure and an environment to make this happen.
The B3i application makes use of “smart contract” functionality, which is a cryptographically secure, self-executing business logic represented in code. Smart contracts provide automated premium management for deposit premiums, instalments and reinstatement capacity with technical account bookings shared in the distributed ledger. Similarly, loss data can be used to automatically calculate claims and trigger their payment. The immutable nature of a smart contract reduces checking and verification, which further reduces costs associated with loss and fraud prevention. The outcome in settlement and claims is reflected in improved liquidity and less operational and credit risk.
The real value of the application lies in making this risk transfer more integrated, accurate and automated while removing duplication and enabling contracts to be agreed more quickly. The cedent can describe some basic treaty details that the broker can build on following their modeling and analysis. Supporting files and documents can be shared with all the parties, and the application can verify that file contents have not changed.
A contract management module covers the layer structure, reinstatements, premium and brokerage calculations, as well as installments due and clauses. Real-time distribution of contract terms and, on conclusion, a digitally enforced contract is made possible with complete visibility of signed and countersigned contract versions.
A workflow negotiation function provides lead and/or follower views showing tiles moving across “swim lanes.” This visualization provides an easy way to see how close to completion the treaty is. Negotiation and messaging can happen at any stage through the process, and each update in the application is notarized on the ledger. This provides an audit trail throughout the process.
The insurer can also leverage the use of the platform for intragroup reinsurance programs that involve multiple legal entities in different jurisdictions. Here the central entity can gather the inward reinsurance risk details in a consistent fashion based on common data standards. In turn, this facilitates a more efficient retrocession contract negotiation process involving brokers, reinsurers and other corresponding parties.
Although blockchain evangelists may question the purity of our nuanced DLT implementation, ultimately, like Douglas Adams and our customers, “what we want is just stuff that works.”
We believe the products and solutions that B3i and its partners are building for the insurance industry represent a fit-for-purpose implementation of DLT. This implementation combines the features of the technology most suited to solving the problems of our customers.
This evolution from a laboratory experiment to a production-ready application has been driven by an ethos of “by the market, for the market.” We engage this community through workshops, test-athons and webinars and enable them to access the application so that they can create simulations and test the functionality at their own pace. In addition, every two weeks our latest release is rolled out to a core testing team of cedents, brokers and reinsurers who provide valuable feedback.
Crucially, this ensures that the application features are focused on outcomes for our customers and prioritized to meet the most important needs. It really is about creating an application that is fit for purpose. This process of direct engagement also helps to dispel any hype and potential disillusionment of DLT, which is a challenge given the average time it takes to get from a POC to a meaningful, market-ready application.
Problem Looking for a Solution?
The interconnected nature of insurance, which cedes risk through long chains starting at the insured via broker to insurer, onto reinsurers, again via brokers, and ultimately to capital markets, sometimes in securitized forms and other times through the equity holding of insurers, is complex.
Ultimately, the insurance industry is a complex network of connections, where the inefficient exchange and processing of data acts as a barrier to allow this network to operate efficiently. This is often characterized by the manual rekeying of information and complex reconciliations.
Many approaches have provided incremental benefits to solve much of this inefficiency. Electronic Data Interchange (EDI) standards developed in the 1980s promised to remove the need for the physical exchange of data, and since the late 1990s email has also played an important role.
However, the single version of the truth promised by DLT, which puts private permissioned data at the front and center, obviates the need to reconcile separate pools of data and removes much of the blockages in the network plumbing.
Our aim is focused on helping the insurance industry maximize efficiency and effectiveness in all risk transfer processes. Ultimately, DLT and other technologies will provide the tools for the industry to “reinvent” itself. This will not be the work of a single party, nor will there be a single solution that enables such transformation.
Our approach is to support this vision by providing an industry-wide platform on the global R3 Corda network, an enterprise blockchain platform. The Corda network allows a high level of interoperability between applications and other business networks such as banking and supply chains.
This will allow partners to develop applications that can run on the B3i network, which means that B3i platform customers can have access to a wider range of applications more rapidly than if they were built by B3i alone. This in turn will, through a network effect, create a rich ecosystem of insurance industry applications built on DLT. Underpinning this approach is our partnership strategy, which is essential to B3i’s success.
Looking beyond reinsurance, our next focus is on commercial property insurance, including international programs and captives. By using a modular approach to the design and development of our applications, we will be able to develop this product relatively quickly by reusing some of the modules from the reinsurance application. The base application of generic components will be developed by B3i, while the specialty components, essential to accommodate different segments, regional market practices and regulations, is expected to be delivered by partners.
This approach extends further as partners will bring their own ideas and applications to B3i to co-create, build and deploy on our network. In turn, B3i expects that partnerships will become a core driver of building the ecosystem and enabling greater efficiency in the market.
Only the Beginning
This is only the beginning. DLT has acted as a catalyst for creating solutions for the insurance industry and, despite a degree of hype, has captured the imagination of many companies and people. We have already discussed the need for these solutions to tackle real business problems in what is an industry largely based on email, paper, Excel spreadsheets and PDFs.
The essence of insurance is grounded in data and sharing information. The systems and processes today do the job, but there is still friction and inefficiency while fraud and errors lead to leakage of resources. This degrades the data and contributes to an unacceptably high administrative burden. These issues will be magnified when you consider the growing complexity and volume of data from IOT devices and sensors.
DLT can help to secure this data, providing a single trusted source and enabling better sharing. Smart contracts can accelerate automation and improve service. Importantly, as the volume of data and the application of machine learning and other artificial intelligence techniques grow, integrated solutions that deliver reliable, real-time data will become paramount.
The future lies not just in DLT or even other new technologies in isolation but in how they interact and converge, and the people and parties that drive their acceptance and adoption. B3i started with DLT, and our first product is a result of this. As we execute on our strategy—in particular, building the network and partnering with other companies as well as our community and the wider market—we believe that we will enable the insurance industry to deliver better solutions for end consumers through faster access to insurance with less administrative cost.
In short, our aim is to offer practical solutions to real insurance business problems through new technologies to offer our customers “just stuff that works.”
This article first was published in the September/October print edition of Insurance Journal’s sister publication, Carrier Management, which published it online on Oct. 8.