Blockchain Is Here. But Can Insurance Unlock Its ROI in Meaningful Ways?

From early-stage adoption and collaborative efforts to innovative use cases, blockchain technology is poised to reshape claims and insurance market dynamics. But where does it stand in terms of returns?

By: Jonathan McGoran | September 7, 2023

Topics: Future of Insurance | Insurtech | Sept./Oct. 2023 Issue

A digital wireframe representing links in a chain

As blockchain technology matures and more players in the insurance industry integrate it into their operations, many are wondering what kind of return companies are seeing on their blockchain investments.

“That’s a very difficult question, because I actually don’t think the insurance industry broadly is using much blockchain,” said Siddhartha Jha, founder, chairman and CEO of Arbol Inc., a global climate risk coverage platform and FinTech company. “They’re still at a very early POC stage in many cases.”

David Edwards, founder and CEO at ChainThat, a London-based insurance technology provider, has a similar take.

“For individual insurers and participants, there’s no benefits, in terms of the ROI for blockchain,” Edwards said. “It must be done as a group, as a kind of a consortium, to get it going. And the only way really to get that going is to get them all to work together. That’s the biggest challenge that we’re still seeing in the insurance industry.”

But Bill Keogh, non-executive chair, The Institutes RiskStream Collaborative, expects that to change soon.

“We do ROI studies for each individual company and show them how the ROI improves over time as you get more adoption in the market. These are very substantial, multimillions of dollars of savings that persist through time as people adopt,” Keogh said.

Keogh sees blockchain adoption as intrinsically related to other new technologies.

“To the extent that the industry gets behind really good use cases, responsible use cases for AI, ML, large language models, it will naturally point them in the direction of data governance, data provenance, data security. And certainly, blockchain is one of the best ways to do that,” Keogh said, adding that “the ROI is going to be blended with all those other [technologies].”

Edwards agrees.

“Blockchain is going to provide very good, clean and up-to-date data that you can then use with AI to actually get the insight to make decisions on and use it internally,” Edwards said. “I’d look at AI as very much your internal efficiency and blockchain is going to be your external efficiency.”

But he cautions that such technologies can also compete for attention, and currently, AI is hogging the spotlight.

Looking forward, he also sees potential benefits in the intersection of high-speed quantum computing and the instantaneous connectivity of blockchain, but those technologies could also compete.

“With quantum encryption trust, you don’t need a blockchain. You can do it peer-to-peer in another way,” Edwards said. “When that becomes mature, that could change our concept of a lot of technologies, so that could disrupt the long-term benefits of blockchain.”

Blockchain Benefits … Take Your Pick

One area that could benefit tremendously from blockchain is claims management, which currently involves a lot of emails and phone calls over time.

“The blockchain solution is having a secure and permissioned network that allows the opposing insurance companies to instantaneously share information with each other, system of record to system of record, in a secure and permissioned way,” said Keogh.

But this use case is dependent on adoption of blockchain throughout the industry.

“If you have 5% of the market doing that, there’s a certain amount of value. If you have 50% of the market doing that, the value increases substantially,” said Keogh. “The ROIs are quite good as you get up into the 20% range of participation.”

Keogh cites another use case, where an ecosystem of two or three parties doing business together have an interest in sharing and exchanging data — an MGA, a carrier and a broker, for example.

“They have a better audit trail and easy access to the information for those trusted parties, and what’s great about that is you don’t have to worry about market share at that stage. You’ve got everybody around the table who matters,” Keogh said. “The ROI is immediate because as soon as they roll it out, everybody in the ecosystem is on board.”

Bill Keogh, non-executive chair, The Institutes RiskStream Collaborative

These efficiencies of blockchain could open the door to whole new products and use cases.

“The operational costs of insurance or reinsurance accounts for 20 to 30% of the actual cost of capacity, and in the case of a blockchain-based protocol, these types of costs can be significantly reduced and, in some cases, removed,” said Marco Mirabella, founder and CEO at Ensuro, a blockchain-based reinsurance company regulated by the Bermuda Monetary Authority (BMA).

