The Blockchain Imperative: The Next Challenge for P&C Carriers

1. The Blockchain Imperative: The Next Challenge for P&C Carriers Blockchain offers a trusted, unalterable platform for recording and distributing transactions within an impenetrable, self-governing and transparent environment for the insurance industry.

2. 2 KEEP CHALLENGING November 2016 Executive Summary The increase in Internet connectivity across enterprise and consumer markets has set the stage for a significant advancement in digital technology. Blockchain, a universal ledger and data-storage platform, dramatically cuts the time, costs and exposures associated with processing and verifying transactions. Blockchain innovations and strategies are expected to transform the way assets are tracked and managed by allowing the direct exchange of tangible and intangible assets within a self-organizing, “air-tight” system that cannot be manipulated. This is a significant departure from the status quo. The infrastructure needed to support blockchain applications and services is currently under construction. As the technology matures, we expect to see blockchain-enabled companies bring its economies and possibilities into mainstream applications. Trailblazers such as Google and Amazon have made significant investments in this space. Financial services leaders, including Bank of America, Santander and Goldman Sachs, are already reporting short-term value from blockchain applications. Government, healthcare and retail organizations are also experimenting with blockchain technology. And many start-ups are building blockchain solutions and consortia. 2 KEEP CHALLENGING November 2016

3. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 3 The most prominent example is R3, a consortium of approximately 45 financial institutions that are working together to study blockchain usage.1 Property and Casualty (P&C) insurance companies have not sat idly. Faced with increasingly tough competition, carriers have ratcheted up their investments in digital platforms and applications to acquire and retain customers, heighten operational efficiencies, and grow profits in the most cost-effective way. We believe that blockchain will be key in helping carriers achieve and sustain these objectives well into the future. This white paper delves into cross-industry experimentation with blockchain and its implications for P&C carriers in four key areas. As with any technology initiative, carriers face some significant barriers, including a shortage of talent and technological know-how, a lack of clarity on regulatory impacts and, perhaps most important, the absence of a robust, insurance-specific platform. With that in mind, we recommend a three-pronged innovation framework carriers can use when exploring and implementing blockchain technologies. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 3

4. 4 KEEP CHALLENGING November 2016 Demystifying Blockchain Technology Blockchain first emerged as the underlying technology and shared public ledger for recording bitcoin network transactions. The goal was to create a trusted, peer-to-peer currency system that would operate independently – invulnerable to political and economic fluctuations, and exchangeable throughout the world without intermediaries. Over time, bitcoin gained wider acceptance beyond its role as a cryptocurrency. This led to significant advancements in blockchain for mainstream enterprise applications across industries. So what is blockchain technology? Blockchain is an independent, universal digital ledger for recording all transactions or digital events executed by participating parties. Blockchain’s core technology uses cryptography as well as distributed database architecture and a peer-to-peer protocol to create shared ledgers among different parties. Each transaction in the ledger is verified via consensus of participants in this ecosystem. Once captured, the information in the blockchain is immutable – meaning it cannot be manipulated or erased. The distributed ledger chronologi- cally stores information in “blocks” containing a verifiable record of every single transaction, as well as the sequence in which the transactions were executed (see Figure 1, next page). What makes blockchain so unique is the absence of a central authority or third party to monitor, manage and validate transactions. Traditionally, transactions such as money transfers or stock purchases required a separate entity to oversee and record these actvities. In a blockchain, in order to perform any transaction accepted by the rest of the network, a participant must show “proof of work” – a mechanism for protecting the integrity of information and preventing fraud. Blockchains can be characterized by the following: • Decentralized data. • Mutual consensus by participants. • Use of cryptography. • Digital signature for identity verification. • Strict controls and time-stamped data. • Direct, secure and immediate access to data (public or private blockchain) and transactions (permission-less or permissioned blockchain). Once captured, information in the blockchain is immutable – meaning it cannot be manipulated or erased.

5. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 5 The Evolution of Blockchain Blockchain technology gained prominence as a platform for bitcoin. Since then, its capabilities have advanced significantly – affording seemingly endless oppor- tunities for employing blockchains along an evolutionary path (see Figure 2, next page). Currently, applications include: • Cryptocurrencies & Global Payments: The concept of blockchain paved the way for bitcoin and other digital currencies (cryptocurrencies) that rely on encryption techniques to regulate the generation of funds and verify the transfer of those monies without the need for an intermediary. This platform can drive down costs, assure “locked-in” integrity and security, and simplify cross-border transactions. • Value Ecosystems: Data related to any asset is shared on a blockchain for other participants to ingest. Assets can be tangible (vehicle and property titles, jewelry, art) or intangible (intellectual property, copyrights, licenses). For example, patient health care records can be placed and distributed on a dedicated blockchain – giving physicians, nurses and other authorized parties immediate access to vital information as needed. All in a secure, unalterable and transparent environment. • Smart Contracts: Business rules stored on the blockchain verify, enforce, nego- tiate and track the performance of a contract between parties, with no human intervention. If an unexpected event (triggering event) occurs, corresponding rules are automatically executed. For example, a smart travel insurance contract can automatically initiate and pay out claims when there is a flight cancellation, using information (flight schedule, weather) stored on separate blockchains. This eliminates the need for intermediaries, and assures that all transactions are transparent, efficient and accurate. Figure 1 How Blockchains Work • Parties exchange value – currencies, contracts, data. • The transaction message includes details about the receiver’s public key, the value of the transaction, and a cryptographic digital signature that proves the authenticity of the transaction. • Blockchain nodes (computers/servers) on the network receive the message and authenticate the digital signature. • The authenticated transaction is verified instantly and placed in a “pool”’ of pending transactions. • The pending transactions are placed in a “block” by one of the nodes on the network and validated. • At a specific time interval, the node broadcasts the block to the entire network. • The miner mines/ verifies the block; a proof of work is also created and published to indicate the mining. • If all transactions and proof of work are validated, the new block is “chained” onto the blockchain. • The new state of the ledger is broadcast to all nodes on the network. New Block Transaction Initiation Transaction Intake Block Creation Block Mining Block Chaining

6. 6 KEEP CHALLENGING November 2016 • Decentralized autonomous organizations (DAO): In this scenario, a group of smart contracts work in tandem. Crowd-funding companies and banks are already showing interest in DAOs. For example, Arcade City, a DAO-based ride sharing platform, competes with similar platforms, such as Uber and Lyft, using a decentralized model where driver onboarding, ride-matching and ride payments are managed by multiple smart contracts. 2 This removes the processing/ transaction overheads and “intermediary layer” found in traditional centralized decision-making models – a benefit that can translate into lower prices for services rendered. Blockchain Industry Applications As blockchain adds more capabilities, its underlying ledger system becomes more dynamic and self-governing/self-organizing. Although adoption is yet to become mainstream, several industries are exploring how blockchain technologies can be used to transform their business model and change their operating assumptions. • Banking and financial services: As noted earlier, the banking industry pio- neered the use of blockchain. In theory, blockchain can streamline banks’ and other financial institutions’ processes by automating multi-party payment clear- ances. Major banks and financial companies such as Bank of America, Santander, Barclays, Goldman Sachs and NASDAQ are piloting the technology’s capabilities in data registry and smart contracts for cross-border payments, remittances, mi- cropayments, trade finance, loans, securities and derivatives trading. For exam- Figure 2 Blockchain Advancements & Capabilities • Sophisticated form of smart contracts that allows the execution and interconnection of a variety of such contracts. • Smart contracts interact with one another in a decentralized and distributed manner to carry out and coordinate functions. Example: Everledger (Diamond data) BitHealth (Healthcare data)Example: Bitcoin (Cryptocurrency) BitShares (Cryptocurrency) Example: Filament (IoT) PlayCoin (Gaming) SMART CONTRACTS • Modular, repeatable and autonomous scripts or computer code stored on a particular node within a blockchain. Capable of executing the script/code upon a designed trigger. • Public ledger to register information on tangible/intangible assets. • Accessed by authorized users as needed. 3 VALUE ECOSYSTEMS 21 CRYPTO–CURRENCIES & GLOBAL PAYMENTS • The digital representation of value that is neither issued by a central bank nor a public authority. • Can be transferred, stored or traded electronically. DECENTRALIZED AUTONOMOUS ORGANIZATIONS 4 Example: Otonomos (Financial instruments) Mirror (Financial investments)

7. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 7 ple, Barclays is testing derivatives trading on a blockchain. 3 Similarly, NASDAQ is building several services on its blockchain, including the issuance of pre-IPO shares. It is also developing exchanges such as securities trading clearinghouses and central securities depositories. 4 In addition to making stand-alone investments, a number of banks have joined hands to form a blockchain consortium, R3, focused on identifying and prototyping new hypotheses and developing blockchain technology standards. 5 • Government: Several government agencies across the globe plan to move publicly available information – land titles, vehicle titles and health records, for example – onto a blockchain to make it easier to manage and access. The State of Delaware announced a blockchain initiative to encourage businesses incorpo- rated in the state to use distributed ledgers and smart contracts. 6 One of the key objectives is to improve the tracking of equities issued and shareholder rights following multiple financing rounds. In another case, a new Australian political party has proposed a real-time, token-based voting system based on the concept of decentralized blockchain technology. 7 Registered voters use the blockchain- based application to vote on issues in parliamentary proceedings. • Healthcare: Organizations in healthcare are gearing up to use blockchain technology to store healthcare records that are tamper-resistant and impos- sible to replicate – enabling all authorized parties to quickly find and act on vital information. Philips Health- care, a Netherlands-based healthcare giant, has partnered with blockchain specialist Gem to build a private blockchain that will aid in the development of enterprise healthcare applications. 8 HealthNautica, a leading cloud-based software company in the healthcare sector, announced its partnership with blockchain provider Factom to secure medical records and audit trails on a blockchain. 9 • Technology: In addition to the industries above, global technology giants such as Google, Microsoft and IBM are already staking their claim in this space. Google is experimenting with blockchain to enable users to access platforms and services without the need for a password. 10 Microsoft launched blockchain as a service platform and ready-made environment where developers can experiment with blockchain. 11 IBM is introducing the capabilities of blockchain to its artificially intelligent computer, Watson. 12 Organizations across industries are experimenting with blockchain to determine how it can be leveraged to disrupt current business models, increase profitable growth, and enable more efficient operations. These initiatives put the onus on the insurance industry to follow suit. Blockchain & Insurance In our view, blockchain can potentially eradicate many of the P&C insurance industry’s most critical business challenges. A number of P&C carriers (e.g., Lloyds of London 13 , Allianz 14 ) are already exploring blockchain applications in areas such as customer acquisition and retention; product development; underwriting/pricing; claims; and expense and profitability management. It is important to understand that blockchain supports any type of unstructured In our view, blockchain can potentially eradicate many of the P&C insurance industry’s most critical business challenges.

8. 8 KEEP CHALLENGING November 2016 data (including from third parties). It can also store and retrieve virtually unlimited amounts of data in an encrypted, time- stamped and decentralized format that is unalterable. As blockchain gains traction, personal and commercial lines carriers will draw benefits from this game-changing technology platform. We expect that the initial focus will be on attaining operational efficiencies and reducing expense ratios in payment processing, data storage/infrastructure, or leveraging third-party data on a blockchain. The latter can include MVR (Motor Vehicle Reports); CLUE (Comprehensive Loss Underwriting Exchange) reports; OFAC (Office of Foreign Assets Control) reports; and ISO (Insurance Services Office) claims or loss runs. Carriers that build these capabilities will be better positioned to price policies competitively and increase revenue – particularly in personal lines and small commercial markets where price is a key determinant in wins. Over time, blockchain will help carriers derive revenue through: • The use of smart contracts. • More effective and efficient insurance processing and multi-party collaboration. • Faster payment processing by eliminating intermediaries. • New business models (peer-to-peer insurance and risk pools). The concept of smart contracts is extremely compelling to carriers, given the potential to transform and optimize processes. Typically, most insurance core functions are viewed as contracts between various stakeholders (agent contracts, vendor contracts, insured policy contracts and reinsurance contracts, as shown in Figure 3, next page). Blockchain-based smart contracts can help carriers react immediately by automating several tasks. For example, imagine an insured policy contract that settles claims in near-realtime up to a certain threshold. The contract can perform real-time checks using publicly and privately available information to determine a triggering event (e.g., a catastrophe in a particular area, images of the area, and the cost of repairs) then automatically settle the claim. Germany- based insurance giant Allianz has reported its success in using blockchain-based smart contracts to automatically process its catastrophe swaps and bonds, which are triggered under predefined conditions.15 Several market-changing trends, such the sharing economy (read “The Sharing Economy: Implications for Property and Casualty Insurers,” the Internet of Things (read “The Internet of Things: P&C Carriers & The Power of Digital”) and the increase in open application platforms allow carriers to quickly and Use Case #1: Adoption of Smart Contracts Over time, blockchain will help carriers derive revenue from new business models such as peer-to-peer insurance and risk pools.

9. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 9 easily connect to digital ecosystems – underscoring the importance and value of processing high-volume, repetitive tasks (e.g., pay per transaction in sharing-economy and usage-based policies; real-time loss prevention and claims processing with smart devices and sensors). Additionally, in their attempts to expand market share, carriers are exploring products such as micro insurance, which entails the payment of premiums in small increments. Smart contracts enable carriers to manage large transaction volumes in an automated, efficient and “fail-safe” manner. For example, LenderBot is a proof-of-concept micro- insurance platform that uses the bitcoin blockchain to insure numerous products and services in the sharing economy. 16 Down the road, smart devices in vehicles, homes, appliances and machines will use smart contracts to monitor performance thresholds and estimate the cost of damage in the event of accidents – eliminating the need for in-person claims assessment. Consider a smart boiler covered under a smart policy contract for equipment breakdown. The boiler would automatically detect a breach, estimate the damage, trigger the smart policy contract, and request maintenance from the designated service provider. Figure 3 How Smart Contracts Impact Insurance Business Processes DISTRIBUTION MANAGEMENT UNDERWRITING & POLICY ADMINISTRATION CLAIMS MANAGEMENT • Smart agent contracts (e.g., billing, commissions/ incentive payouts, licensing, terminations) • Smart contracts for simpler products and sharing economy (e.g., micro insurance, pay-per- transaction) • Smart contract-based policy administration (e.g., automated renewals, cancellations. endorsement processing, premium audit, risk engineering) • Smart reinsurance contracts • Smart contract-based claims processing (e.g., automated FNOL, multi-party claims workflows and claims payouts) • Smart service providers/ vendor contracts (e.g., billing, payments, terminations) Smart devices in vehicles, homes, appliances and machines will use smart contracts to monitor performance thresholds and estimate the cost of damage in the event of accidents.

10. 10 KEEP CHALLENGING November 2016 Carriers’ success in optimizing processes has traditionally centered on data. Across the insurance spectrum – from operations, distribution, underwriting and policy administration, to billing, claims, reinsurance and finance processes – ever-increasing amounts of information are stored and exchanged. Consequent- ly, carriers continuously look for new and better ways to capture customer and risk information from the Web, mobile devices, social media and sensor data. Carriers depend heavily on third-party reports, such as (MVR, CLUE, OFAC and court records) for data pre-fill and to refine underwriting, pricing, and claims management. While these sources help carriers expand their knowledge and improve accuracy, the process is expensive, due to the non-standardized fee structure and the need to develop numerous partnerships to gain access to third-party data. The adoption of blockchain by various internal and external sources would generate data from a single true source, which would be far more cost-effective for carriers. Figure 4 depicts common insurance processes that involve multi-party data-sharing and collaboration. Use Case #2: Effective Processing & Multi-Party Collaboration Figure 4 Collaborative Processing on a Blockchain: The Potential DISTRIBUTION MANAGEMENT • Access complete information on customers from multiple channels (internal and external). • Access larger markets/ syndicates/excess and surplus markets for complex risks. • Access larger markets for collateralized assets (e.g., CAT bonds) and raising capital. • Collaborate with third-party information sources (e.g., MVR, D&B, loss history) for effective underwriting and pricing. • Share customer and policy information with customers, agent/brokers, reinsurers, risk-engineering specialists. • Collaborate with service providers, share claims information to determine fraud and accelerate investigation. • Share claims status with agents/brokers, customers, account executives and service providers. • Share regulatory and statistical reporting (State DOI, ISO, NCCI, NAIC) and avoid intermediaries where possible. REPORTINGUNDERWRITING & POLICY ADMINISTRATION CLAIMS MANAGEMENT Blockchain’s innate immutability and distributed ledger promise greater data integrity and a single version of the truth.

11. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 11 Blockchain may well become the principal repository for information pertaining to property and vehicle titles, business licenses, building permits and annual reports, for example – eliminating the need to rely on various sources. As of this writing, several blockchain startups have invested in public blockchains to manage the purchase of high-net-worth items such as antiques, luxury items, diamonds, gold, fine arts and jewelry. Everledger, a leading blockchain provider, has established relationships with major certificate houses across the globe to create a detailed digital record of diamonds on a blockchain, each with a unique identification code. The company has already registered more than 850,000 diamonds to reduce diamond fraud. 17 Carriers can integrate with these public blockchains to verify and access information, and improve underwriting and claims management. When it comes to managing data across far-flung enterprise IT environments, blockchain comes into play. By moving data on customers, policies, claims and agents to a blockchain, Social Security numbers, credit card information and other sensitive data can be stored in a decrypted, secure format that cannot be replicated or tampered with, and is essentially immune to cyber-attacks and data breaches. Many other data-rich industries, such as banking and retail, have partnered with providers of blockchain distributed ledger technologies to move their data onto the blockchain. At this time, several major banks, including JP Morgan, BBVA, and Credit Suisse have joined the R3 consortium (a blockchain technology company) to decentralize financial information via blockchain. 18 In addition to impenetrable security and cost-effective storage, blockchains allow for easier and more efficient data-sharing among insurance industry stakeholders – a critical requirement in businesses where core processes call for close collaboration among various players (reinsurers, agents/brokers, service providers, regulators and customers). Blockchains have the capability to open access to a larger marketplace, specifically for complex risks that are handled by syndicates, risk pools, and excess and surplus markets. Blockchain technologies can also help carriers tap into a wider market of investors for presenting collateralized assets (e.g., CAT Bonds) to pro- spective buyers and raising capital. The encrypted nature of blockchain makes it especially well-suited for these types of activities. Blockchain’s innate immutability and distributed ledger promise greater data integrity and a single version of the truth. Payment processing is an integral part of insurance, especially when it comes to premiums, commissions and claims payments among customers, agents/ brokers, and vendors. Carriers have taken several measures to ensure faster payment processing through payment solutions such as mobile payment, social media payment, mobile wallet, debit cards, and electronic funds transfer (EFT). While these new methods have made it easier to complete payments, intermediaries’ (e.g., banks, vendors) service fees and clearance times remain a challenge. These issues are more significant in commercial insurance transactions, where payments are in thousands of dollars or involve multiple countries where payments must be settled in the local currency. Use Case #3: Faster Payment Processing, Eliminating Intermediaries

