Big Boys Club: The Tale of Blockchain, Reinsurance, B3i and Dispute of 9/11 Aircraft

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Our London correspondent Nick Ayton takes a look at B3i Reinsurance Club and what potential it holds for reinventing the sector on the eve of fresh announcements about new members.

Recent catastrophes have shown the reinsurance industry hasn’t moved forward in decades and cannot deal with today’s risks let alone tomorrow’s. There is a clear need for change.

Reinsurance is the practice of insurers transferring portions of risk portfolios to other parties. It is based on the agreement to reduce the likelihood of having to pay a large obligation resulting from an insurance claim.

The five-year dispute of the fallen aircraft that hit the twin towers raged on for a long time. Policy conditions were not clear and synchronized between insurers. They did not allow for a double event, as the towers themselves were part of the complex claim.

What is the mandate for B3i exactly?

Is it a ‘consortia’ where members pay into the greater good or a ‘club’ where the blind are leading the blind and all are trying to cram knowledge because someone has said this Blockchain thing is important?

There have been several press releases by the initial members Allianz, Aegon, Munich Re, Swiss Re and Zurich Ins talking about signing up but lacks the details.

It is difficult to decipher what is actually going on. On the MunichRe website in October 2016, the press release talks about the opportunity Blockchain presents but doesn’t highlight the specific things B3i will be working on. It is all a bit loose and doesn’t tell us much.

Is B3i about standards only according to the Article in Nasdaq on 25 Jan 2017? Do the members of this new club actually know what they hope to gain from the consortia?

Blockchain is a great fit for reinsurance

Just in case the members are not sure, let’s look at a few specific areas where Blockchain can make a significant impact.

There is no doubt Blockchain is a great fit for reinsurance given the structure and nature of the business where large expensive things are insured across a number of parties. Large ships, airplanes and cargo require several insurers to take a share of the risk as these large assets fly through our skies and move across the water delivering cargo and are themselves very expensive assets.

In an industry heavily reliant on brokers to place the business in the market, it strikes me there will be bigger issues ahead as the ethos of Blockchain is to removes the service fringes and middlemen.

Does this mean the market structure is up for grabs? Brokers place the risks on the market, the create a market for the business they are trying to place. Hoping other reinsurers will take a piece of the ‘pie’ and put it out on the market – where insurers rely on sharing information and creating policy conditions that tie in several parties that together take on the risk.

Processing costs are high as each reinsurer has different systems and data formats and there is a delay in sharing information and knowing the state of any insurance risk at any single point in time.

It is this inefficient System of Record that adds a great deal of friction, time cost to the entire process and brokers want to get rewarded for placing the business.

The potential is huge

There is no doubt the re-insurance market can eliminate 30 percent to 40 percent processing costs quite quickly and the flow of information reduced as each risk is written to a shared ledger called the Blockchain.

In practice, reinsurers like most Financial Services and Insurance business are fierce rivals and don’t play nicely together. A factor that has held back the industry and why it is ready to be re-invented or destroyed by a new model.

It is quite obvious Smart Contracts that are neither smart nor contracts can automate the fulfillment of terms and conditions and help to monitor ‘state’ of risks as events happen in real time. The potential is huge.

One assumes B3i are looking at a closed permission world where the reinsurers remain the central Validator and use the technology to make things better for themselves and not pass net benefits to the end customer, the agenda of the banking led consortia.

Will the end customer be able to place the risk directly, will they be able to see their policy and who is underwriting it and maybe adjust it in real time to reflect events and changes in condition. Will the client be a node on the B3i network of will the backbone be the reinsurers as read-write nodes and brokers a view (place only) and clients shutout?

A big boys club or something more?

With B3i nobody can be certain where the Club is going and what they will actually deliver for customers.

Is it the case of let's get a few organizations together and see what happens? Are reinsurers clambering to find out what Blockchain can do for them as both opportunity and threat? Or is it a case of having to join in as being outside the tent suggests they are missing out, but then missing out on what?

There are significant benefits the reinsurance sector will gain from deploying Blockchain. The same information can be delivered in near ‘real time’ to help all parties adjust their position, reducing human errors from keying data and information flows between participants are date and time stamped, where the provenance is known.

Risks can be shared and the policies document synchronized allowing digital signatures that will go a long way to preventing the five years legal dispute that started on that fateful day. Permissions granted only to those with rights of access that related to the risk will speed up underwriting, claims and policy administration and servicing.

There is no doubt the reinsurance industry has an opportunity and B3i is here. Let’s hope they don’t waste the opportunity and history suggests these rivals don’t play nicely in the playground. Time will tell as new members announced in late 2016 were promised and we expect any day now to get an update on this new big boys club or will they let the smaller players and other market participants in.

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