ENTERPRISE BLOCKCHAIN: DRAGGING INSURANCE OUT OF THE DARK AGES
Ryan Rugg, Global Head of The Industry Business Unit at R3
The history of insurance traces back to the development of modern business and insuring against its risks; property, cargo, medical and death. Insurance helps mitigate losses, wary of the financial losses a capsized ship could cause, forward-thinking vessel owners established communal funds that could pay for damages to any individual’s ship within the group. While this basic concept holds strong to this day, insurance is now a multi-trillion dollar industry that impacts almost every other sector of business, from healthcare to capital markets and aviation.
Despite the insurance industry’s image of being a conservative sector, insurers have been consistently innovative in the property and perils they protect against, but the supporting technologies and infrastructure have remained antiquated and unfit for purpose. Operational inefficiency is the single biggest threat facing the insurance industry today, and insurers are now taking steps to tackle this challenge head-on with purpose-built enterprise blockchain technology.
Inefficiency and fragmentation
Blockchain provides a solution to drive efficiency and security that would allow private data to be shared in a secure manner. Many policies are still sold over the phone rather than online, and the policies themselves are then processed on paper contracts, introducing huge potential for manual errors in claims and payments. This anachronistic infrastructure is even more surprising when you consider the complexity of the insurance ecosystem and the amount of parties involved in a transaction, including consumers, brokers, insurers, reinsurers and more.
The costs of this inefficiency and fragmentation are well documented. Inaccurate, disparate sources of data acquisition lead to long underwriting cycles and inaccurate risk profiling. Extensive manual intervention is required across the insurance value chain, ranging from contract placement to claims settlement. Archaic billing systems and complex billing processes lead to high reconciliation costs. Ambiguity in loss conditions, assessment procedures and claim settlement delays leads to increased litigation risk. It has been estimated that as much as 60% of customer premiums is consumed by these inefficiencies.
In addition, increasingly stringent and dynamic regulatory requirements continue to impact areas such as renewals and claims assessment. Insurers often have a complete lack of visibility of their liabilities and obligations, and a lack of transparency across the entire business. In today’s regulatory climate, it is unsurprising that authorities are beginning to demand more from insurers.
Blockchain technology is not a panacea for all of these problems, but with the right architecture a platform can address and reduce inefficiencies. There are also new revenue and growth opportunities in cutting-edge sectors such as cyber insurance that blockchain technology can help enable.
Tackling the blockchain privacy challenge
Blockchain offers insurance firms a new way to coordinate information between each other, by using a pre-agreed technology solution instead of relying on a third party’s bookkeeping. The technology enables disparate parties to connect via a shared platform environment. While this premise may appear simple at first glance, the insurance industry has specific requirements in relation to privacy and security that only certain blockchain platforms can fulfil.
For example, if a blockchain has the appropriate data privacy architecture in place, each insurance firm can maintain the same amount of control over their data as today, but with more flexibility. Unlike the traditional permission-less blockchain platforms – in which all data is shared with all parties – Corda shares information with those who have a “need to know,” ensuring the confidentiality of trades and agreements while also capturing the benefits of a shared distributed ledger infrastructure.
Blockchain platforms such as R3’s Corda have been purpose built for enterprise usage in industries such as insurance and tackle issues such as data privacy, scalability and security head-on. Following a period of experimentation with multiple consortia and technologies, insurers are now consolidating their blockchain efforts around Corda.
Testament to this is the recent decision of the industry-leading B3i consortium to port from IBM’s Fabric to Corda or RiskBlock decision to port from Ethereum. All the major insurance groups and ecosystems are coalescing on Corda in order to effect change and form standards. As Metcalfe’s Law states, the value of a network is proportional to the number of connections in the network squared – the more insurers that build upon on a common platform, the more valuable the platform becomes to all participants due to the interoperability of applications. The consolidation around Corda creates network effects industry-wide.
Contract placement: leveraging the network effect
To more tangibly examine the benefits of these network effects, we can look at a specific insurance use case that involves a network of many different entities and counterparties – contract placement.
Contract placement is the process of negotiating a potential insurance contract between a broker and an insurer in order to issue the contract to provide coverage for an end customer. For most commercial and specialty insurance scenarios, except for small commercial and some mid-market products, this is an arduous, complex process involving several entities – a broker, one or more insurers, and potentially a reinsurer and reinsurance broker. Furthermore, outsized risks generally mean that multiple insurers come together to insure the risk at the requested limit price, resulting in additional complexity for the broker in managing the placement process.
