The insurance industry blockchain consortium B3i has revealed the latest details of its blockchain smart contract prototype, progress that could squeeze insurance brokers out of the industry.
Called "Codex 1", the prototype aims to automate many of the catastrophe reinsurance processes currently handled by brokers, and ultimately to improve risk trading more broadly.
To achieve this, the prototype allows insurers to find reinsurers, and the reinsurers serving them will be able to access the same encrypted, secure distributed ledger.
Although the parties currently involved in the reinsurance workflow remain unchanged in Codex 1, the prototype shows that some of the services of insurance brokers will become irrelevant.
In a conversation with CoinDesk, Paul Meeusen, Director of Global Business Solutions at Swiss Re, said that if this blockchain prototype can be adopted on a large scale, it will have a huge impact.
Meeusen, also a founding member of B3i, said:
"The administrative work brokers are involved in—collecting documents from the parties and then ordering them passed on to the next participant—will certainly become redundant."
Consortium members—including Aegon, Allianz, Munich Re, Swiss Re, Liberty Mutual and Sompo Japan Nipponkoa—began work on Codex 1 earlier this year, evaluating several potential use cases for blockchain.
The consortium ultimately decided to convert the "Property Catastrophe Excess of Loss" (Property Cat XL) reinsurance workflow into a self-executing smart contract, especially because the global similarity of this type of business means the smart contract could be widely adopted in the future. He said:
"Whether the wind howls or the ground shakes, a catastrophe may occur—in simple terms, the nature of catastrophe is the same around the world."
Reducing costs
At the consortium's founding, Meeusen argued that blockchain technology could enable reinsurers to compete to offer better products, not just better platforms.
For example, in a typical "Property Cat XL" reinsurance contract, brokers receive quotes from multiple reinsurers and help organize the most favorable combination of risk assessment and pricing. They then facilitate communication among the parties while keeping the final terms of the deal private.
With Codex 1, however, most of the broker's role will be replaced by a permissioned blockchain, automating premium settlement and claims processing while ensuring that the parties do not know each other's terms.
Meeusen hopes companies can eventually focus their attention on providing more accurate risk assessments and more favorable prices. He said:
"We expect that once reinsurers' efficiency improves, they will soon be able to offer more attractive prices."
According to Meeusen, if brokers are not removed from the process, they should "charge lower commissions, because their services will become more efficient".
Expanding use cases
According to Meeusen, although this prototype focuses on property catastrophe, the consortium is ready to undertake multiple other projects on this basis.
Its next step is to expand the scope of services to include casualty insurance (such as motor vehicle accidents and workers' compensation), which Meeusen said requires only "copy-pasting" the current smart contract.
B3i also hopes to expand its blockchain work to include "proportional contracts" that rely on pro-rata terms, and to improve the design of insurance-related securities and bonds.
The prototype is scheduled for its first live demonstration at the Monte Carlo RVS conference in September. If successful, it could eventually create tokenized bonds, making trading risk as simple as trading digital currencies such as bitcoin and ether.
Meeusen concluded: "This is the master plan, but we must learn to walk every step before we can run."
Source: Sohu 2017-08-31