Preparing for a Subro Blockchain Solution
The insurance industry is being presented with technology opportunities in a way it has not seen before. Who would have thought just ten years ago something called a chatbot would converse with policyholders, an auto estimate could be written using artificial intelligence, or we would consider riding in a vehicle being driven autonomously? Today, these are real solutions impacting our industry, but we are just getting started with technology that has the potential to transform our industry. The use of distributed ledger technology (DLT), or commonly known as blockchain, may be one of those technologies with the potential to dramatically change how business is done.
Cryptocurrency is commonly the first use case that comes to mind when the term blockchain is mentioned. The dramatic increase in Bitcoin’s value in 2017, and subsequent downward valuation, caught people’s attention and drove the perception that Bitcoin and blockchain were one-in-the-same. However, that is not the case. Bitcoin, along with the other 1600+ cryptocurrencies in circulation, operate on DLT network meaning the transaction information is not kept on a centralized server, but rather on multiple servers providing the ability for everyone using the application to verify the data, provide an audit trail for all the parties, and to know if data changes somewhere else in the chain of communication. This process provides accountability for all involved in the transaction and is a friction free way to transact commerce. So what does this have to do with the subrogation process? Let’s take a deeper dive and see.
It makes sense to provide some standard definitions to work from as we move forward. First, as stated above, distributed ledger is a technology where data is kept in multiple locations and not in a centralized environment. DLT networks can be either public or private. The driving force for the different type of networks is the level of trust between the involved parties involved. For example, Bitcoin is transacted on a public network. Anyone can join and there is no assumption that a member of the network shouldn’t be a part of it. The parties are anonymous. A private network is just that, private. There are qualifications to belong and an enrollment process whereby someone becomes a member. The goals of the DLT are specifically set forth for the members to serve a certain purpose. This could be a network of a manufacturer with their suppliers such as Walmart and produce suppliers throughout the world. If there is a problem with a supply of lettuce, the farmer or product packaging group can be easily traced and identified to determine where the lettuce originated. A much improved and quicker process than the previously utilized. Relationships within a blockchain are governed by a set of agreements called ‘smart contracts’. A smart contract is an agreement between parties outlining how they agree to take actions based on the issues or data points of the situation. An example of a subro smart contract could be one that outlines how two carriers agree to settle a left turn accident. This agreement could differ on points of impacts, information on the type of intersection, etc, but under each situation, a smart contract would govern the settlement.
Currently there are multiple insurance DLT platforms in various stages of development and addressing various insurance related issues. Some deal with reporting and compliance while others address the various process of the carrier from first notice of loss to the subrogation recovery. Let’s take a look at three examples.
AAIS ( www.aaisonline.com )
AAIS, a national, not-for-profit advisory organization providing rating and regulatory services to the insurance industry, partnered with IBM to implement a block chain solution for their clients allowing them to contribute data for reporting purposes. The new process transforms an antiquated workflow into a much less friction filled experience while also opening new visibility for the carrier to understand how they rank in the industry. Contributors provide only the data they elect to share with the parties who they want to share it. According to Truman Esmond, VP – Solutions & Partnerships for AAIS, “The open Insurance Data Link starts from the existing legal framework and processes, revisiting the role of AAIS as a data intermediary for our member insurers, and through blockchain, can not only streamline existing processes for reduced overhead, but create new value from these processes and establish a foothold for collaboration across companies, consortia, and the industry for new efficiencies, insights and the potential for innovation to meet current and future challenges.”
B3i ( www.b3i.tech )
The B3i is a European based organization started in 2016 as a group of companies collaborating on how blockchain could be utilized specifically for reinsurance contracts. They developed a proof of concept and in 2018 took the steps to incorporate as an official entity with both U.S. and European participation.
