Blockchain could offer benefits for captives

BURLINGTON, Vt. — Blockchain has the ability to create efficiencies in the captive ownership and management process, experts say.

Blockchain has three potential benefits for captive insurers: streamlining workflow processes, including seamlessly moving payment data through systems, completing regulatory filings more efficiently and reducing costs such as by eliminating manual processes and using software to automate some of the work, Havell Rodrigues, CEO for Boston-based blockchain technology firm Adjoint Inc., told attendees of the Vermont Captive Insurance Association conference in Burlington, Vermont, on Wednesday.

Mr. Rodrigues also asked captive owners to provide feedback on what a blockchain platform for the captive industry should like and what the potential barriers are to utilizing blockchain in captives. He also noted the ease of using a smartphone to order and pay for a car through a rideshare company such as Uber Technologies Inc. and said “that’s a user experience that we’d love to bring to the captive owners and the captive managers.”

But even captive owners who are uninterested in utilizing blockchain should pay attention to blockchain developments “because there’s a very good chance that the service providers they work with may realize there are some efficiencies in utilizing blockchain, especially in this era where there are so many mergers and acquisitions,” said Rocco Mancini, consultant for captive solutions with Marsh USA Inc. in Norwalk, Connecticut. “Some captive owners may not even realize that they’re accessing blockchain on the back end from one of their service providers.”

In June 2017, American International Group Inc. partnered with technology provider IBM and client Standard Chartered Bank P.L.C. in a pilot effort to create the first multinational, “smart contract” based insurance policy using blockchain.

“We’ve really been doing business very manually for years,” said Carol Barton, president of multinational insurance at AIG in New York. “How do we change that world? When you think about the industry, it’s based on a foundation of utmost good faith, trust. Blockchain is a way to build on that trust, so exploring it in the industry is a great idea and a great way to do that.”

Multinational programs are complicated because a company is headquartered in one location but has to be compliant in all of its locations, including “having locally admitted policies where it’s required that follow local governance and at the same time give you contract certainty,” she said. “One of the challenges, I think, is the timing of all of this.”

It could take years to issue a policy due to the need to secure local office approvals and comply with regulatory requirements, Ms. Barton said.

“But in the meantime, if there is loss, where is the contract certainty?” she said. “How do you know if you can adjust the loss in that country? If you can adjust the loss in that country, can you pay the loss in that country? If you can pay the loss in that country, what will be the taxes, fines, penalties that you may incur? Focusing on contract certainty is paramount in my mind to delivering true value, strategic value to clients, captives, etc.”

The pilot effort proved the visibility of the transactions at the local level, particularly in “challenging countries” from a regulatory perspective such as the United Kingdom, Kenya, Singapore and the United States, and for the risk manager at the global level, Ms. Barton said.

“In real time, it proved the concept that you could pay the premium, issue the contract and follow those steps in the process, all of the regulatory compliance steps in the process,” she said. “That is the biggest challenge for multinational programs.”

Reducing costs and lowering the risks, including of human error, are also benefits proven by the concept, in addition to driving efficiencies in the process and easing the reconciliation of payments and invoices at the local level, Ms. Barton said.

“Reconciliation is costly — it’s a nightmare,” she said.

Busting myths

Mr. Mancini disputed several myths about blockchain, including that blockchain and bitcoin are the same thing, that there are too many barriers to entry and that it is not secure.

“Blockchain in many ways is an evolving technology; in many ways it’s still in its infancy,” he said, adding that early efforts are targeting operational efficiencies. “There’s a lot of ambiguity. There’s a lot of potential opportunity. It’s definitely worth exploring, especially in the insurance industry where there are so many disputes, so many problems with trust, especially in the captive industry. We have a room full of people that are all familiar with the fact that sometimes the commercial insurance market just doesn’t respond in the way you want it to.”

The Blockchain Insurance Industry Initiative, known as B3i, has grown to 15 members since its formation in October 2016, led by reinsurers Munich Reinsurance Co. and Swiss Re Ltd., along with insurers Aegon N.V., Allianz S.E. and Zurich Insurance Group Ltd. It recently incorporated, with headquarters in Zurich. Other members include Assicurazioni Generali S.p.A., Hannover Re S.E., Liberty Mutual Insurance Co., Scor S.E., and XL Group Ltd., which does business as XL Catlin. The Institutes, based in Malvern, Pennsylvania, also has its own RiskBlock consortium.

“The insurance industry is trying to address these barriers to entry,” he said, adding that B3i may not be as large as other collaborations in the finance sector, “but for the insurance industry, it’s massive to just get these very slow-moving groups all together to work on these barriers to entry. These consortiums are all working to create clear standards and processes for blockchain in the insurance industry. They’re setting very, very impressive deadlines. They want to have a reinsurance contract on the blockchain by the beginning of next year. Think about it: It’s not that far away.”