Contract placement, with the extensive negotiation cycle between a broker and insurers, as well as between an insurer and reinsurers – with or without a reinsurance broker thrown in – has several inefficiencies related to inter-firm coordination. Extensive manual intervention and reconciliation is required for brokers, insurers and reinsurers to keep track of requests and responses; high IT spend is required for all participating parties to maintain an audit trail of the negotiation history between different entities; and each firm must make heavy investments in document storage systems to maintain separate contracts over the policy lifecycle.
Leveraging the network effect by connecting brokers, insurers and reinsurers onto the same blockchain platform can deliver numerous benefits. These include:
- Near-instantaneous communication between participating parties to eliminate delays associated with reconciliation and coordination;
- Real-time consensus among all parties involved in the contract on coverage, price, terms and conditions;
- Complete audit trail from all sides of negotiations and data exchanges;
- Greater regulatory compliance throughout the insurance industry due to instantaneous communication of in-force contracts to the regulator;
- Eliminating the “double spend” problem of having the customer buy the same policy from different insurers by involving the notary (regulator);
- Reduced IT spend for individual firms, with eventual decommissioning of legacy document storage systems and reducing spend on document generation systems.
A brighter future
Blockchain technology offers great promise across many avenues, not only contract placement. Platforms like Corda can add value to many insurance business segments – commercial and specialty insurance, life insurance, personal lines and health insurance, along with niche areas like marine and trade credit.
The industry’s recent consolidation around Corda reaffirms that data privacy is pivotal for a network of enterprises and that the platform’s peer-to-peer data sharing approach matters for insurance blockchain applications going into production. For a highly regulated industry like insurance, only Corda can ensure that the entire supply chain of brokers, insurers, reinsurers and consumers can interact in a seamless, secure and private manner.
From contract placement to insurance as an industry, we are excited to see the new opportunities and efficiencies that blockchain technology will enable between this wide ecosystem of participants now that the right network – Corda – is in place.
Budgeting the unknown, forecasting the uncertain
Tarka Duhalde, Vice President, Financial Controller, IRIS Software Group
Volatility and uncertainty are still looming large. In late March the Bank of England raised interest rates from 4% to 4.25%. While many think interest rates will peak at 4.5% in Summer 2023, no one knows for sure. Likewise, no one knows what the price of fuel or the price of energy will be in six months, despite the UK not falling into a recession, as announced by the Chancellor in his Spring Budget.
Nevertheless, the high level of uncertainty will not disappear overnight, making the tasks of budgeting and forecasting even more difficult than they normally are, as there are simply so many unknown quantities at play. However, senior business leadership are continuously looking to their finance team for clarity – often asking them to generate accurate forecasts at a faster pace. In many ways, this request makes sense. After all, in a climate of uncertainty, who doesn’t want visibility?
However, generating multiple forecasts can put a lot of pressure on already-overworked finance teams. What’s more, when it comes to budgeting and forecasting, speed and accuracy can be at odds with each other. Too often, finance teams feel they have to choose between turning around an accurate forecast at a slower pace or a less accurate forecast at a quicker pace. Obviously, neither option is ideal.
That said, hope is not lost. If the right tools are in place, it is possible to turn around accurate forecasts at a rapid pace.
Eliminate guesswork and assumptions
Businesses and finance teams should want their forecasts to be as close to reality as possible. Yes, forecasts are about predicting the future, but they’re not magic, they’re science.
There are many ways to generate an accurate forecast, but the first step should always include cutting out wishful thinking, guesswork, and assumptions. If this isn’t done, businesses run the risk of inaccuracies. The ‘single truth’ is the goal and a wildly conservative forecast is just as incorrect as a wildly optimistic forecast.
Instead of relying on wishful thinking, guesswork, and assumptions, finance teams and businesses should base their forecasting on robust quantitative and qualitative techniques, including strong research, reliable data, and facts. As well as assessing the accuracy of previous budgets and forecasts, looking at the business’ historical data, checking the latest industry analysis, and seeing how the competition is doing. All of this will help get forecasts as close to reality as possible.
Embrace artificial intelligence
In addition, businesses should consider investing in automation, artificial intelligence (AI) and machine learning as the right tools will be less error-prone than humans. On top of this, they can help with eliminating conscious and unconscious bias and will spot data patterns finance teams cannot. They can also vastly reduce cycle times – freeing up team members’ time to focus on adding strategic value.
It is crucial to remember, the aim is not to replace employees with AI tools, rather the ultimate goal is for AI to work with people – helping to optimise the budgeting and forecasting process.
What’s more, the tools are only going to get more sophisticated as time goes on. Businesses and finance teams should seriously consider getting ahead of the curve and adopt these technologies sooner rather than later.
