Picture: Alexandra Gedge, JLT
11 June 2018Analysis

Blockchain and captives: effectively managing all the moving parts

Captives often require many links in the chain to make everything work smoothly and successfully for those operating them. The services provided to a captive include fronting companies, multiple re/insurers, brokers, claims teams, actuaries, auditors, captive managers, and ultimately the captive owner.

Managing all these moving parts can be an onerous, time consuming task, including the coordination of the board meeting for the captive, and can be particularly tested in the event of claims. Subsidiaries and insureds of captives want to see quick claims payments for the individuals, and to minimise disruption to the business operations.

“Smart contracts can be utilised to support the roles of risk and captive manager alike—to facilitate greater captive transparency and productivity.”

One of the best options to manage this process which has recently become available is the emergence of blockchain capabilities. Blockchain has been around for a decade but so far its application has been limited to the digital currency, Bitcoin. We have started to consider the potential benefits it can bring to captives and the re/insurance industry.

What is blockchain?

Blockchain was introduced in conjunction with the launch of the cryptocurrency, Bitcoin, around 10 years ago. In the Bitcoin market, it acts as a shared public ledger of all the Bitcoin transactions that have ever been carried out. The entries on the ledger are called ‘blocks’ and the list or ‘chain’ of entries grows as more transactions take place.

Blockchain is different from a standard database because no data is held centrally. Instead, it is shared across the entire network, which means each computer connecting to the network gets a copy. An advantage of this is there is no centralised point that hackers can exploit. Data cannot be altered without overriding the entire network. This helps with verifying important data (for example, financial transactions) and creating an authenticated chain of custody.

Blockchain potentially has several other uses outside of Bitcoin because it is essentially about recording and facilitating online transactions. It is a secure way to do business, as individuals would need to perfect a precise code to break into the chain (not impossible, just more difficult).

What are the benefits for captives?

Studies on the use of blockchain in the re/insurance industry suggest the benefits could be extremely significant. A 2016 report by PwC, Blockchain: The $5 billion opportunity for reinsurers, went as far as to say that blockchain could result in industry savings of between $5 billion and $10 billion.

For captives there can be benefits for global programmes, as the technology could introduce a more automated and streamlined approach, resulting in lower transaction costs and fewer operational risks.

Alternative risk transfer policies could have automatic data uploads and payouts immediately upon an event being triggered. This enables payments to be quicker (claims, premiums or dividends could all be automatic); updates and changes create immediate notifications, which allows for the transfer of information across all parties.

Blockchain can minimise the disruption to your business, improve the efficiency of your organisation, and control the claims process (it has been shown on some lines of business that the quicker a claim is reported and notified, the better the cost control).

JLT Insurance Management manages captives which have fronting, direct insurance, additional direct capacity, reinsurers, operating expenses, consulting fees, brokerage, and claims payments. If all of these payments seamlessly communicate within a blockchain this would support all parties and enable transactions to be more efficient and timely.

For example, where a reinsurance contract operates under a follow-your-fortune clause, the reinsurer could be notified of a claim, and respond automatically per the information received from the captive’s upload to the blockchain.

Why is blockchain relevant for re/insurance?

Blockchain is of particular interest to the re/insurance industry because the policies are intangible assets, in a similar way to digital currency.

In addition, the re/insurance industry contains an enormous amount of data that passes between clients, brokers, reinsurers, and third parties. This data all relates to the same contractual arrangements.

Currently, data has to be manually entered and reconciled multiple times with a high chance of human error. The web of relationships involved in a transaction means reconciliation between each individual database can take weeks.

If this data was on the blockchain ledger, each party to the transaction would have access to it, removing the need to re-enter information on several systems. Settlements could be authenticated between parties without the need for a third-party intermediary.

It is possible that the entire reinsurance transaction could be carried out in a single place and shared among all the parties simultaneously.

For re/insurance this means smart contracts. Changes to contracts will be noted, systems of all parties will be updated, and requests will be triggered where required. If a claim is made, it can automatically be verified and have an immediate payout, without human interaction and disruption.

This increases the efficiency of the process and will simplify insurance transactions. Human interaction will still be required for large or complex cases, although utilising blockchain can make this process easier to track, update, and share information.

What’s next for blockchain?

Blockchain systems will take time and money for implementation and many will work on the basis of ‘if it ain’t broke, don’t fix it’. The good news is that companies are already exploring how blockchain can be applied in practice and what tangible benefits it could bring.

Blockchain will continue to grow, expand, and become more streamlined. Smart contracts can be utilised to support the roles of risk and captive manager alike—to facilitate greater captive transparency and productivity. The applications stretch into captive insurers where there are clear benefits for captive owners and managers to develop and refine the captives proposition, with improvements for the end user: captive owners.

With some companies already offering blockchain support (such as Allianz in November 2017), the technology is there and offers a wealth of benefits for captives. It provides an increased level of security, enhanced levels of collecting and sharing data, and improves administration efficiency, freeing up time to focus on refining the captive and its usage.

Consult your captive advisor on the opportunities for using blockchain, and discuss the options available to you and your team with the chain.

Alexandra Gedge is business development and captives executive at JLT Insurance Management. She can be contacted at: Alexandra_gedge@jltgroup.com