Blockchain/Distributed Ledger Technology

Bradley’s Policyholder Insurance Group is pleased to present “What Blockchain Means for Your Insurance” as part of our ongoing Policyholder Insurance Webinar Series.

This webinar will discuss the applications of blockchain technology in the insurance industry, recent developments in blockchain technology, and the potential impact on policyholders presented by Bradley attorney Katherine J. Henry and Brendan W. Hogan.

When: Thursday, November 2, 2017, 11:30AM – 12:30PM CST

Where: Webinar Registration

What: Distributed ledger technology, often called “blockchain,” is rapidly emerging as a potential solution for businesses in many sectors, often with promises of increased security, reduced risk, and greater efficiency. With any new technology, however, come new risks. Risk management professionals should understand, assess, and plan for the risks that their organization will face resulting from the implementation of blockchain—not only today but in the future. In this webinar, Bradley’s Policyholder Insurance Coverage Team, led by Katherine Henry, will discuss the applications of blockchain technology in the insurance industry, recent developments in blockchain technology, and the potential impact on policyholders. Join us for this compelling introduction into the future of insurance coverage.

We look forward to seeing you there!

Blockchain: The Policyholder Plan for Smart Insurance PoliciesInsurers’ exploration of distributed ledger technology (DLT), commonly referred to as blockchain, continues to expand. Last month, AIG announced a partnership with IBM and Standard Chartered Bank P.L.C. to test a “smart contract” insurance policy. The Blockchain Insurance Industry Initiative, B3I, formed last year, recently expanded to 16 members, including Munich Reinsurance Co. and Swiss Re Ltd., as well as Aegon N.V., Allianz S.E., Assicurazioni Generali S.p.A., Hannover Re S.E., Liberty Mutual Insurance Co., XL Catlin, and Zurich Insurance Group Ltd.

Industry analysts suggest that insurers can use DLT in reinsurance contracts, wholesale insurance products, claims management, reserve calculation, automated notice of claims and losses, evolving underwriting models, and fraud detection. DLT could increase administrative efficiency and reduce administrative overhead, improve underwriting accuracy and claims management efficiency, and provide access to new insurance markets.

These benefits, if realized, could substantially increase insurance company profitability. DLT could profoundly impact the bottom line of early-adopter insurance companies, even if those companies only touch the surface of DLT’s potential uses.

DLT’s emergence poses both opportunity and risk for policyholders. Savvy policyholders should:

  • Plan for potential claims automation.
  • Assess the future value of source-level data for risk assessment.
  • Develop strategies for controlling access to risk assessment data to maximize coverage benefits.

How Does DLT Benefit the Insurance Industry?

At its most fundamental, DLT is a customizable peer-to-peer digital ledger. DLT allows users to efficiently share information at a previously agreed upon level of automation. Before implementation, users agree on DLT’s key features, such as information sources, transfer methods, triggering events for information or payment transfer, and rules for recordkeeping on the ledger.

DLT allows users to add or remove functionality based on their needs. Insurers may not require immutability (a key characteristic of the bitcoin blockchain) in which past entries, once added to the ledger, cannot be changed. Ever. Period.

Bitcoin requires immutability to operate as a currency. Without it, users could spend the same bitcoin more than once, much like forwarding an email. In contrast, a permissioned blockchain privately operated between a group of insurers and reinsurers may not require immutability.

Insurers may customize DLT to use an “oracle” to trigger a blockchain event. An oracle is a mutually agreed on source of data (usually from a trusted third party). For example, a “smart” property policy could use National Earthquake Information Center (NEIC) data as an automated trigger to invoke or ignore an earthquake exclusion in a property loss claim. Similarly, a property policy could use a fire alarm as an automated trigger for notice of a fire-related insurance claim.

While DLT’s insurance applications are still in their infancy, insurers will likely customize their DLT applications to accomplish four goals:

  1. Efficiently gather and store information from policyholders (for both applications and claims).
  2. Automate portions of claims management.
  3. Automate and improve recordkeeping and data access.
  4. Share necessary information with reinsurers.

