22 May 2017 Blockchain an Emerging Technology with Wide Potential Application for Insurance Rory Unsworth, Swiss Re Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 1. Making Sense of Blockchain 2. Financial Markets and Insurance Applications 3. Swiss Re Activities 4. Outlook Table of Contents 2 22 May 2017 1. Making Sense of Blockchain Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 Blockchain in a nut shell 4 Back end database - that permanently records transactions in a replicated shared ledger Value exchange network - for moving and validating transactions/assets between peers without the assistance of intermediaries Transparent, updated in real-time, immediately available and selectively auditable by all relevant stakeholders What is blockchain? Implications Application of blockchain has multiplicity of effects: Consensus, provenance, immutability, finality and resilience Trust layer over internet - establishes trust, accountability and transparency within market participants Enterprise applications using blockchain range from back-office functions to parametric products to new business models Well known cross-border, large scale application to-date of blockchain technology is bitcoin Making sense of blockchain Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 5 Company 1 Records Auditor Records Bank Records Company 3 Records Company 2 Records Counter-party records Ledger Ledger Ledger Ledger Ledger Ledger Hack Ledger Ledger Ledger Ledger Ledger Ledger # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Expensive Inefficient Vulnerable Market Problem Business values include: Automated contractual workflow Simplified auditing Reduces reconciliation Fraud Reduction Dispute mitigation Enables business continuity Making sense of blockchain Blockchain Solution Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 ? ? ? Blockchain as a trust web - Bitcoin 6 Blockchain keeps track of who owns what, and who owned what in the past FULL HISTORY OF ALL PAST TRANSACTIONS (E PERITIA RATIO) Making sense of blockchain A wants to send money to B The transaction is represented online as a block The block is broadcast to every party in the network Those in the network approve the transaction is valid The block then can be added to the chain The money moves from A to B Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 7 Why is blockchain unique? Four technologies in one Making sense of blockchain Decentralized, peer-to-peer network Append-only distributed database Replicated to all participant on the network Shows current status as well as status over time Distributed Ledger Ensures that transactions are secure, authenticated & verifiable Verifies participants' privacy while the ledger is shared Cryptography Consensus is the process by which transactions are verified Decentralized consensus ensures agreement on "single-version-of-the-truth“ (allows for consistency among distributed ledger) Consensus Programmable contracts which contain the business logic that is automatically executed when pre-defined conditions are met Ideal for arrangements that are: tailored, verifiable, signed, self-executing, embedded in blockchain networks Smart Contracts 22 May 2017 2. Financial markets and insurance applications Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 9 Banking and exchanges have been first movers in applying blockchain Financial markets and insurance applications Active PoCs include areas in post-trade settlement, trade finance, international payments, corporate bonds, asset tracking Banking Santander facilitating international payments through Apples app “Apple Pay” Users are free to transfer amounts from £10 to £10000 (payments in GBP to EUR & USD) E-Finance NASDAQ is exploring blockchain to enable peer-to-peer securities transactions to replace current transaction systems DTCC and Digital Asset partnered to develop a blockchain solution for Repo clearing Exchanges Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 10 Incumbent insurers and insTech startups beginning to see and test the value of blockchain Financial markets and insurance applications AXA Strategic Ventures invested in Blockstream, a company that develops hybrid blockchain platforms that connect public and permissioned chains Everledger is developing a permanent ledger for diamond certification and transaction history, used by insurance companies and others to combat fraud PWC Whole sale Reinsurance PoC - Placement and contract life cycle documentation SafeShare launched first blockchain-based insurance solution for the sharing economy Dynamis is a peer-to-peer mutual, offering unemployment insurance, built on a blockchain and relying entirely on smart contracts for claims Allianz Cat bond Natural catastrophe risk trade on the blockchain for smoother facilitation and accelerated triggering of cat swaps & bonds Commercial insurance placing platform -ChainThat's decentralized application platform allows brokers and carriers to place commercial and specialty risks in the insurance market. 