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The Actuary Magazine

In recent years, the insurance industry has faced renewed challenges from increased competition, compressed margins, increased regulatory scrutiny, disruptive technologies and rapidly shifting customer expectations. In response, insurers are actively exploring new ways to achieve operational efficiencies, reduce their cost structure and drastically improve the customer experience. While forward-looking life and health (L&H) insurers are actively embracing emerging technologies such as artificial intelligence (AI) and robotic process automation in conjunction with the internet of things and big data, there is buzz in the air around the new kid on the “block”—distributed ledger technology (DLT), or blockchain—in response to these challenges.

DLT 101: An Introduction

DLT, at its heart, is a method of collectively maintaining a record on an immutable, distributed ledger.1 In contrast to existing systems, it does not rely on intermediaries (e.g., banks) to create and uphold trust. Instead, the ledger is “distributed” or shared among many different parties. Membership in the distributed ledger can be open to all (a public network), or only open to select parties (a permissioned network).

Transactions on the DLT can generally be classified into three key steps.

  1. Select parties exchange a unit of value representing money, medical records, customer information or anything else that can be digitally described.
  2. All participants in the system use predetermined rules to determine that the transaction is valid (e.g., ensuring it makes sense in the context of previous transactions, authenticating parties’ identities).
  3. Once participants validate a transaction, it is permanently added to the “chain” of transactions that form the ledger as a new “block.”

Critically, once entered, information on the ledger can never be erased or altered. Any given DLT therefore gives a verifiable record of every transaction that has taken place and can be trusted implicitly.

This powerful technology provides four unique and transformative capabilities that have a wide-ranging impact across industries.

  1. Transparency and auditability. All data added to the chain is immutable, and can be viewed by all members (although some implementations allow for privacy). This makes it a lasting record upon which all network participants can rely.
  2. Trust. All data blocks on a chain are interconnected and mutually dependent, making the entry of fraudulent data essentially impossible. That, in tandem with the distributed validation of transactions, makes it possible for all participants to trust one another.
  3. Disintermediation. Transparency and trust together enable direct peer-to-peer transactions, allowing DLT to displace traditional intermediaries such as payment service providers.
  4. Automation and smart contracts. Through smart contracts, which are defined as a predetermined set of rules that can be thought of as a series of “if” statements, the DLT can also actively trigger transactions when predetermined conditions are met. These can automate routine payments and are especially applicable to industries like insurance where policies clearly define the conditions that trigger a payout.

The underlying key to success with DLT is a high degree of collaboration among trusted parties. The strength of a network, such as a distributed ledger, lies in the number of its members. This presents an interesting opportunity for an industry so heavily dependent on the integration and transfer of digital assets among parties in its ecosystem (i.e., reinsurers, vendors, regulators, providers).

Global Insurance Applications of DLT

Rising Global Interest

In recent years, the global financial services industry has been extensively exploring the applications of DLT.2 Banks, especially, prize it for its ability to detect and reduce fraud, and its role in streamlining operations while better and more securely meeting customers’ needs.

Among insurers, DLT is still in its adolescence. Public skepticism largely associated with the hype around cryptocurrency, regulatory concerns and a general lack of awareness or understanding have weighed on insurers’ minds and prevented enthusiastic adoption of this technology. However, given the quickly evolving industry dynamics, the global insurance industry is seeing a rapid uptake in both interest and activity. Successful efforts to realize this technology’s potential require not only the right capabilities, but a sufficiently large network. In order to gain these prerequisites for success, many companies with scale are going it alone, while even more prefer to work with consortia.

The Power of Collaboration

For a few large global players, going it alone is a viable option. They have the scale to make headway with their own solution and are willing to build, buy or create partnerships with DLT startups to gain the required capabilities. For example, global insurer and asset manager Allianz is assessing the viability of deploying smart contracts across its multiple global entities. Rather than transferring assets between disparate departments and subsidiaries, it hopes to do so by automatically triggering actions through the use of smart contracts when certain conditions are met.3 This would reduce the administrative burden on employees and allow the enterprise to make internal transactions more quickly and inexpensively.

