Blockchain in Insurance: An Introduction Asha Vellaikal Head, Marsh Digital Labs asha.vellaikal@marsh.com April, 2018
What Is Blockchain? Blockchain is a distributed ledger technology a ledger maintained by the consensus of a network of participants. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. 1
Related Concepts to Blockchain Cryptocurrency (Application) Blockchain (Platform) Distributed Ledger (Concept) Source: Oliver Wyman 2
A Bitcoin transaction on Blockchain Source: CBInsights 3
Features of a Blockchain Mechanism to provide agreement across a distributed ledger For all participants to see the same information Non-repudiation achieved through native security, not afterthought To store and execute business logic automatically based on conditions Source: StateStreet 4
Value Driven by Blockchain Trust: Shared ledger ensures multiple parties are viewing the same representation of data. Efficiency: Data reconciliation needs can be dramatically reduced through transparency and consistency. Security: Native cryptographic functions are built in and allow enhanced lineage tracking and audit reporting through immutable sources. Automation: Smart contracts operating on consistent and immutable data can provide new levels of automation and computational power. Cost Reduction Risk Reduction New Products and Services 5
What Kinds of Blockchains Exist? Understanding the use case and the advantages/disadvantages of each type of blockchain is critical. Public Blockchain Permissioned Blockchain Private Blockchain Fully decentralized chain can operate with very low trust. Fully transparent anyone can read, send transactions, and participate in the consensus. Slow confirmation of transactions. Limited privacy protections anyone can read the blockchain. Low cost for transactions. Quasi decentralized hybrid. Read permission of the blockchain restricted to participants greater degree of privacy. Consensus controlled by presented set of nodes. Participants can agree to rule changes, transaction reversals, and modifications. Transaction costs agreed to by group. Centralized requires high trust entity. Read permissions restricted to participants. Only centralized authority has capability to rule changes, transaction reversals, and modifications. Greater privacy protection as centralized entity controls access. Transaction costs dictated by one entity. Market disruption (e.g., Bitcoin) Majority of corporate solutions Do you need blockchain? 6
Example: End-to-End Blockchain-Enabled Supply Chain Source: Oliver Wyman 7
Why Is Blockchain Potentially Transformative? Distributed ledger technology has the potential to transform multiple industries. Key elements/functionality Consistent, Immutable Recording of Data Distribution Across a Network Consensus is an ongoing process where ledgers are updated to hold the same data in the same order. Historical data cannot be easily or secretly changed by any single actor, making it practically immutable. Encryption & Signature Validation Data fingerprints generated through one-way encryption makes checking data integrity fast. In permissioned ledgers, identity and permissions are continually validated with each transaction. Databases (ledgers) are replicated across network participants. Validation of data is performed via a pre-defined algorithm rather than a central authority. Smart Contracts Allow business logic and workflows to be built into a distributed ledger. Capable of updating the ledger (e.g., making payments) based on pre-defined conditions. Select Implications Irrevocable transactions with near-instantaneous clearing. Peer-to-peer operation eliminates supervision. Openly-verified transactions automatically administered. Almost any intangible document or asset can be referenced by a distributed ledger. A publicly-accessible historical record of all transactions is created. Source: Oliver Wyman 8
What Is Being Said About Blockchain? It could be the most disruptive innovation since the Internet. By 2027, 10% of the global GDP is likely to be stored on blockchain platforms. I believe blockchain will do for trusted transactions what the Internet has done for information. CEO, IBM World Economic Forum Blockchain technology isn t just a more efficient way to settle securities - it will fundamentally change market structures - and maybe even the architecture of the internet itself. CEO, Fidelity As scalable applications are deployed - and if they live up to their potential - blockchain will profoundly change how records are kept and transactions are processed. Chief Innovation Officer, Deloitte Utilizing the blockchain is a natural digital evolution for managing physical securities. Head of Nasdaq For the first time in the history of the world we can reimagine how the world transacts without relying on an intermediary. Cofounder, Blockchain.info 9