22 May 2017 3. Swiss Re activities Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 Automated claims 12 Data vault Secondary market for securitized risk Parametric products Maturity LevelBasic blockchain SmartcontractsVisionaryDigital P2P mutuals Time Blockchain to evolve with concrete business applications Placement and client on-boarding Swiss Re activities Contract automation and intracompany settlement Digital Marketplace for placing risk Microinsurance Low-cost, index-based insurance with automated payouts by smart contracts Identity ledgers and smart contracts Give access control over personal and sensitive data back to the end consumer Provenance Shared Reference Data Intra Group Retrocession (IGR) Automate internal retrocession process on blockchain platform with smart contracts Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 13 1 Automate internal retrocession process on blockchain platform with smart contracts. Integrated retrocession combining Cat XoL with Q/S: Create contract, process statement, compute cession, generate payment instruction, record settlement. Internally: blockchain for internal retrocession Once proven, extend network across insurers, reinsurers, retrocedents, retrocessionnaires. Most natural fit for proportional contracts, e.g. non-life quota shares, as well as simple excess of loss structures. Network of retrocessionaires and retrocedents within Swiss Re group (Intra-Group Retrocession: IGR) Externally: extend network across the industry (B3i) Within the reinsurance market covering cessions between insurers, reinsurers and retrocessionaires External Party B Swiss Re External Party D External Party A External Party C 2 Swiss Re Internal Benefits include: 1) acceleration of process and settlement 2) reduction in cost and operational risk 3) increased transparency for all participants 4) better quality cash management Proof of concept for IGR process is the first step in establishing industry standards Swiss Re activities Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 Blockchain implementation of parametric products for low premium, high volume business 14 Integration of Blockchain and Smart Contracts into the Microinsurance / Insurance-on-Demand Market Local Insurer Community of Policyholders (e.g. Smallholder Farmers) Index-based insurance for severe weather conditions : Low premium, high volume business Transaction fees are the main obstacle to it Blockchain might offer a way to solve this issue and gain in efficiency along the insurance value chain Swiss Re activities Severe weather conditions triggers purchase of on-demand insurance Upon purchase of E-Flight Ticket: a smart contract for Flight Delay is generated and posted on the blockchain Flight Delay Automatic payout of a compensation of a predefined amount |X| Boarding Flight Delay Compensation: 22 May 2017 4. Outlook Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 Significant hype, early promises 16 Regulatory environment Collective standardization Legal Framework Source: World Economic Forum Systems integration Scalability Confidentiality/Privacy Top Challenges Outlook Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 Investment will get focussed towards establishing standards, achieving scalability, ensuring confidentiality etc. Private blockchains with limited subset of trusted participants will emerge Blockchain “inspired” applications addressing specific industry needs (e.g. R3 Corda) Regulators step in to assess challenges and benefits First wave of enterprise applications would go into production in financial services New areas of research will include potential synergy between blockchain, IoT and Big Data Market outlook for 2017 17 The blockchain is not a panacea, and the technology and business applications are still evolving However, the technology has potential to enhance cooperation among re/insurers, to reduce operational costs and to create new product and enhancement opportunities Outlook Colour palette for PowerPoint presentations Dark blue R17 G52 B88 Gold R217 G171 B22 Mid blue R64 G150 B184 Secondary colour palette Primary colour palette Light grey R220 G221 B217 Pea green R121 G163 B42 Forest green R0 G132 B82 Bottle green R17 G179 B162 Cyan R0 G156 B200 Light blue R124 G179 B225 Violet R128 G118 B207 Purple R143 G70 B147 Fuscia R233 G69 B140 Red R200 G30 B69 Orange R238 G116 29 Dark grey R63 G69 B72 22 May 2017 18 Expressions of individual views by members of the Institute and Faculty of Actuaries and its staff are encouraged. The views expressed in this presentation are those of the presenter. Questions Comments Legal notice 19 ©2017 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.