The power of distributed ledger technology is truly enabled when engaged with a broader network.

However, the power of DLT is truly enabled when engaged with a broader network. For that reason, most players are opting to be part of a consortium, which typically includes industry representatives, governments, vendors and regulators. These groups support the development of decentralized business platforms and applications, allowing all members to transact and contract with one another on the DLT. Some prominent consortia, such as Enterprise Ethereum Alliance, R3 and Hyperledger, provide open-source platforms to enable cross-industry applications of this technology.

One of the largest is R3, a New York–based company that leads a consortium of more than 70 large financial institutions in efforts to develop a distributed ledger applicable to the broader financial system. Its code was made open source in 2016 and is designed to quickly and easily scale to serve global financial markets’ needs. R3’s members, and the financial space more broadly, are poised to benefit from the decreased transaction costs and increased security the platform can provide.

Consortia are becoming a strong force in the insurance space. Many insurance companies have joined the DLT Insurance Industry Initiative (B3i), a European joint venture that market-tested a DLT reinsurance prototype and is expanding its focus to include commercial and primary insurance, including L&H applications. More important, it is laying the groundwork for future collaboration and standardization across key players and parties within the insurance ecosystem. This effort is crucial to eventually integrating the multiple DLTs that are in development across industry value chains. Establishing common standards will dramatically amplify this technology’s ability to drive operational efficiencies and a seamless customer experience. Through B3i, network participants are actively pursuing cutting-edge technology to address insurance-specific, industrywide pain points.

RiskBlock Alliance—a partnership between The Institutes, a risk management and insurance knowledge group focused on the property and casualty (P&C) industry, and LIMRA—is another group dedicated to accelerating the insurance industry’s adoption of DLT.4 This consortium includes more than 30 insurers in the United States and has already developed a DLT-based auto insurance solution alongside several use cases. By bringing insurers together to discuss the strategy, architectural requirements, standards and governance around DLT, it enables the industrywide collaboration vital to unlocking this technology’s benefits. Lucky for the L&H industry, after a successful track record of P&C use cases, the partnership plans to focus its next DLT application on annuities.

IconBy bringing insurers together to discuss the strategy, architectural requirements, standards and governance around DLT, it enables the industrywide collaboration vital to unlocking this technology’s benefits.

The desire to embrace DLT in insurance may be off to a slow start, but it is quickly gaining momentum. As consortia, governments and organizations begin to collaborate and develop a better understanding of the applications of DLT, viable DLT companies, proofs of concept and lessons learned will increasingly emerge.

DLT in Life and Health Insurance

The Suitability of DLT

Like most technologies, DLT is by no means the right solution—or even a viable solution—to all challenges faced by the L&H insurance industry. However, based on the foundational elements of DLT, there are several requirements (i.e., suitability criteria) that, when met in part or in full, indicate DLT may be an effective solution for a particular business issue. Some DLT problems may possess only a few of these characteristics, and their relative importance may vary by context and organization, but these five criteria can be useful in assessing the suitability of DLT as a solution across the L&H value chain (see Figure 1).

Figure 1: Criteria for Assessing the Suitability of Distributed Ledger Technology

The Need for a New Solution

Leveraging these criteria, several pain points faced by L&H insurers are thought to be especially amenable to resolution through DLT:5,6

  1. Inefficient exchange of information. The frequent flow of data among customers, third parties, vendors, reinsurers and regulators is often slow and difficult to integrate, requiring time-consuming manual intervention or complex processes to facilitate.
  2. Vulnerability to fraud. Verifying policy application and claims information is often prohibitively costly, leaving insurers open to otherwise avoidable losses.
  3. Fragmented data. Lacking a single source of truth and with data silos spread across organizations, many insurers struggle to gain a complete picture of their business.
  4. Manual processing. Inhibited by legacy systems, a large portion of insurers still require costly and inefficient manual processes. Labor-intensive processes and an inability to automatically approve simple applications and claims limit opportunities for back-office efficiencies.
  5. Burdensome customer experiences. Policyholders are frequently subjected to inefficient processes, long wait times and customer experiences unacceptable in comparison to those offered by other industries.