By customizing DLT, insurers hope to improve risk assessment, reduce overhead, and improve reinsurance outcomes by laying off appropriate levels of risk. The primary benefits to insurers are improved data gathering, data utilization, and operational efficiency, each of which should translate into better earnings or lower expenses.

How Does DLT Impact Policyholders?

DLT will likely impact policyholders through claim automation and data commodification. Policyholders should properly plan and negotiate placement of “smart” insurance policies to minimize the adverse impacts of both automation and commodification.

Policyholders Should Carefully Consider the Impact of Claims Automation

Implementation of claims automation without proper policyholder controls in place could wrest critical decisions from policyholders:

  • Should we submit this claim given current business conditions?
  • How should we describe the underlying event?
  • When did the operative event actually occur?
  • Does an exclusion potentially bar coverage?

Under the existing claims paradigm, policyholders can assess an event, determine the best strategy to manage and report the claim (in strict compliance with the policy’s notice requirements), and present the claim in a manner that maximizes the potential coverage available while accurately depicting the triggering event. This reporting process can range from simple and formulaic for some types of more routine claims to complex and customized for unique or substantial claims.

Negotiating automated triggers for reporting certain claim information and processing claim information necessarily removes an element of policyholder control from claims reporting. While automated processing could provide benefits (for example, automated claims notice mitigates the potential of a claim being denied for late notice), presenting certain information without context could increase the risk of a claim denial for other reasons.

For example, consider a cyberinsurance claims oracle that uses a mutually agreed upon set of network events to detect a distributed denial of service attack (DDoS) (a flood of requests to a particular network impacting the policyholder’s consumer web portal causing loss of sales and potentially leading to a business interruption claim).  While automated reporting may benefit insureds, both philosophical risk management questions and technical questions about the oracle framework could impact claims management using automated DDoS reporting.

From a philosophical perspective, should the policyholder report every DDoS event, even if the ultimate business interruption may not cause a covered loss (either because the DDoS event did not actually impact aggregate sales or the lost sales did not exceed the deductible)?  If this reporting is done, what information should be sent as part of the automated process? Should the notice be limited to the fact of the DDoS event or should it include additional network information that may be relevant to the insurance company’s investigation of the potential claim? Should the notification trigger a delayed sales impact report at a specific time following the DDoS event? May the insurer rely on notification of a DDoS event in subsequent renewal and premium decisions even if the event did not result in a claim? And perhaps most importantly, what benefit do policyholders obtain in exchange for this automated reporting system that they could not obtain at a less institutional cost than automated reporting?

From a technical perspective, the traffic monitoring protocol that detects a DDoS event and automatically reports the claim should report the event when the network speed is sufficiently impacted to cause the loss of sales while minimizing false positives due to higher than normal usage rates.  Policyholders should negotiate these technical details ahead of time to limit their adverse impact on the subsequent administration of a claim.

Policyholders Should Control Data Commodification

Adopting DLT applications could allow insurers to gather, store, and analyze policyholder data to a far greater degree than they currently do. Insurers already obtain a significant amount of data from their policyholders over the course of what is often a multiyear, collaborative business relationship. The development of DLT applications combined with the proliferation of always-on, always-connected devices (the Internet of Things or IoT) could substantially increase the depth and scope of the data that insurance companies obtain from their policyholders.

Insurance is and always has been a data-driven enterprise, but even modern insurance frameworks require substantial manual data entry and duplication of effort across departments. Despite the substantial information that insurance companies obtain from their policyholders, much of the analytic value of this data is currently lost to this administrative inefficiency.

With proper data management protocols and access to new and better sources of data from the IoT, insurers will have access to unparalleled databases to refine and improve their underwriting and risk assessment models. While improving risk assessment could benefit some policyholders in the form of reduced premiums, policyholders should carefully consider the type of data shared with insurers, the format of the shared data, and when that data is shared. Policyholders who negotiate restricted access to source data and instead present analytical results during renewal may obtain lower premiums than those companies that simply allow insurers continuous access to source-level data from key sources.

