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2017 RIMS

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.
By: | April 25, 2017 • 4 min read

With hackers growing more sophisticated every day, companies and their customers could benefit from some bulked-up cyber defenses.

Blockchain technology is one innovation trying to provide a solution against hacking and fraud, but its drawbacks may stall implementation for the foreseeable future.

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“[Blockchain] is there; everyone is aware of it. It will pop one of these days, but no one knows how to insure it. It takes time for insurance to catch up because there’s no loss history,” said Jimmy Kirtland, VP, corporate risk management, Voya Financial, presenting on the topic at the RIMS 2017 conference in Philadelphia.

Currently, financial transactions are recorded through a central authority like a bank, which keeps one ledger for all parties involved. It provides a reliable record of ownership and asset flows, but it’s easily hackable. A cyber criminal only needs to gain access to that one ledger to place every party – and all of their transaction data – at risk.

Blockchain, on the other hand, is an example of a distributed ledger. There’s no central authority, and every participant has their own copy.

Brian Scarbrough, partner, Jenner & Block LLP, compared blockchain to “one giant interactive and global spreadsheet,” which displays real-time changes so every copy is identical, and which no single user controls.

The advantage of this distributed model is that it’s much harder to hack or manipulate.

In a blockchain model, transactions are organized into discrete “blocks,” which are time stamped, encrypted and linked to the previous block, creating the chain. Each block can only be added to the chain if there is consensus among participants that it has been verified.

Without consensus, no transaction is recorded.

So, if a hacker gains access to one of the local copies of the ledger and tries to retroactively change a transaction, it means he must also change every block that comes after that transaction. But that creates a split in the chain, and other participants’ copies will differ from the hacked ledger. Because consensus is required, the participants in a blockchain ledger would easily be able to identify and reject the change.

Brian Scarbrough, Partner, Jenner & Block LLP

“Cryptography is used to validate and confirm transactions,” Scarbrough said.

Through complex mathematical equations, cryptography encodes transaction data. It also acts to cut out trusted intermediaries that normally do data verification and encryption.

“Cryptography solves the threat of multiple networks being hacked,” Scarbrough said. “Instead of trusting one central party, users trust a network of participants that keep each other honest through mass collaboration because they have to vote on each transaction to be added to blockchain, and cryptography aids that process.”

Insurance Impact

Blockchain technology, through its ability to track and store data including policy applications and renewals, can potentially help to streamline the underwriting process. Records of ownership could also prove useful in insurance disputes and in claims handling.

However, running encryption and decryption software 24/7 requires a lot of energy and resources.

“Running blockchain around the clock requires massive amounts of electricity and is very capital intensive,” Kirtland said. There is also a lack of mature infrastructure, lack of scalability, the potential for fraud through collusion, and unanswered questions around regulation and legality.

There’s also uncertainty around how cyber coverage would respond to failures of a blockchain system. Some cyber policies have only just begun to incorporate language addressing bitcoin, which is an example of blockchain technology.

“Running blockchain around the clock requires massive amounts of electricity and is very capital intensive.” — Jimmy Kirtland, VP, corporate risk management, Voya Financial

Bitcoin incentivizes people to invest their resources in the data mining and hashing necessary to keep blockchain transactions going by rewarding them with bitcoins. With other blockchain applications, though, incentives are still lacking.

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As demonstrated through the number and participation of session attendees, blockchain is garnering a lot of interest, but brings up just as many questions.

Audience members had uncertainties around the technical aspects, and the technology’s exposure to hacking. But if the industry can gain clarity around those uncertainties, and if cost of implementation goes down, blockchain models could drastically change the way insurers and other financial institutions do business.

Additional stories from RIMS 2017:

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Manufacturing

More Robots Enter Into Manufacturing Industry

With more jobs utilizing technology advancements, manufacturing turns to cobots to help ease talent gaps.
By: | May 1, 2018 • 6 min read

The U.S. manufacturing industry is at a crossroads.

Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.

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Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.

If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.

“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.

“The risks associated with this are broad and span the entire value chain — [including]  limitations to innovation, product development, meeting production goals, developing suppliers, meeting customer demand and quality.”

The Talent Gap

Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.

Ben Dollar, principal, Deloitte Consulting

“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.

“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”

To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.

It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.

“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”

Rise of the Cobot

Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.

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More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.

Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh

“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”

The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”

Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.

“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”

Potential Solutions

Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.

“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”

By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”

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Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.

It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.

Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.

“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]