Combined, these inherent challenges within traditional L&H insurance business models limit an insurer’s capacity to combat increasing operational costs and adversely affects its ability to ultimately improve the overall customer experience. The need has never been greater to identify an appropriate solution to address these friction points, and only by gaining a deeper understanding of the foundational elements of DLT will the industry identify whether or not it has the transformative potential other industries are buzzing about.

Potential Use Cases

While implementation remains in its infancy, several insurers and consortia are building out use cases to better understand the risks and benefits of DLT as a solution. In an attempt to bring this technology to life in the context of L&H, three use cases are illustrated. They depict the potential future state processes, including the network participants and the key activities affected as a result of leveraging DLT.

Use Case 1: Group Health Claims Payment

Driven by the sheer volume of data transfer, high-cost manual processes and the dependency on trusted partners, the first use case focuses on health claim payments, leveraging DLT to exchange data with trusted health care providers beginning with policy issuance.

Key activities include:

  1. The plan sponsor uses DLT to issue a request for proposal (RFP) to insurers, including quote details and required member data; data flows from plan to sponsor to insurers.
  2. The insurer receives the data from the plan sponsor via DLT and generates a quote.
  3. If the quote is accepted, the plan sponsor and insurer bind the policy with a DLT-enabled smart contract that contains coverage details, plus terms and conditions; data flows from insurer to plan sponsor.
  4. When either an employee or health service provider submits a claim, they do so on the blockchain, automatically triggering claims processing via smart contract; data flows from employee or health service provider to insurer.
  5. The smart contract looks up the source of the claim in a directory of trusted service providers, automatically paying if the provider is in this directory; data flows from insurer to service provider.
  6. If the claim does not come from a trusted service provider, it is routed for manual review (per predefined claim amount limit thresholds) and paid after approval; data flows to claims reviewers.

Key benefits include:

  • Reduced fraud. Automatic verification of member data and trusted providers eliminates opportunities to mislead.
  • Efficient data exchange. All data is integrated via DLT, and most of it flows automatically.
  • Automated claims processing. DLT enables a sharp reduction in manual labor required to investigate and approve claims.
  • Enhanced customer experience. Customers receive payment faster and with no paperwork required.
One of the pain points faced by L&H insurers is a burdensome customer experience. Policyholders are frequently subjected to inefficient processes, long wait times and customer experiences unacceptable in comparison to those offered by other industries.

Use Case 2: Sales and Underwriting

The second use case applies DLT to the life insurance sales and underwriting process, which remains heavily dependent on the data exchange amongst several parties. This application of DLT has the potential to change the traditional business model by disintermediating the adviser in the initial data exchange process and requires the collaboration of health care providers as well as policyholder consent.

Key activities include:

  1. The customer requests a quote by providing necessary information through the blockchain; data flows to insurers, who are automatically notified.
  2. The insurer obtains health information through third parties such as health care providers and physicians also connected through the ledger; data flows from third parties to the insurer.
  3. The insurer matches the customer with a risk profile, generates policy details, and offers a quote directly to them; data flows from insurer to customer.
  4. Once the customer accepts the quote, the DLT generates a smart contract reflecting the policy’s terms, and reinsurance policies where applicable; data flows from customer to insurer and reinsurer.

Key benefits include:

  • Reduced fraud. Insurers can obtain data directly from third parties, rather than relying on the customer.
  • Enhanced customer experience. The customer need not manually provide data or submit to burdensome exams (e.g., blood tests).
  • Automated diligence and underwriting. Insurers can quickly and automatically verify information and generate an appropriate price.
  • Efficient information exchange. Integrating entire health ecosystems on the blockchain allows insurers, customers and third parties to seamlessly communicate.

