Blockchain solutions in Reinsurance

Blockchain technology can be used to create a new system for reinsurance or agency contracts, allowing reinsurers to decentralize their finances by creating a “peer-to-peer” banking system by swapping liabilities between itself and its client.

How does Blockchain actually work?

The basic property of blockchain technology is a distributed ledger that tracks data. For example, a bank uses a ledger to secure a loan and a payment, just as a supermarket uses a ledger to transfer inventory. In the case of insurance contracts, they are used to exchange financial information.

The benefits of using a blockchain-based ledger system in reinsurance for reinsurers include:

Gain greater control over underwriting and claims settlement than with traditional derivatives

Generate more revenue by allowing reinsurers to directly offer large loss events or risk coverage

Have cost savings due to the reduced cost of transaction processing and settlement

Decrease the risk of delays and inefficiencies in settlement

The benefits of using a blockchain-based ledger system in reinsurance for agency contracts include:

Remote monitoring of costs and underwriting strategies

Procurement savings since it allows distribution more effectively

Ability to insure less sophisticated contracts

Higher revenue of around $300 million as stated by Bloomberg estimates

Pros and cons

Some people have expressed concern that blockchain technology raises the risk of financial fraud, identity theft and compromise. One reason for this might be the self-imposed, indeterminate nature of the ledger. But a distributed ledger can achieve tremendous efficiencies when utilized in other sectors, particularly in complex contractual spaces that can be easily duplicated.

For example, the U.S. Financial Accounting Standards Board (FASB) recently released a new guide that sets the parameters for the use of new technology such as blockchain to improve financial reporting. The guide addresses reporting of held for sale securities and securities under management, changes in control and controls over securities, reporting of derivatives, real property and property and casualty reserves, remuneration for independent valuation of securities held by a general partner of a master limited partnership, and data in certified books and records. The guide creates a new code of generally accepted accounting principles (GAAP) procedures that can be utilized in analyzing investments with these new reporting rules.

For reinsurers using blockchain technology, only a small portion of their financial results will be affected by the ledger. Once a person knows who owns a particular part of the ledger, the exchange can be “closed” without having to re-key terms in the ledger. According to industry experts, the reinsurance value attributed to a particular party is managed in a centralized location in the form of “blockchain transaction values.” If a claim were to be filed against a reinsurer’s agency broker, reinsurers could use its value in the central repository of the ledger, instead of the brokers’ value.

Analysis

The innovative concept of blockchain in the reinsurance industry remains a relatively untested topic within the industry. It has yet to be explored in depth with the exchanges, but various stakeholders are already suggesting potential solutions for integrating the new technology. It is obvious that there are many stumbling blocks that have to be cleared before blockchain can truly disrupt the reinsurance industry.

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