Note: This Q&A originally appeared in RU40s April 2017 Newsletter.
RU40s sat down with John Cusano, Accenture’s Senior Managing Director for Insurance, for a discussion about technology and transformation in the (re)insurance industry, with a particular emphasis on blockchain. We asked John questions that we thought would demonstrate his perspective on the convergence of technology and the (re)insurance industry and here’s what he had to say:
Q: Blockchain seems like one of those buzz words that gets thrown around alot in InsurTech discussions. What exactly is blockchain and where do you think it can have the most impact operationally?
Blockchain is ultimately a ledger or database technology which is different from SQL or Oracle in that blockchain in “distributed” – that is, there could be multiple owners each maintaining a copy of the same database. This is a marked difference from traditional databases where just a single trusted party is responsible for administration and maintenance. However, it is important to remember that this is a new technology and there will be a cycle of evolution to achieve commercially applicable maturity. One of the key steps to gaining widespread acceptance is a proof of concept. And to that end, we do see some short-term, “faster to reality” use cases which can demonstrate the value of blockchain.
There is an obvious sweet spot which would have a meaningful operational impact on the business and that is the syndication of large commercial or reinsurance risks. Currently, we may have 20 or 30 insurance companies who all individually maintain and verify the accuracy of certain particulars of the deal, resulting in a massive duplication of effort. In addition to this inefficiency, the insured maintains its own ledger of the same information as well as the broker. The broker often facilitates the movement of payments through our existing financial institutions, resulting in yet another administrative cog in the process. Streamlining the administration aspect of this scenario by hosting all of this information within a blockchain ledger would release enormous value for the industry. Of course, this achievement also reduces barriers to entry into the industry which may incentivize “new” capital to continue their entry into the space.
Q: What is the downside risk?
The reality is that we have technology today to solve the previously described problem of duplication of labor – we can do this with an Oracle database. With that information, it becomes clear that the biggest impediment to blockchain in insurance is collaboration between companies, which has so far begun with industry consortiums. Once the technology matures and the real value is demonstrated,
blockchain may make it just that much easier for insurance companies to collaborate and if it tips in that direction, the industry may move to build out the framework for utilization of the technology in a production environment. While the distributed model of blockchain could help achieve administrative efficiencies, such a shift will undoubtedly require the development of a governance framework as well as compliance rules and other standards.
Still, some use cases show more immediate promise than others and continued to be tested through proof of concept blockchain iterations. In identifying such proofs of concept, a sound approach may be to focus on one company and one ecosystem in order to prove the concept in one functional area. Claims is a good example of an
early use case where a company could build central a repository within an organization to manage claims transactions without impacting other critical areas of the business, such that the blockchain exists only within an insurer’s internal operations. However, there is a real “early adopter” risk associated with this movement. There is a risk that a company initiates a substantial investment in a technology stack that is not ultimately the winner for the industry as a whole. For example, Oracle and SQL now dominate the industry for database technology but we can’t forget that there were countless other competitors throughout the evolution of the technology and as such a great deal of sunk cost associated with supporting technologies that were not widely adopted.
Q: Are there any notable examples of early adopters?
Currently, there aren’t any major (i.e. multi-billion dollar) investments but we do see increasing amounts of activity in the capital markets space, particularly with exchanges and clearing houses using this blockchain in the early stages with the goal of simplifying settlement processes. There isn’t too much in a final production environment but we have observed some investment and good positive momentum. There is a lot of momentum behind the B3i initiative being undertaken by the insurance industry and there is real money being spent here. However, there is a “chicken or egg” argument here since everything needs to be tested before robust development can be considered. Unfortunately, the investment in development is difficult to justify without a demonstration of production value. As such, there has been a great deal of proof of concept piloting. Even still, an Accenture survey found that 35% of insurers are currently using blockchain in a production environment.
Q: Accenture has written on editable blockchain. What is this and how is it different than other unalterable blockchains?
The significance of editable blockchain is that there is a good chance that errors find their way into the chain. In a permissioned system managed by a consortium, wouldn’t it be great to have a way to correct what every party agrees is an error in the chain? The idea is that edits to the chain would not be made often and the edit itself would be kept in the chain, providing a record that an amendment was made. A corrective blockchain action which would optimize the chain and continue to solve problems associated with the technology, which contributes to the maturity of the technology and improves adoption potential in future.
Q: Does Accenture favor a certain platform for blockchain?
We don’t necessarily have a favorite. Accenture has laid out the “pros and cons” of each platform for our clients – the fact is, some platforms are optimized for security and data privacy but have drawbacks related to processing speed. Other platforms are more “open” and trade ironclad security for faster speeds. What is important is to educate clients and fit the appropriate technology to the relevant use case at hand.
Q: Blockchain can change distribution – how can companies prepare for this?
At a minimum, companies should remain aware and knowledgeable about developments on the technology front. Companies need to be constantly thinking about the implications of a technology movement for their business but should not lose sight of what the opportunities could be. It could be valuable to have a strategic discussion about being a first mover and whether or not there may be advantage associated with making an early investment. Putting their heads in the sand is not a good move.
With that said, I feel that most companies are pretty good about becoming educated and the insurance industry is proactive about remaining aware of developments, even if we are less so the “proactive first mover”. An acquisition strategy is one way for major players to establish a foothold in developing technologies, though the downside to that strategy is that a new company could grow so quickly that the incumbents do not have time to buy it. But imagine blockchain as applied to quake insurance – if blockchain can facilitate an efficient administration of a broad, massive syndication of risk, we could theoretically spread the financial impact to every single insurer.
Q: This is unrelated to blockchain, but do you have any thoughts on the autonomous vehicles movement and the resultant impact on personal auto market?
There is no way around it: autonomous vehicles will have a massive impact on personal auto industry. I feel that we’ll probably be in a semi-autonomous stage for a longer time than we think and that probably means business as usual for a little while. Full autonomy, however, is likely to pull a great deal of premium out of the industry. Good news is that the risk is not going away since this risk will just move to the commercial market with the auto manufacturer simply assuming the exposure. I feel that weather will continue to be a major hurdle since the autonomous vehicles continue to struggle under adverse weather such as rain or snow (plowed snow, for example). If we are 98% autonomous, the concept still doesn’t really work as advertised.
John Cusano is Accenture’s Senior Managing Director for Insurance. He is responsible for setting the industry group’s overall vision, strategy, investment priorities and client relationships. Mr. Cusano joined Accenture in 1988 and has held a number of leadership roles in Accenture’s insurance industry practice. He led Accenture’s North America Insurance client service group and, prior to that, Accenture’s Insurance Software Solution Group. Mr. Cusano has overseen a number of large client relationships and the execution of projects ranging from strategic consulting to multi-year global programs to transform company operations.