BraveNewCoin: PwC challenges insurance industry to adopt ‘technologies such as blockchain’ and deliver ‘millions in savings’
Luke Parker || Blockchain Adoption || Insurance || Insurtech
PricewaterhouseCoopers (PwC) recently challenged the reinsurance industry “to take brave steps in their cost reduction strategies,” at the international rendez-vous of insurance and reinsurance, in Monte Carlo. The event attracts major players in the world Reinsurance markets, including reinsurers, insurers and brokers, as well as a large number of lawyers, bankers, accounting and rating companies.
The insurance industry is a major component of the economy by virtue of the amount of premiums it collects, the scale of its investment and, more fundamentally, the essential social and economic role it plays by covering personal and business risks.
The latest industry report from Swiss Re, a leading wholesale provider of reinsurance and insurance, states that direct premiums written in 2015 totalled $4.5 trillion, before reinsurance transactions. The world insurance study is based on direct premium data from 147 countries. The U.S market is the largest market, accounting for $1.3 trillion.
A reinsurance company simply insures insurance companies. Insurance companies buy reinsurance for two related reasons, as an alternative to capital and to reduce the volatility of their results. Aon Benfield, a leading reinsurance intermediary and full-service capital advisor, estimates that global reinsurer capital rose by 4 percent to a new high of $585 billion over the six months to June 30, 2016. This calculation is a broad measure of the capital available for insurers to trade risk with.
Responding to profit pressure, 70% of insurance business leaders already plan to implement a cost reduction initiative over the coming year, PwC revealed on Monday. However, “squeezing a few percentage point savings is no longer enough in such a competitive and disrupted marketplace,” the firm argued.
The current environment triggered the challenge to the insurance industry. “Be bold, be brave and be creative,” states PwC. “Those who take up the challenge will see significant cost savings and a game-changing boost in customer relationships.”
“Real business transformation is necessary,” added Stephen O’Hearn, global insurance leader at PwC. “Many insurance executives have had bruising prior experiences with cost initiatives failing to deliver long-term gains or culture change within the organisation. But the time to confront the challenge is now.”
O’Hearn recently co-authored two reports on blockchain technology in the insurance and reinsurance industry. A PwC-sponsored report, published in July by Z/Yen Group, highlights how blockchain technology might transform wholesale insurance.
“Chain Reaction: How Blockchain Technology Might Transform Wholesale Insurance” describes a “multiplicity of repeated checks,” which raise costs and result in delays. “If a client deals with a broker which deals with multiple underwriters, most of which deal through brokers with reinsurers, a single transaction can involve many tens of participants, each of which has to perform KYC/AML along the chain.”
The report proposes using a blockchain “to store all ancillary contract documents,” which could then be shared between the broker, underwriters, reinsurers and claims agents. This would ensure information consistency and remove the need for repeat checks. “The blockchain would also be viewable by regulators, tax authorities and other participants,” the report states.
O’Hearn also co-authored a separate PwC report published last Sunday, “Blockchain: The 5 billion opportunity for reinsurers.” The document outlines three specific areas where blockchain solutions could save costs; processing, new business, and full transparency.
The percentage of premium used to pay the costs of acquiring, writing, and servicing reinsurance “are typically 5%-10% of premiums,” PwC states. “Our analysis of the potential for both more efficient data processing and reductions in claims leakage and fraud indicates that blockchain solutions could remove 15% to 25% of expenses, so delivering an industry-wide saving of $5-10 billion.”
PwC is not the only advisory firm acknowledging the benefits of blockchain technology for reinsurers. In April, Ernst & Young released a report stating “blockchain has the potential to eliminate error, negligence and detect fraud. This displaces the roles of a trusted third party, prevents duplicate transactions and provides a verifiable public record of all transactions.”
Despite the benefits, only a few insurance and reinsurance companies are currently working on their own blockchain projects. In June, global insurance provider Allianz and Nephila Capital Limited announced a catastrophe bond and swap prototype using blockchain and smart contracts for settlement.
In May, Blem Information Management Ltd’s XLRAS reinsurance administration system started using a Z/Yen Group blockchain system, MetroGnomo. The open-source timestamping and document retrieval system is used to increase trust in reinsurance records. According to Blem, XLRAS is used daily by London market companies and managing agents of insurance heavyweight, Lloyd's of London, to optimize their reinsurance assets and cashflow.
Other reinsurers are taking the wait-and-see approach. “There is a huge potential that Blockchain impacts the insurance industry,” one of the world's largest reinsurance groups, Hannover Re, told BraveNewCoin on Wednesday. “There is a huge potential that Blockchain impacts the insurance industry. Therefore, we observe the different initiatives and insurtechs and will decide when it is the right time for us to participate.”
In May, the world’s largest reinsurer, Munich Re, authored an article in Topics Online, a magazine for insurers called, explaining the concept of bitcoin and blockchains in detail. The authors conclude "it is still early days for the blockchain." It would therefore be wise to take a serious look at the matter now to avoid being caught off guard later, “should a revolution in the financial system take place.
PwC is currently working on “a number of proof of concept applications” to demonstrate the potential of blockchain technology within insurance and reinsurance, the firm revealed in its latest Blockchain report. “We believe it’s important to show that potential blockchain applications not only work, but provide the right solutions to specific business problems.”
The firm’s EMEA (Europe, the Middle East and Africa) insurance consulting leader, Patrick Maeder, urged reinsurers to take up his firm's challenge to cut costs. “Resistance from within the organisation is a common challenge for leadership teams looking to streamline,” he said. “But insurers must bite the bullet and tie their cost reduction measures to their modernisation strategies.”
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