How Much Is Being Invested in Blockchain? Investments in blockchain continue to grow. Blockchain global equity financing (excluding ICOs) Observations Equity funding ($M) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1. October 2017; Source: CB Insights 51 $99 2013 146 $359 2014 Number of deals 175 192 $532 $554 2015 2016 254 $1,230 2017 YTD Disclosed funding ($M) $2.8B invested across ~820 equity deals since 2013. ~75% of the funds were invested in very early stage deals (Seed and Series A). US accounted for most of the deals, followed by the UK and China, Singapore, and Canada. Initial Coin Offerings (ICOs) are also on the rise. Additional $2B+ has been raised via ICOs in 2017YTD. To date 1 more than 135 teams closed ICOs greater than $500k. Teams holding ICOs are building a broad range of blockchain applications in asset management, social networks, lending, advertising, etc. The ~$3.2B invested in the form of equity (~$1.2B) and ICOs does not include direct investments from large corporations. 10
Array of potential use cases across industries.. Financial Services Health Care Insurance Digital currencies (e.g. Bitcoin) can provide a public ledger to record and verify transactions without the need for a central record keeper Biometric devices can access and update electronic medical records stored on a blockchain to simplify providers data sharing processes Smart devices can communicate status updates onto a blockchain in order to simplify insurance providers authentication processes Legal Services Travel & Hospitality Education Smart contracts stored on a blockchain can serve as an official ledger of contract details or software licenses Travelers can store authenticated travel documents on the blockchain to replace physical identification Educational credentials can be stored on a blockchain for third party verification such as degrees, transcripts, and assessments 11
Insurance Blockchain Participants 12
Blockchain Insurance Use Cases 13
Blockchain in Insurance Example: Parametric Insurance claims facilitated by blockchain ledger Source: Oliver Wyman 14
Sample Public Blockchain Efforts in Insurance and Reinsurance Aug 29, 2017 Brokers Beware: B3i Reveals Codex 1 Blockchain Prototype B3i has revealed new details about its blockchain smart contract prototype, including advancements that could eventually remove much of the administrative work done by all counterparties. While all the counterparties involved in the reinsurance workflow today remain intact in Codex 1, the prototype shows how insurance brokers could have some of its services rendered irrelevant Sep 5, 2017 Maersk and Microsoft Tested a Blockchain for Shipping Insurance Maersk partnered with EY, Microsoft, Willis Towers Watson, and several insurance companies to try securely sharing shipping data on a blockchain. It used KSI, a blockchain developed by Guardtime, a startup whose technology underpins the tech-savvy nation Estonia, for the test June 15, 201 7 AIG and Standard Chartered successfully piloted a multinational insurance policy using blockchain December 06, 2017 BitPay Raises $30M in Record-Breaking Bitcoin Funding Round led by Aquiline Technology Growth January 10, 201 8 First blockchain-based solution for the corporate insurance market in Italy to improve customer service in the risk assessment phase Generali, AIG and UnipolSai Assicurazioni as insurers, with Aon and Willis Towers Watson as brokers, and consulting support from Capgemini in Italy have implemented, for the first time in the Italian insurance market, an innovative solution to reduce inefficiencies and enhance the services offered to corporate clients. July 18, 201 7 Banking And Insurance To Double Spending On Blockchain Jun 14, 2017 Allianz Risk Transfer, Nephila Capital successfully pilot blockchain for Cat Swap The pilot one of several test applications Allianz Group s disruptive technologies division has undertaken to explore future blockchain opportunities makes clear that smart contract technology facilitates and accelerates the triggering process of Cat swaps and bonds Sep 13, 2017 AXA goes blockchain with fizzy AXA is the first major insurance group to offer insurance using blockchain technology. Discover fizzy, a 100% automated, 100% secure platform for parametric insurance against delayed flights. Currently in the test phase, fizzy applies to direct flights between Paris Charles de Gaulle airport and the US. The goal for the upcoming months is to expand the solution internationally and develop partnerships to further improve users travel experience. 15
A Wide Range of Consortia and Standard Bodies Insurance Industry Consortia Open Blockchain Technologies 16
Blockchain A New Emerging Technology Gaining Adoption Benefits 1. Decentralization of control and governance Challenges 1. Technology is still very nascent 2. Transparency of transaction level details 2. Unclear/uncertain regulatory impacts 3. Immutability of historical records 3. Need good governance models 4. Single version of the truth 4. Integration concerns Enterprise Blockchains 2017: Experimentation Phase Small prototypes with limited participants. 2018: Validation Phase Public multiparty pilots with expanded parties. 2019: Production Phase Production blockchains with legally-binding contracts. 17
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Example: How Does Bitcoin Use Blockchain in a Transaction? Source: Oliver Wyman 19