For example, consider commercial auto insurance. Insurers calculate premium rates based on several factors, including the type and amount of automobiles in the fleet, the number of authorized users, the location of automobiles, the usage of those automobiles, and the level of desired coverage.

With the advent of DLT, insurers could supplement this basic underwriting information with automatically reported driving monitoring data and offer dynamic premium pricing based on daily fleet usage. A sophisticated commercial policyholder might obtain lower premiums by using the same devices, gathering and analyzing the data itself, and reporting previously agreed-upon outputs to its insurer, rather than allowing the insurer access to the source-level driving data.

Even if the policyholder permits its insurer to access the source data, the policyholder should consider restrictions on the storage and use of that data. For example, may the underwriter use some or all of that driving data during renewal?

Driving is simply one example of DLT in action (and perhaps not even a long-lived example given the advent of autonomous vehicles). The IoT could make similar data reporting and analysis available for large portions of commercial and industrial systems. The commercial value of this data cannot be understated.

DLT applications allow insurers to more efficiently gather and store data for later use, but policyholders should control the type and form of data shared with the insurer before trading terabytes of data for the promise of reduced premiums.


Insurance Industry Exploration of Blockchain ExpandsThe insurance industry’s exploration of blockchain-based solutions continues to expand, potentially impacting future policies available to commercial policyholders. The Blockchain Insurance Industry Initiative (B3i), an industry consortium tasked with exploring the potential uses of distributed ledger technology, also known as blockchain, expanded to 15 members last week. B3i was founded in October 2016 by five insurance companies – Allianz, Aegon, Munich Re, Swiss Re, and Zurich – to allow members to exchange and test ideas for potential uses for this technology in the insurance industry. Current member companies are Achmea, Aegon, Ageas, Allianz, Generali, Hannover Re, Liberty Mutual, Munich Re, RGA, SCOR, Sompo Japan Nipponkoa Insurance, Swiss Re, Tokio Marine Holdings, XL Catlin and Zurich Insurance Group.

The B3i initiative is a platform “for the efficient and trendsetting testing and improvement of inter-company processes” to “optimize business processes and value chains,” according to members of the group. While the consortium’s findings will not be reported to the public until at least June 2017, analysts predict that insurance applications for blockchain-based technologies will substantially impact policy underwriting and sales as well as claims management and settlement. A recent report from PwC explains that insurers can use blockchain-based recordkeeping to improve placement and pricing of insurance by making more robust information easily available during underwriting. The PwC report also explains that insurers can simplify claim management (particularly in undisputed claims) by making record sharing between insurance companies and claims administrators more efficient. Similarly, another report by McKinsey and Company explains that insurance companies can improve efficiency and profitability by increasing fraud-detection capabilities and reducing administrative costs.

Well-informed businesses can gain a potential competitive advantage by understanding the applications of blockchain technology in the insurance industry. Our previous discussion of blockchain’s impact on commercial policyholders summarizes some of the key components of blockchain technology and explains how policyholders can use this technology to their benefit.

Three Things You Need to Know about Blockchain and Insurance PoliciesDistributed Ledger Technology – commonly referred to as “blockchain” — has recently emerged as a buzz word in the insurance industry. The insurance industry is quickly deciding that this new technology will fundamentally reshape the insurance industry. For example, Aegon, Allianz, Munich Re, Swiss Re, and Zurich recently launched the “Blockchain Insurance Industry Initiative” to explore the potential of distributed ledger technologies to “better serve clients through faster, more convenient and secure services.” The insurers hope to use the blockchain to replace existing information systems, leading to streamlined paperwork and reconciliations for insurance contracts, improve auditability, accelerated information sharing, and faster claims payments.

