Critical insights on the potential of smart contracts and distributed ledger technology for the Insurance sector are explored in an interview with Principal at Liberty Mutual Insurance, Christopher Lowell
Adjoint: Can you first tell us about your professional background?
Chris: Liberty Mutual Insurance is a large, global, diversified insurance carrier. We are organized around our three major businesses, our global retail markets, our global risk solutions, and our investments group. I work in Corporate Strategy and Research, which, provides management consulting services and objective advice and analysis to senior executives, including our CEO. Understanding new emerging technologies, such as distributed ledgers and smart contracts, is especially important for us as thought partners and strategic advisors to the businesses.
My professional background is from strategy and management consulting, having come from Bain & Company, working in London and South Africa. The future of insurance is an incredibly fascinating space, and I feel lucky to think about it all day long.
Adjoint: Can you tell me about your experience with smart contracts and distributed ledger technology?
Chris: Liberty Mutual has been developing an understanding around blockchain, distributed ledger technology, and smart contracts for about 2 years. Liberty has approximately 50,000 employees worldwide, of which about 40 people in the organization in different groups and departments are at least partially dedicated to working on blockchain projects.
I am a non-developer, so my role is to unify and coordinate these groups of subject matter experts to share their knowledge, discuss and prioritize their use cases, and get the right information to the right people to leverage our scale with this technology.
I find it an interesting challenge to filter through all of the information and noise in the ever popular and evolving DLT space, as well as to bring new people into the conversation that do not have a technical background and find this technology difficult to understand.
Adjoint: We have seen reports by many consulting companies on the use of distributed ledger technology and smart contracts in the insurance industry. This covers a wide range: new products, fraud detection, underwriting, claims processing, and many more. Where do you see some good use cases.
Chris: Insurance has many areas where DLT and smart contracts may be applicable, including all of the examples you mentioned. Insurance companies gather data on discrete risks, leverage years of loss experience using algorithms and actuarial pricing tables, and help policyholders essentially hedge that risk into a smoother cost budget that can be managed and accounted for. All of the math and triggers in the process may be good use cases for DLT and smart contracts. The biggest challenge will be prioritizing them and understanding when blockchain is necessary. Often a simple shared database will suffice to improve business operations, but sometimes, rarely but importantly, only a blockchain will solve the pain-point.
On a broader scale, the larger disruptive opportunities are there – using DLT and SC in new ways to help people lead safer, more secure lives. What companies such as Airbnb and Uber did might be possible with DLT and SC in insurance. They leveraged data to provide a personalized experience, fast response times, and access to new methods of solving age-old problems. Overall, they provided a better customer journey, and that is what we hope to do. They also happen to have ravaged the hotel and taxi industry incumbents – which is why Liberty is working hard to stay ahead of the curve.
Adjoint: Which use case do you see DLT and Smart Contracts making the most impact?
Chris: I think that DLT and SC-leveraged automation of back-office processes will be the first to happen. While it may not be the most valuable, streamlining insurance operations will allow us to test this new technology internally before bringing it to the policyholder herself.
Subrogation is a great example of one of the first likely blockchain solutions. Subrogation is the substitution of one group or individual for another in terms of insurance claims. For example, if I have Liberty Mutual auto insurance and I am rear-ended by someone who has a different carrier, immediately, Liberty will pay for my medical claims and will fix my car. Then, once it is determined that the other driver was at fault, Liberty will go to the other driver’s insurance company and communicate that they owe Liberty. This allows us to help the consumer in their time of need and then settle up financially later on.
What happens today is that an employee will open up an Excel file or claims system, check if money is due from another carrier on a specific claim, pester someone from the other company via email or phone, and maybe get a check in the mail. They then physically cash the check, maybe not walking to the bank themselves, but a very manual process nonetheless. The banks of both insurance companies communicate to clear the check, and then it is logged in the other insurance company’s Excel file or claims system.
Having a new payment settlement ledger for the whole industry would simplify all of this and make the customer experience much better – as everything would be dramatically faster, more accurate, and less expensive. The shared ledger would streamline the data sharing and reduce errors and inconsistencies. The smart contracts would allow for automated settlement so similar transactions could net out.
In the medium term, I believe middle office automation will happen – the enhancement of claims adjustment through the leveraging of data oracles with SC to streamline the flow of information. There are many straightforward claims that take up a significant amount of a claim adjuster’s time. We would prefer that the claim adjuster be able to focus on the really difficult cases where there are multiple parties and injuries, which enables them to get back to helping those customers with the greatest needs.
The last phase is customer-facing applications – the combination of Internet of Things with Smart Contracts to nudge customers in safer directions. Being able to shift the industry to focus on prevention rather than recovery, and truly being able to help people lead safer, more secure lives – this is where the technology could truly be transformative, not just for the industry, but for everyone.
For example, last week in Boston we had absolutely freezing temperatures and there were thousands of burst pipes. There are products out there that will tell you when your pipe bursts and will shut off your water automatically. Insurance companies could leverage DLT technology to understand which customers are using these prevention devices, and therefore understand their risk exposure better. There is a meaningful difference between whether or not you have a loss (your house is flooded and destroyed), and whether or not your insurance carrier has to then pay for that. Implementing this combination of technologies leads to lower premiums and safer, more secure lives.
Adjoint: What challenges or obstacles will need to be overcome for an insurance company to use DLT and smart contracts?
Chris: One point of difficulty will be with the industry as a whole rather than individual companies. Industry collaboration is one of the biggest challenges in insurance. Convincing all of the industry players to jump into something new is always a challenge. There is also a potential gap within the insurance space between people who understand the value of DLT and SC (typically younger and more tech-focused), and the people who make executive business decisions. The companies that will win are the ones that can take their understanding of technology and articulate to the business executives the true value and impact of this technology both to consumers and to the bottom line.
Another major challenge is getting talent to work on DLT and SC. With startups and external consultancies hoovering up most of the graduates, it’s difficult for century-old companies to convince the talent market that we are serious about shifting gears to become a more technology-led business. Liberty is doing that, and we are working very hard to make sure we tell people about it. Insurance is going to change more drastically in the next 10 years than the last 100. We need to get others as excited about that as we are
Adjoint: What are your recommendations for your insurance industry colleagues as they deal with smart contracts and DLT - as well as the technology companies trying to work with them?
First of all, DLT and SC is not something that you gather some developers in a room for three months, build something fantastic, and launch it. This is a sharing environment where the more people you get onboard, the more value you add – the network effects are huge. It’s also work that requires an Agile approach – put ideas out there, get feedback, and iterate – that’s what will win.
Secondly, start with the business need and opportunity. Understand what you’re trying to achieve and whether DLT is the right solution. If not, the goal should be to improve the product or customer experience, rather than to use the shiny new toy for the sake of using it alone.
Finally, take this new technology as an opportunity to re-imagine risk management and insurance. There are lots of small improvements that will be very worthwhile in the next few years, but large scale disruptive opportunities are out there, and we need to be open to seeing them. We need to be open to disrupting ourselves…not just in insurance, but in all industries.