“By reducing the cost of transactions, you can allow different types of use cases,” Mirabella said. “So, for instance, you’re going to have micro-insurance, which is something that I believe is going to be dominant in this space … usage-based insurance, or IoT-based insurance. You can have different types of devices that are triggering policies in an automated fashion, using smart contracts … That has previously been impossible to do, from the position of traditional (re)insurance companies, because handling that type of information or that type of product production would be impossible.”

Fraud prevention is another area where blockchain could produce benefits.

“Part of the use would be to make sure that claims data — from the start, when an adjuster gets to a place, all the way to the end — is tracked and traced in a clean way that highlights any chance of fraud very quickly,” said Jha.

Edwards cites the fraud-fighting potential of posting on blockchain “zero-knowledge proofs,” which include the details of claims but are anonymized.

“Every other party is going to be able to tell me whether they’ve got a similar claim coming in, or they’ve seen repeated ones,” Edwards said. “We won’t know that insurer A and insurer B and insurer C have also seen it; we’ll just know and can prove that three other insurers have seen that same claim come in or seen that type of pattern as well.”

Why Parametrics Are the Likely Adopter

One segment of the insurance industry that is particularly amenable to blockchain is parametric.

“Parametric insurance is a space that can be impacted a lot, because you have this trustless nature of grabbing the data from the outside world, and then the policies are generally binary in nature,” said Mirabella.

“So if this amount of rain hits a certain location, then it triggers a policy with this specific payout. You remove some of the time consumption and the fraud from processes that might happen in a traditional insurance product.”

The intersection of parametric and blockchain could help address a paucity of underwriter appetite in some markets; climate change-impacted property is a current example.

“Parametric is a much-needed bridge between alternative capital and getting that climate coverage gap closed,” said Jha. “Parametric … actually kind of resembles financial products outside of insurance, like a corn contract or oil contract settled on the price of oil. Here we are settling on hurricane data or temperature data. All of it resembles things that, broadly, the capital market providers are familiar with.”

According to Jha, the insurance industry is already attractive to alternative capital.

“New types of capital do want to come in, because … these markets offer diversification from interest rates and stock markets, which are becoming very correlated,” said Jha.

“So it works for both sides. But the bridge needs to be easy to cross. You need that transparency. You need to build that comfort for capital that isn’t used to how insurance works.”

According to Mirabella, declining yields on cryptocurrency investments may make the insurance marketplace more attractive to cryptocurrency investors looking for better returns. And those trailblazers may well be followed by others.

“As more new types of alternative capital and others start to move into insurance markets, we’ve seen more interest from outside capital providers to move in,” said Jha.

Smart contracts, primary insurance and reinsurance all on the same chain could also be securitized, providing liquidity that may also attract new capital.

“You have that end-to-end flow, and you could get to the point where you could start to trade at any point,” Edwards said.

“It may actually bring more capital in, because it’s actually making insurance more tradable instead of having it only at the very end, where I think today you could really only do ILS and a few other types of things.”

The blockchain would maintain the historical record of who is at risk at what point in time, should any retrospective claims come in.

Assessing the Hurdles

As with any modern technology, however, there will be challenges.

“Getting everybody to understand the need to change the current system is often a big challenge in old industries. ‘Well, why change something that’s been working?’ Maybe it’s not really working in many ways that it should be,” said Jha.

Another challenge is adopting standards.

“Getting a group of people to agree on a standard isn’t really the way. What you really need is the dominant market forces to say ‘Here’s how we’re going to transact business. And if you want this business, here’s how to use it,’ ” said Edwards, who suggests the large brokers are well situated to fill that role.

He cautions companies to be aware of the full cost of implementation.

“Let’s just say we think this blockchain solution is going to cost us a couple of million, but then I’ve got $50 million of internal change to get through,” Edwards said. “Is the investment really worth it at this stage?”

In the end, though, he argues it probably is.

“Why people are putting things on blockchain now and why you might want to adopt it now is thinking of the future, that blockchain will be widely adopted, and you’re not going to have to go back and retrofit it if you’ve got it already in place,” Edwards said. “So, when there’s more adoption, I’m there, ready and waiting to reap the benefits early on.” &

Jon McGoran is a magazine editor based outside of Philadelphia. He can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.