A Blockchain Conversation with John Cusano, Senior Managing Director, Insurance at Accenture

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.


“25 Years After Hurricane Andrew, Did Floridians Relive History?”

Marla Schwartz, Atmospheric Perils Specialist, Swiss Re

On August 14, 1992, a small and seemingly insignificant tropical wave developed off the west coast of Africa. Three days later, the depression reached tropical storm status, earning the innocent name Andrew. After intensifying over warm Gulf Stream waters, not-so-innocent Andrew slammed into Miami-Dade County at 5:05am on August 24.

The first Atlantic tropical storm of the 1992 hurricane season arrived in South Florida at an ill-fated time. Decades had passed since South Florida’s last major hurricane landfall, and memories of Betsy’s 1965 destruction had faded. Some Floridians grew complacent when it came to hurricane preparation and traditional stick frame houses were widespread.

Plowing into the coast with one-minute sustained winds over 165mph, Hurricane Andrew’s 1992 rampage caused USD 26.5bn in economic damage (1992 USD), destroying more than 25,000 homes and damaging an additional 100,000. The storm left nearly 250,000 people temporarily homeless and 65 dead. One of only three hurricanes to be at Category 5 intensity upon its landfall in the US, Hurricane Andrew upended homes, businesses and lives in the Miami suburbs.

In response to Andrew, Florida improved hurricane preparedness, emergency management and disaster recovery. The state beefed up building codes and began regular house inspections. Andrew left a mark on the (re)insurance industry by changing our perception of risk and stimulating trust in catastrophe models.

Last month, we marked the 25 years since Andrew’s landfall in South Florida. This benchmark served as an opportunity to remember the devastation and lives lost, as well as to appreciate the rebuilding efforts and resilient spirit that have allowed South Florida to flourish again.

With all the talk about Andrew’s impact on South Florida and (re)insurance, it is only natural to wonder: What if Andrew hit South Florida in 2017? Is South Florida a sitting duck for the next Big One? Fortunately, the insurance industry has tools to answer these questions and a recent Swiss Re publication took a deep dive into this topic.

Andrew caused 26.5bn (1992 USD) in economic damage, but losses from a present-day storm with an identical track and at the same intensity would dwarf the losses experienced in 1992. Our analysis shows that physical damage from a present-day Andrew would exceed USD 80bn-100bn, and only USD 50bn-60bn would likely be insured.

Damages increase due to a combination of population growth and coastal development. Yet, the physical damage is under USD 100bn because of efforts to address South Florida’s vulnerability. (Miami-Dade, together with neighboring Monroe and Broward Counties, maintains the nation’s highest wind standards when it comes to building codes.)

As hurricane geeks and reinsurance professionals, an even scarier hypothetical comes to mind: What if Andrew made landfall about 20 miles north of its historical landfall location in Fender Point, FL? This would place Andrew’s eye directly over Miami, an area far more populated, developed and commercialized compared to Homestead, yet arguably no less vulnerable or prone to hurricanes.

Catastrophe models allow us to estimate the financial impact of hurricanes that have not necessarily occurred in the historical record, but are physically possible. A hurricane of comparable intensity and size to Andrew that makes landfall in the city of Miami is estimated to produce losses to the insurance industry of a magnitude not yet observed: USD 60bn-180bn. The estimated economic damage from such an event ranges from USD 100bn-300bn, making it the costliest natural disaster ever in the US.

While these numbers invoke a sense of “sticker shock,” the difference between economic and insured losses calls attention to a profound protection gap and the remarkable weight carried by society when natural catastrophes like Andrew occur. We must close the protection gap together to reduce the impact of these inevitable shocks.

Numbers like these serve as a wake-up call: It is more important than ever to better understand hurricane risk, to learn about new solutions that address the protection gap, and to consider if insurance instruments are sufficient to cover financial needs in the event of a significant loss, like an Andrew.
You can download a copy of the full publication at http://www.swissre.com/library/archive/hurricane_andrew_the_20_miles_that_saved_miami.html. The report dives into the topics above, and offers insight on changes in South Florida since Andrew, the impact of global sea level rise on storm surge, and Miami’s recent efforts to mitigate their ever-increasing flood and hurricane risk.

The 25th anniversary of Andrew’s landfall served as a wake-up call to the insurance industry, homeowners, small businesses, public officials and the private sector to better manage hurricane risk and remember it’s not a matter of if a major hurricane will barrel through South Florida, but when.

In an almost surreal turn of events, Florida Governor Rick Scott warned last week that Irma is “bigger, faster and stronger” than Hurricane Andrew. Harvey’s catastrophic flooding in Texas and Irma’s destruction throughout the Caribbean and US only serve to reiterate the importance of understanding and addressing hurricane risk. Over the last few weeks, as my eyes have been glued to news reports, hurricane forecasts and photos of devastation, I have been reminded of the importance of resiliency and how critical it is to plan better.


Marla Schwartz is an atmospheric perils specialist at Swiss Re, where she develops tools and techniques to assess risk due to wind-related perils, including hurricanes, tornadoes, hail, wildfire and winter storms. Prior to joining Swiss Re, Marla was a postdoctoral researcher at UCLA where she investigated impacts of climate change to snowpack accumulation and snowmelt in the Sierra Nevada Mountains. She obtained a PhD and MS in Atmospheric and Oceanic Sciences from UCLA, and a BA in mathematics from Columbia University.