Smart Contracts, Smarter Insurance: Blockchain 5 October 2016 [click for next slide]

Insurance Digitalization Online customer acquisition – Google AdWords replaces the agent Underwriting with no-human interaction Fast-tracked claim settlements for your best customers ‘Internet of Things’ (IoT) sensors that transmit loss event data These are the benefits we always hear about … but what else is there?

What Else Can Digitalization Do? Provide a perfect audit trail Reduce the risk of record-tampering, fraud Streamline administration and management of policies and claims Accelerate post-event activity for non- underwritten covers (parametrics, industry loss, ILWs)

Blockchain: Purpose and Objective Secure, distributed and immutable record of transactions Enables safe transaction of value between two parties New transactions aggregated into block which is added to previous blocks, hence ‘block-chain’ is linked list of blocks of transactions. Content courtesy of Crowdaura

Blockchain Basics Distributed Ledger Smart Contract Immutable, append- only database Cryptographically secured Distributed, massively replicated Smart Contract Self-enforcing terms and conditions Execute administrative actions automatically The code is the contract! Content courtesy of Symbiont.io

Blockchain in Action: Ethereum Inspired by Bitcoin, Ethereum is a programmable blockchain Enabling the creation of decentralized applications (dapps) using smart contracts Automate processes with extreme fault tolerance and zero downtime Content courtesy of Crowdaura

Who Uses Blockchain? Bitcoin – this is the one most people talk about Cryptocurrency through distributed-ledger technology Perhaps the largest application of blockchain so far Fintech/insurtech are catching on as well Insurance has been watching Several pilots are in progress with high-profile re/insurers worldwide Still considered to be in its infancy

Why Do Insurers Need Blockchain? Insurance enterprise systems are designed around the manual business processes Replacing/augmenting them means replicating paper workflows digitally (sacrificing true benefits of digitalization) Commercial insurance, in particular, suffers from the fact that paper-based workflow logic still underlies their automation   (Courtesy of Mike Fitzgerald, Senior Analyst, Celent)

New Technology, New Processes Successful digitization of insurance involves replacing paper-based processes with ones that leverage new capabilities and deliver higher quality outcomes at lower costs. Recent advances in digital technologies, and one technology in particular — blockchain — offer the potential to fundamentally change the insurance business paradigm. The ability to add information which cannot be altered into a single, shared, immutable, global source promises to reduce costs, collapse wait times, and increase service levels. -Mike Fitzgerald, Senior Analyst, Celent

Insurer Benefits from Blockchain Operational efficiency Reduced dispute resolution Improved transparency Reduced latency Reliable audit trail No reconciliation Better cyber security (Courtesy of Symbiont.io)

What’s a ‘Smart Contract’? The contract terms and conditions become rules in the blockchain platform Third-party data source (the ‘oracle’) indicates when the conditions of the contract have been met Execution automatic based on the coded contract terms and inbound data Imagine a contract that does all the work itself. This is it.

(Courtesy of Symbiont.io) Example: ILW Contract Trigger terms: US ANP $20 bn Annual aggregate loss $3 bn franchise $10 mn in protection Reporting agent: PCS (Courtesy of Symbiont.io)

Smart Contracts and Cat Swaps ILWs (cat swaps and reinsurance) among most popular areas of exploration Simple structure, non-underwritten cover Use of a third-party oracle rather than re/insurer workflow reduces time and admin Third-party oracle also removes bias from the transaction Reduced dispute risk as there’s effectively no claims process (the way there is with traditional cover) Parametrics (like Bosphorous Re) would also fit into this category

(Courtesy of InsuranceLinked.com) But, ILWs Aren’t Enough Small market: only $4 bn in notional, 2/3 of which is the US market Limited growth given current soft reinsurance market conditions Trading is volatile from year to year based on retro market trends Ultimately serves only a small portion of the global $400 bn prop-cat market, let alone global primary insurance (Courtesy of InsuranceLinked.com)

Commercial Claim Management Indemnity cover obviates need for a third- party oracle However, still plenty of benefits to blockchain in commercial insurance Advantages include: Permanent record of all discussions – time- stamped and tamper-proof ‘Single version of the truth’ Reduced dispute risk Reduced cycle time as a result of above Lower overheads, lower LAE because of reduced cycle time

Parametric Primary Insurance Covers Already gaining traction for some prop-cat business in the US Primary insurance triggers on event magnitude rather than paying out based on the insured’s loss Potential examples: Earthquake (magnitude, USGS or local sensors) Flood (floodwater depth at various locations) Terror (fatalities/casualties/hostages, incident/weapon type, event duration)

IoT and Automatic Triggers Embedded sensors Automatic payment on event magnitude Data aggregation for dynamic catastrophe definition Sensors serve as the oracle Send event threshold/magnitude data to the blockchain Data sent initiates smart contract execution From sensor to payment, human interaction becomes entirely unnecessary

Questions?