While these insurers are actively testing and applying blockchain technologies, many insurers are behind the curve in the adoption of blockchain technologies. PwC recently estimated that almost one-third of insurance company executives are not at all familiar with blockchain, and widespread adoption is still likely several years away. Businesses can use this window to their advantage by building systems now to leverage the increased flow of information to better quantify risks, understand the impact of smart contracts and rapid information sharing, and demonstrate a case for reduced premiums.

Well-informed businesses can gain a potential competitive advantage by understanding the applications of blockchain technology in the insurance industry. Here are three things you need to know to understand the impact of blockchain technology on your insurance coverage:

1. Blockchain is an encrypted, easily-accessible, permanent digital ledger.

For all of its potential applications, the underlying concept for blockchain is simple.  Blockchain is a digitally‑stored public ledger. What makes blockchain exciting is the combination of ease of access, privacy, and security. Unlike existing digital ledgers, which use central administrators or clearinghouses to ensure accuracy and security, blockchain relies on a public network of individual computers solving incredibly complex cryptographic puzzles in exchange for verification of the legitimacy of each entry – each block – in the ledger. Each individual block is linked to the previous blocks, forming a chain. This process ensures the security and accuracy of individual entries.

Because each transaction stored on the blockchain is encrypted and publicly verified, it is secure despite being publicly accessible. Because the transactions themselves are pseudonymous and encrypted (like email), they are private despite being publicly accessible.

2. Blockchain encourages more sophisticated underwriting.

Because the blockchain allows for more information to be parsed and appended to so‑called smart contracts, substantial amounts of information can be shared easily between parties.  The applications of increased data availability are only now beginning to be parsed, but more nuanced and sophisticated underwriting is one promising application.

Consider a commercial auto policy for a large company with hundreds of potential drivers and a massive fleet of vehicles. The insurance company now underwrites these risks based on amalgamations of fleet size and location, number of drivers, and claims histories.  With a blockchain‑based insurance policy and proper data capture, insurers can base underwriting on real time use of individual vehicles by individual drivers in individual areas. Today insureds pay the same insurance premium rate regardless of whether an individual vehicle is in use, the user’s identity, the geographic location, and the period of time that the vehicle is in use. If this use data is captured in real‑time, insurance premiums can instead change dynamically based on the number of vehicles in use, the identity of the users, and the vehicle’s particular use. After all, the risk of a motor vehicle accident is drastically reduced when the car is parked in a garage on your company’s property.

This type of dynamic underwriting already exists in the drone insurance market, where companies can buy insurance by the hour, but the blockchain allows this technology to scale beyond a single hobbyist flying a drone in a park to a real world commercial application.

3. Blockchain allows for faster claims payments and more efficient claims management.

Increasing the efficiency of information sharing between insurers, brokers, and policyholders through the use of blockchain technology should lead to faster claims submissions and faster claims processing. It will also allow certain types of information to be automatically gathered and reported. The potential benefits of this increased efficiency are immediately apparent to insurers in the form of decreased overhead and greater control over claims adjustment. The potential benefits to policyholders are obvious too; undisputed claims may be paid more quickly and, hopefully, with less time spent gathering claim-related information.

On the other hand, a move towards efficiency and automation in claims adjustment, especially in the information-gathering phase, necessarily comes with a loss of at least some control over the flow of information between the parties. If blockchain technology impacts the claims submission and adjustment, commercial insureds should understand what portions of the claims process have become automated, what information will automatically be shared as part of this automation, and the avenues to engage in a more nuanced dialogue about more complex claims.

The Bottomline on Blockchain

Blockchain is really about sharing very large quantities of information quickly, reliably, and efficiently. Automation of information sharing in underwriting and claims adjustment may initially benefit insurance companies.  Savvy insureds, however, should be able to leverage this information sharing to their benefit by negotiating the automated information sharing in so-called “smart” contracts; gathering, controlling, and presenting shared data in a consistent and thoughtful manner to place the company in a favorable position when a claim arises; and negotiating clauses that allow for de-automation of the claims process in more complex claims.