The application of Blockchain on Financial Services makes a lot of sense. Blockchain technology is great for financial transactions, trust between different parties, and resolution of disputes. All of this is common in the financial industry. Less well known, however, is the benefit of using blockchain technology for reinsurance. Let's take a look.
What is reinsurance?
Reinsurance is essentially insurance for insurers. Reinsurers are separate companies that own the insurance of insurance policies that another insurance company, known as assignor I have already sold
Let's say that insurer A has insured a company against any damage it may cause. In the event of a natural disaster such as terrible floods or a hurricane, the company could suffer billions in losses. Insurer A often does not have the assets or the liquidity to cover these costs without going bankrupt. In order to be able to continue providing insurance while avoiding bankruptcy, they will pay another insurer or specialized reinsurer to cover part of this liability.
This practice allows smaller insurers to increase their revenues without risking financial collapse in the event of such damage.
The process can go one step further by introducing another party called the retrocessionaire. The retrocession allows a reinsurance company to share the charge of a policy with another reinsurance company.
Why use a blockchain?
The industry believes that Blockchain could help to achieve significant cost savings, increase visibility and shorten turnaround times, and add a level of security that was previously impossible. In fact, PwC estimates that the blockchain could save the industry in between 5-10 billion dollars,
Let's take a look at some of the areas where Blockchain could help.
Blockchain can very well automate tasks that were previously done by humans. It would be possible to use intelligent contracts instead of much of the documentation available in the industry.
PwC analysis has come to the conclusion that blockchains could save between 15 and 25 percent of the costs. This reduction would be achieved through automated data processing, reducing fraud and cost savings.
When companies implement a consortium block chain, they can only contain the information to the rightful owner. At the same time, they would ensure that all parties receive complete transparency about transactions and smart contracts.
As the reinsurance and retrocession chain becomes longer, it becomes more difficult for the original insurer to keep track of which parties have which liabilities. By participating in a shared blockchain, all parties can see exactly how and to whom the risk is being shared. If the insured person then makes a claim, both the claim and the settlement between all the parties can be completed faster and with fewer disputes.
This greater transparency and access to reliable data mean that all parties can maintain more accurate risk models.
Since a blockchain is immutable, ie its data can not be changed, it offers an extremely high level of security for reinsurers. Industry leaders hope that fraud can be reduced both internally and between companies.
More centralized consortium block chains can achieve high throughput and high speed because they consist of fewer nodes. By using such a blockchain, the reinsurance industry could significantly speed up the comparisons between the parties. This should undoubtedly lead to higher standards and overall improvement for the industry as a whole.
Not only does Blockchain provide a faster processing level, but payments can also be automated among the participating companies because no human interaction is required.
An appropriate type of reinsurance block chain
Many of the benefits we have experienced so far depend on the type of block chain that companies use. It is highly unlikely that reinsurance companies will opt for a public block chain ether, If they did, they would not only be limited to working with the blockchain native asset, but all transactions would be publicly visible.
They are much more likely to use a composite chain or a consortium blockchain. This approach means that only approved companies can participate in both entering new data and reading the blockchain itself. This ensures that only participating companies have access. However, there is a risk that the centralized design will open the door for some knots to conspire and alter the blockchain, undermining the industry's coveted immutability and security.
Of course, this is not a matter of course and we have to evaluate each proposal according to its own ideas.
The acquisition of Blockchain is currently led by a consortium called B3i in the reinsurance industry. They were founded in 2016 and currently have 38 members from around the world. Its main purpose is to research applications of blockchain for reinsurance.
By joining as a group, a common standard should be agreed that can easily be used by all companies. It is almost impossible to work with several different blockchain methods.
B3i is currently working on its prototype product, which they expect to go into full production in the near future. The product handles all calculations, billing and reports via a Hyperledger Design. In fact, three different blockchain levels are executed.
Each party has its own private blockchain where it stores its contract data. There is one base data Blockchain, which stores company information and general contract terms. Finally, that shared communication Blockchain contains the communication that confirms and verifies the status of each private blockchain.
It allows all parties, including reinsurers and cedants, to execute their contracts and encrypts all communications between the parties. In addition, the cedant may solicit offers from all parties and communicate until all parties agree and sign the contract.
Surely, B3i's product is intriguing and we have to wait for the success of the product to be determined until it is released for full deployment. Of course, without the consensus mechanisms of game theory, such as work records and evidence of use, it is hard to see how they can ensure the level of immutability and security that can be observed in public block chains.
The reinsurance blockchain | The simplification of the complex insurance industry first appeared on CoinCentral.
Contribution Source: Reinsurance Blockchain | Simplification of the complex insurance industry
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