Use Case 3: Life Claim Processing

The third use case applies DLT to the life insurance claims process, recognizing that this is a highly manual process for a majority of carriers today despite a large volume lacking the need for complex adjudication.

Key activities include:

  1. A hospital uploads death information on a distributed ledger to which the insurer has access, automatically triggering a smart contract that confirms details (e.g., validity, beneficiary, payment amount) and pays out simple claims; data flows from hospital to insurer.
  2. If the life insurance policy is complex and requires manual review, the smart contract automatically escalates it to a claims team; data flows to this team.
  3. If a fraud investigation is required, a special investigation unit is brought in to request additional documentation from family members; data flows to the investigators.
  4. Upon the claim’s approval, payment is made automatically to the beneficiaries with no requirement to apply for it; data flows to beneficiaries.

Key benefits include:

  • Reduced fraud. Automatic escalation to investigative teams as needed provides a safeguard, preventing fraud.
  • Efficient exchange of information. Linking hospitals and insurers via DLT allows carriers to respond instantaneously to covered events.
  • Automated claim processing. Insurers drive efficiency by straight-through-processing simple, commonly occurring claims.
  • Enhanced customer experience. Removing the need to apply means the customer will be paid faster and with less effort required.

Considering DLT

The innovative nature, complexity and, to some extent, the pure stigma associated with DLT has deterred many L&H insurers from entertaining the possibility of its applications within their operations. However, given the pace at which the industry is forced to react to the shifting market dynamics, there is no reason to leave any stone unturned.

Getting Started

As you begin to consider potential technology-enabled solutions within your organization, consider:

  • Enhancing your understanding of DLT. Gain a foundational understanding of the key elements and benefits of DLT through online resources, expertise within your organization or subject-matter experts within your ecosystem.
  • Engaging in ideation sessions. Host internal or external ideation sessions with representatives from varying lines of business and across the value chain (i.e., regulators, vendors, underwriting, claims) to identify an initial list of industrywide or organization-specific priority pain points to be addressed.
  • Assessing the suitability of DLT. Using the suitability criteria identified in this article, assess whether blockchain may be a suitable solution for the initial list of pain points, and as a group prioritize those you believe to be an appropriate use case or proof of concept.
  • Joining a consortium. Enhance your collaboration efforts within your insurance ecosystem and leverage the existing partnership network, capabilities and proofs of concept already developed by consortia.

Ultimately, consortium-driven distributed ledgers can accelerate and enhance the potential benefits of DLT. They provide the opportunity to engage various industry stakeholders (e.g., peers, regulators) to share capabilities and expertise; promote valuable discussion, learning and facilitate the ideation process; and aid in shared costs and risks among members. After all, a technology that at its root is shared and distributed across different players in the network should have a shared and distributed approach to development. A hurdle for carriers to overcome will be the level of collaboration required among competitors. However, industrywide problems require industrywide solutions, and these organizations are uniquely positioned to bring together disparate parties in pursuit of mutual benefits.

Opportunities Ahead

As L&H players race to find an appropriate solution for challenges inherent in traditional operations, they should not overlook the potential applications of DLT. By partnering with peers, competitors, regulators and other members of the insurance ecosystem, insurers have the opportunity to resolve a wide range of longstanding, cross-industry pain points and position themselves for future growth and profitability.

Melissa Carruthers, FSA, FCIA, is a manager in Monitor Deloitte Canada and focuses on strategy and operations, including the applications of emerging technologies for life and health insurers in Canada.
Louisa Bai is a senior manager and the head of Business Development for Deloitte Canada’s Blockchain Consulting practice.
Russell Shirra is a consultant in Monitor Deloitte Canada and focuses on insurance strategy.