Adopt rolling forecasts
Instead of finance teams just generating a yearly static budget, they should also look to adopt rolling forecasts – ideally revisiting and reforecasting on a quarterly or even monthly basis. This will maximise visibility, giving leaders the crucial insight into how the business is performing in real time or near-real time, allowing more informed business decisions to be made. Especially in more uncertain times, it’s important to stay agile and rolling forecasts can facilitate this.
Whilst static budgets have their place, they cannot adapt to change. For example, if shortly after generating a budget, the business loses a major client or the wider economy takes a turn for the worse, the budget will already be out of date. However, rolling forecasts can adapt to change. In this way, they are more accurate and, by extension, more useful than static budgets.
Once a business is up and running, rolling forecasts can be highly efficient. What’s more, if AI and automation have already been embraced, there won’t be a need to sacrifice accuracy for speed.
If businesses and finance teams want to generate accurate budgets and forecasts during these uncertain times, they will need the right tools, the right strategy, and the right mindset. For maximum visibility, casting aside assumptions, embracing automation, and adopting rolling forecasts are three great places to start.
5 Often-Overlooked Investment Options To Consider Exploring In 2023
When choosing what to invest in, many people will initially focus on the stock market which is considered a more mainstream investment. However, investments are more than stocks, and there is a wide range of alternative investments you can add to your portfolio to not only add growth to your long-term returns but also to spread the risk. If you’re looking to diversify your investments or if you simply want to get started with something different, this guide will cover the overlooked investment options that you should consider in 2023. From investing in EIS schemes and commercial property to commodities and collectables, there is plenty to discover.
One of the first on our list of overlooked investments is EIS investment opportunities, one of many flagship policies developed by the UK government to support early-stage companies. With an EIS investment, you would be helping to support businesses in exchange for various tax reliefs. Depending on your circumstances, this could include 30% income tax relief, tax-free gains, CGT deferral, loss relief, or inheritance tax relief. To understand more about investing in EIS schemes and their benefits, head over to Oxford Capital, to learn more.
When property developers are looking to finance new commercial or residential projects, they typically do so with property bonds. These bonds are used to raise capital for the projects from investors and typically last for a fixed term, between two and five years. This form of investment is attractive due to the higher interest rates, ranging from 4% to 15%, offered in comparison to traditional government bonds, which generally perform at under 4%.
While there is a risk that the project could be abandoned due to external factors such as a rise in material costs, disruptions to supply, and a lack of finances, if the project goes to plan, you will see a return of your original investment as well as any interest accumulated. However, you can also opt to receive the interest payments monthly, quarterly, or annually throughout the course of the project, in which case, at the end of the project, your original investment will be returned with any leftover interest that has not yet been paid.
The term commodity encompasses a variety of physical investments you can make. Unlike traditional investments such as stocks, bonds, or funds, these investments have both a use-value and an exchange value. This is because when you invest in commodities, you gain ownership over a small amount of the resource you are investing in. As there is always a need for physical goods, these commodities are an excellent way to diversify your investment portfolio and hedge against inflation, market changes, and the depreciating value of different currencies.
Some of the most common commodities you can invest in include:
- Agricultural products.
- Crude oil.
- Precious metals.
- Diamonds and other precious stones.
- Spices, sugar, and salt.
When looking into properties to invest in, many people choose residential options as they can renovate and sell or rent these homes. However, as the property market can be particularly volatile, a great option when you want to invest in properties is to look to commercial options instead. When it comes to commercial property, there are many ways you can invest, and these include:
- Direct investment:This means buying a share or all of a property, which can then be rented out to businesses.
- Direct commercial property funds:Often referred to as bricks-and-mortar funds, this is the most popular way to invest in commercial property. With this fund, you invest into a scheme that invests directly into an existing portfolio of commercial properties, which pays out the interest of your investment monthly, quarterly, or annually.
- Indirect property funds:Similar to the direct commercial property fund, with this fund, you would invest in a collective investment scheme that invests in the shares of property companies in the stock market.
Peer-to-peer lending is a risky venture where you would invest directly into start-up enterprises in order to help them get off the ground. It’s an excellent way to help small business owners get going with their dreams while also creating a lucrative investment. When you choose peer-to-peer lending, you loan the start-up a specific amount with the promise to pay back with interest. You can determine a timeline for this, or you can also choose to have the interest paid back monthly, quarterly, or annually.
However, as already mentioned, peer-to-peer lending is a risky venture, as the company you invest in could fail, and in that case, they would default on your loan. With this in mind, before you choose peer-to-peer lending, you should always thoroughly research the start-up’s fundamentals first, as this will give you a better insight into the viability of the business.
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