The RiskBlock Alliance (www.theinstitutes.org/guide/riskblock)
The RiskBlock Alliance, part of The Institutes, is a consortium of more than 30 companies who have agreed to work together to determine how DLT can be utilized for various use cases such as proof of insurance, FNOL, and subrogation. There are seven use cases being considered by the RiskBlock Alliance for 2019 with the subro use case being one of those. What could the subro use case look like?
The first initiative is that of the netting of payments between carriers. It is a simple step to begin the DLT process, but the value will be realized with future settlement functionality. A number of questions will be required as the industry begins to consider the greater opportunity. How will the settlement process change in a DLT environment? How will this speed up the recovery process? Does the carrier collect the required data or better yet, have a way to capture data to help facilitate the creation of smart contracts? Will the need for litigation and arbitration exist to the same extent as it does today? At the end of the day, any of the pathways for a subro use case should reduce friction, reduce costs, and maximize recoveries.
REDUCING FRICTION can include reducing unnecessary steps, roadblocks, and ultimately the labor associated with the process. No one wants to take on a new process if it requires more effort and time to reach the goals trying to be achieved. The old adage of ‘working smarter, not harder’ applies here. Secondly, REDUCING COSTS can be achieved by taking repeatable tasks, matching data to the task, and systematizing the process. This step requires the ability to leverage internal operations and systems to help facilitate how much efficiency (ie cost effectiveness) will be gained by a subro DLT use case. The gaining of EFFICIENCIES goes hand-in-hand with the reduction of costs. Finally, MAXIMIZING RECOVERIES should be the goal of any new process and does not differ for a DLT initiative.
Having access to actionable data is the primary step to recover every dollar and provides the foundation for the establishment of settlement preferences. For example, understanding how a left turn accident, involved with XYZ Company and Joe Adjuster, with an impact to the right front end normally gets settled provides the ability to determine how similar claims will be settled in a DLT scenario. Actionable data also contributes to reducing friction and costs as well maximizing recoveries. Imagine the aforementioned scenario knowing how those claims are settled historically and the overall impact on the settlement process. Friction will be reduced as the historic information is readily available to make a recovery percentage decision. In these cases, we can project that arbitration will not be required as there is data to support the liability analysis and agreement. Should the industry be satisfied with the doubling of arbitrations filed over the last four-year time period or should the expectation be to reduce that number exponentially? How would actionable data affect friction, costs, and recoveries when considering the need to arbitrate? When arbitration is called for, how can we initiate and manage the process more efficiently? The expectation is for friction and costs to be reduced while recoveries are driven upwards.
A subro use case for DLT solution sounds interesting, but it will require preparation by the industry for adoption. Carriers will need to determine how they will be able to access data allowing them to make the required decisions. Does the existing claim platform capture what is needed and if not, how will the data be obtained? What resources will be allocated to reaching that goal? Secondly, like most new events that cause change, moving to a DLT solution will require a paradigm shift in thinking. The settlement process will be different from today and if we try to fit today’s process into a DLT solution, the potential of the DLT will be compromised. Lastly, there will be ‘friction’ to consider in getting to the point of full utilization of a DLT solution. Carriers will be required to obtain the required data to set up smart contracts on the various loss scenarios and this will take some effort up front. Each carrier will need to determine what, and how many, resources they are willing to put towards that effort.
Three options rise to the top as we peer into the future of a subrogation use case for DLT. First, we continue with existing processes and make incremental improvements, but the issues of too much friction, cost, and not having data to maximize recoveries still exist. The second option is to solve those problems by adopting technology and processes that drive meaningful settlement preferences outside of a DLT solution. This option could be implemented fairly quickly and not require the larger step of implementing a full-blown DLT process which is the third option. DLT has the potential to be a beneficial technology for the industry with a strong return on investment for the subro use case. It will take some work to get there though. What is unknown is whether the adoption, and to what extent, will come in the next 6 months, a year, or two years. In the near term, DLT provides a stimulus to think differently about how we approach subrogation as an industry and to begin taking action to realize efficiency opportunities today. Only if we had a crystal ball…..
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