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NEW YORK — The insurance industry may be better suited for blockchain than the financial services sector, which created its own solution, according to a panel discussion hosted Monday by the New York City Bar Association.
“I think insurance is the perfect industry for blockchain,” said Nick Williams, senior partner at Clifford Chance L.L.P. in New York. “Accuracy in pricing will increase as (distributed ledger technology) platforms increase the transparency of risk.”
Intermediary costs will be lower and risk assessment will improve as information is more easily verifiable and data more easily shared, which will also further enable fraud detection, he said.
Those thoughts were echoed by Paul Meeusen, head of distributed ledger technology at Swiss Re Ltd. in Zurich.
“If there is one industry where the time value of money is key, it’s insurance,” Mr. Meeusen said.
Looking at blockchain, he said, “It seemed very intuitive that this technology was very suitable to some of the key issues we deal with in our industry.”
By some estimates, Mr. Meeusen said, only some 50% of premiums are eventually used to pay for indemnity, “so there’s a lot of frictional costs lost across the value chain,” he said.
The Blockchain Insurance Industry Initiative, or B3i, of which Swiss Re is a founding member, is trying to change that.
“We focused on the bit in the middle — the business-to-business interaction between the insurance companies, the reinsurers and the brokers,” Mr. Meeusen said. “There is a lot of working capital that gets lost in this very inefficient process between primary insurance companies, reinsurers and brokers.”
The Initiative has grown to 38 members from its original 15 and recently completed two months of testing of the prototype of its first offering, a natural catastrophe excess-of-loss product, according to Mr. Meeusen.
Traditional blockchain technology is less appropriate for the financial services industry, said Ryan Rugg, a director in New York with R3CEV L.L.C., an enterprise software firm launched in September 2015 that brought together banks, financial institutions, regulators, trade associations and professional services firms and developed Corda, its distributed ledger platform designed specifically for financial services.
Issues of both security and scalability make traditional blockchain technology not “fit for purpose” for the financial services sector, Ms. Rugg said. Instead, the sector set about building Corda, which is now in development among the more than 100 members of R3.
Corda, which utilizes “states” rather than blocks due to the way blockchains process transactions, was “built by our members for our members,” Ms. Rugg said, and is an example of a new distributed ledger.
Blockchain’s potential for the insurance industry, however, is not without obstacles.
The enforcement of contracts which utilize the new technology remains unknown, according to Mr. Williams.
“Given the lack of case law on this, there remains the question as to what forms of smart contract will ever be enforceable under law,” Mr. Williams said.
Clyde & Co on Thursday said it has launched Clyde Code, a consultancy to advise insurers and clients in other sectors on issues related to smart contracts, blockchain and distributed ledger technologies.