Analysis: Behind the scenes of a year-long Blockchain pilot

Blockchain has become a buzzword in the industry but few know what it means, even less so its implications for insurance.

The distributed ledger system is not exactly new and has already swept through the global banking industry.

In order to explore the time and cost-saving benefits of the technology in insurance, a cross-industry pilot called B3i was launched in October last year with a handful of players.

One year on, 38 firms are now signed up to the pilot, yet Blockchain still seems to lack credibility in certain corners of the industry.

Wei Keat Ng, strategy and business development at KMPG, watched a presentation on B3i at the Reinsurance Rendezvous in Monte Carlo in September.

“The vast majority of people were sceptical of Blockchain and not completely aware of what it could do,” said Ng.

“Largely, scepticism remains because of previous failures within the insurance industry. The industry has attempted to launch initiatives in the past and they haven’t worked.”

B3i pilot

The B3i initiative started off with Zurich, Munich Re, Swiss Re, Aegon and Allianz joining forces in October 2016 to launch the proof of concept Blockchain pilot.

Soon after, global reinsurers, insurers and brokers flocked to join the initiative with the likes of Covea, Aon and Chubb signing up. It was announced in September of this year, that the initiative was to begin beta market testing for the use in reinsurance contracts. All the contracts being used in the B3i market testing are hypothetical and not based on real customer data; however it is believed that the testing is based on real contracts.

Having a high number of participants using the same Blockchain is essential in order for it to reach its full potential. Since its inception, B3i has had 38 global insurers, reinsurers and brokers join up. It has most recently gained 23 new participants that will join in the market testing.

Ng said that having so many participants could be a sign that the initiative will cease to be just a flash in the pan and could instead prove impactful within the industry.

“Perhaps the fact that so many people have signed up to B3i could change the sceptical attitudes that have previously surrounded Blockchain,” said Ng.

“The participants have been sensible in narrowing the scope of B3i by using it within the reinsurance space. The initiative could help define how Blockchain is used as a point of interface between insurers and reinsurers.”

Impact of Blockchain

Despite its exciting sounding name, a Blockchain actually serves a prosaic function. It is a growing list of records, called blocks, which each contains a timestamp and transaction data. The individual blocks are resistant to modification of data, making it a more reliable way of doing business with third parties.

Allianz was one of the five founding partners that put together the first proof of concept idea for the initiative. The insurer said that the Blockchain system will help to make the insurance industry more digital.

Michael Eitelwein, head of group enterprise architecture at Allianz SE said: “B3i aims to improve efficiency for the industry, and we also wish for industry-wide digitalisation so that it can provide an even better service and even reaching customers we have not been able to serve to date.”

For the initiative to be fully successful rather than just noise, said Eitelwein, it needs widespread use.

“A further 23 additional companies have joined the market testing of B3i and this is very important because the power of a platform and network increases exponentially with the number of players on it,” said Eitelwein. “For the B3i platform to succeed as an industry utility, such momentum needs to continue and the team needs to continue to deliver at the same high standard.”

Gary Nuttall, managing director of Blockchain consultancy firm Distlytics, said that the opportunities around Blockchain technology have gained more interest over the last year. As well as having the 38-member initiative, Nuttall predicts that an increase in Blockchain will see traditional insurers partnering with Blockchain start-ups.

“There has been growing hype around Blockchain because it’s been used in different spaces such as property, and there is more public awareness,” said Nuttall.

“There has been a wave of Blockchain start-ups in the space that now see the insurance industry as being ripe for disruption and a strong opportunity to gain revenue. Aside from B3i, insurers are looking at developing Blockchain capabilities in-house. We will certainly see traditional insurers partnering with Blockchain start-ups and hedging their bets on the opportunities of the platform.”

Ng added that, even though there are brokers taking part in the B3i pilot, it might prove a concern to brokers surrounding their futures and role within the insurance value chain.

“The biggest challenge with this system is the transformation it will bring as the role of different participants will change,” said Ng.

“It is interesting that there are brokers taking part in this pilot because a lot of them are worried about their future in the digital world – B3i increases those worries. A lot of the business in the insurance sector is cost driven and brokers play a key part in this. As a result they might be cautious about how B3i develops further, but they will be interested in how it can help them do their job better.”

Real world application

At present, the processes of B3i are all hypothetical and participants are not handling real customer data. It remains to be seen how the technology will be used in a real world setting when, or if, the time comes for it to go live to market.

There will be various operational and regulatory challenges that insurance firms will have to tackle if Blockchain is to be used within business processes.

Although participants in B3i are looking at the implications of industry-wide live adoption, it may take the industry years to figure out how to embed it into their business.

Claudio Di Nella, managing director of financial services at Accenture, said: “It will be a long time before we see this initiative ready to go live, it is at least three years away.

“Going from proof of concept to production is not something that anyone has tried at scale mainly because maturity of their systems and technology. There will be various operational aspects that insurers will need to manage once it’s out there.

“Once the B3i participants start using the Blockchain with real world data, we still don’t know how they will handle the operationalising of it. Between where we stand today and mainstream adoption lie many hurdles. All of which will need to be addressed in order for it to work. We still don’t know how Blockchain will fair within regulatory environments across geographies.”

It is uncertain as to who will be held accountable by the Information Commissioner’s Office if data on the Blockchain is not managed in accordance with the in-coming General Data Protection Regulation.

However, according to Simon Gaffney, chief data officer at Willis Towers Watson, a participant of B3i, there is work being done to establish the terms of use in the regulatory environment.

“Until B3i becomes an entity, the terms of use are still uncertain,” said Gaffney.

“In terms of GDPR, if the data that exists on the Blockchain isn’t handled correctly, the regulator will go after the data controller. It’s the responsibility of everyone involved to hold discussions with the regulator and be transparent.”

However, Gaffney said that Blockchain offers up more solutions to how firms can handle data, rather than difficulties.

“High costs and friction within the insurance industry are because all of us are doing things differently,” said Gaffney.

“But if we get everyone on a common platform with common data standards, we have the opportunity to remove that cost. That is why B3i has expanded to reinsurers, insurers and brokers participating in using it across different classes of business.”

B3i is likely to go live in the market by 2018. Those taking part in the market testing will be feeling out the resilience of Blockchain and helping to develop the platform so that it can be potentially used within other spaces such as commercial insurance.

Ken Marke, marketing and communications lead at B3i and head of strategic futures at Ageas, said: “It would be too early to launch this prototype into wider areas, the current process is about improving the product until we reach a point where it can replace paper-based solutions.

“Once we’re happy with the finished product, we will look to put it out into other areas such as commercial lines and life and health. The appetite for Blockchain and technology is there, however there are lots of tweaks left to be made. But we don’t see any issues with the prototype going out to market next year or eventually entering new markets. Next year we will launch a legal entity and we will look for shareholders within our members. We want B3i to be run by the market and for the market.”

What remains clear from the experience in Monte Carlo is that, even with the obvious benefits of the technology, the B3i participants still have some way to go to overcome the lingering scepticism in the market.