Insurance Reconciliations Be Gone!

Companies involved in intermediated insurance business have individual silos of customer data. When trading with each other these entities will send information to notify the other parties of transactions that they have been involved in and usually produce an extract (known as a bordereau). This represents their view of transactions that have happened during the last trading period.

Intermediated insurance consists of multiple parties interacting with each other to serve customers.

These extracts are usually produced at the end of a trading period and often include transactions that happened weeks ago. There can also be subsequent amendments to the data relating to the historic transactions. So when the bordereau is sent it may already be out of sync with a customer’s transaction history.

The transfer of data/bordereau is usually followed by (bulk) cash transfers that then also need to be reconciled with the data in the bordereau. This process introduces a number of potential problems including changing data and manual errors. As a result the view of what a company has on risk and who owes who money stutters along with a granularity of days, or often even months.

The UK intermediated insurance business is often made up of multiple entities (brokers, underwriters, regulators, etc.) with their own IT systems and data that periodically and expensively reconcile their data.

The traditional way to deal with these inefficiencies is to use an external company to host the software and the data on behalf of the other players (e.g. Lloyds and Xchanging). This can achieve the required efficiencies, but at the same time puts a single entity in an extraordinary position of power and responsibility. All transactions and parties are completely dependent on the third party to provide a continuous service and to maintain the integrity of the data. As such the interactions with the third party become just as expensive.

An alternate configuration of intermediated insurance, all entities entrust their data to a single third party allowing them to stay in sync.

With the advent of blockchain technology and the application of a smart contracts to this technology we are given a third option to solve the problem. Instead of each party having an entirely separate computer system with only certain parts exposed as and when needed, these two technologies allow for all parties to run the same software, and to keep it in sync with each other in real time.

The software isn’t run by any single entity, and if any of these go offline for a period of time, the remaining entities are able to continue operating by themselves. When the offline node comes back online it will sync up with the rest and carry on as before. If any of these node tries to deliberately change the state of the system without following the rules defined by the rest, they will simply be ignored and can no longer participate in the system.

A blockchain-based view of intermediated insurance. All parties interact directly with each other, as per the first diagram, but through the use of blockchain and smart contract technology are able to stay in sync with each other immediately after any change is made.

This has a profound effect on the ability of the system to produce and maintain policy and claims data. Think of the currently booming sharing economy; Fred’s car has a flat tyre, so he wants to borrow Sally’s car for the next hour while he takes the kids to school. With blockchain technology, the underwriter can see that Fred is on risk as soon as he jumps in the car and again off risk the second he’s finished with it. This opens the door for the players in this system to provide all kinds of new and progressive products.

What this new system enables is the real time sharing of data and money across all interested parties. This means that the bordereau and reconciliation processes can be significantly reduced or completely removed from many areas of the business. Therefore costs of the systems and people doing back office policy administration can also be drastically reduced.

Getting the insurance industry collaborating using a technology like that described above is only the start of the story. The most commonly explored application of blockchain technology; transfer of value (see bitcoin et al) could applied to make payments instant. Another could be when a critical mass settles on a decentralised identity solution; we can leverage the benefits of this by allowing customers to control, build and share the identity with our system; allowing for additional efficiencies and benefits.

Blocksure has these kinds of applications in mind for the future of insurance and has proven they can be implemented through a proof of concept system. Blocksure will be partnering with several players in the UK insurance market to prove their usefulness in the real world soon. Stay tuned for our next post which will describe how these advances in technology and thinking can be applied to insurers.