12. 12 KEEP CHALLENGING November 2016 Blockchain offers a better way to address carriers’ payment-related challenges – promising faster processing (instant payments), real-time clearance and posting of funds with confirmation. Payments are authorized within the network itself, without a central authority – drastically reducing payment costs. International and cross-border payments are easily enabled through blockchain’s distributed ledger. (See Figure 5). Many insurance companies and insure-tech startups are toying with the idea of peer-to-peer insurance or risk pools-based business models. Already, a few ventures formed worldwide are managing risk pools for parties with similar needs. Currently, these include Friendsurance (Germany), Guevara (UK), Lemonade (U.S.), Inspeer (France), PeerCover (New Zealand) and TongJuBao (China). Blockchain has the potential to redefine the peer-to-peer insurance model and advance it to the next stage with the ability to: • Pool geographically dispersed parties into a common marketplace. • Govern smart contracts (decentralized autonomous organization) and consensus management in the areas of risk-pool management, underwriting, and claims payments. • Access carriers/reinsurers that can provide the necessary coverage for excess/ reinsurance layers beyond what the risk pool can cover. • Store and manage premiums/assets in a blockchain digital wallet. These self-governing activities are a step closer to achieving a mutual insurance model. Companies can conceptualize a secure blockchain network comprising a pool of insureds using a common digital wallet to store pooled money as a cryptocurrency. The funds in that wallet can be spent only if the insured member and majority of members in the risk pool vote for it. Similarly, the voting consensus Use Case #4: New Business Models: Peer-to-Peer Insurance & Risk Pools Figure 5 Payment Functions Enabled by Blockchain DISTRIBUTION MANAGEMENT • Process agent/broker commissions. • Process agent/broker incentives. • Process premium receivables at the start of new business, during renewals, or during financial endorsements. • Process premium refunds during cancellations. • Process third-party vendor payments (risk engineers, premium auditors) immediately. • Process claims payments instantly. • Process service provider/ vendor payments immediately. UNDERWRITING & POLICY ADMINISTRATION CLAIMS MANAGEMENT

13. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 13 among members will drive the risk coefficient of the new entrant and, correspond- ingly, the share of the premium or claims payout to be paid. Companies such as Teambrella 19 are already investing in and creating variations of this model. Beyond product design, carriers can apply peer-to-peer concepts to develop market- wide collaboration models on blockchain platforms, bringing in external parties as needed. Examples include collaboration between vendors or service providers during claims handling; between carriers during subrogation of liability claims; or with reinsurers to place re-insurable risks. The immutability aspect of the blockchain helps ensure data integrity and a trusted record of interactions among multiple parties. A Parade of Challenges Blockchain technology has the potential to upend if not transform industries, including insurance. However, before it can become mainstream, there are numerous challenges to overcome. Among them: • A lack of talent and technology know-how. A key challenge associated with blockchain is a lack of awareness of the technology and how it works. The skills required to implement blockchains are often beyond the traditional IT skill sets insurance carriers have today. Thus, it is imperative for carriers to understand how others – competitors and peers – have implemented blockchain, and make sure they gain equivalent knowledge of blockchain applications. • The absence of industry standards and an industry-specific platform. As carriers consider how and where to implement one or more blockchain initiatives, they will face two major issues: a lack of industry standards and the need for a Quick Take As blockchain becomes mainstream, it could potentially – and significantly – transform the Internet of Things (IoT), the connected world of devices, vehicles, buildings and other entities instrumented with sensors, software, and network connectivity. The ability to place IoT assets on a blockchain will help address important IoT roadblocks around centralization, availability, privacy, authentication and storage. Once IoT information is available on a blockchain, all stakeholders (e.g., device manufacturers, service providers, insurance companies, consumers) can, if permissioned, access the information as required – eliminating the need to partner with multiple parties within the IOT ecosystem. And with its capability to verify each and every transaction, the blockchain can alleviate concerns over hacking and privacy. Imagine a world where smart refrigerators are registered onto a universal blockchain and all the details (e.g., parts information, assembly information, service history) about them is tracked on a blockchain from inception – simplifying maintenance, product recalls and product/software upgrades. Additionally, as part of the blockchain the refrigerators can monitor and report the contents that are stored, solicit bids from grocery stores, and pay for the delivery of new items – automatically. Applying blockchain technology and thinking to the world of IoT is perhaps the much-needed silver lining that could help expedite the adoption of what has been termed “The Internet of Value.” Blockchain & the Internet of Things

14. 14 KEEP CHALLENGING November 2016 sturdy, insurance-based platform – neither of which can be resolved in isolation. A critical number of leading P&C carriers need to form a consortium and create a system for developing standards for data formats, and exchanging protocols and encryption processes designed specifically for insurance. • A lack of clarity on regulatory impacts. Since blockchain technology is still at the nascent stage, regulations (what information can be stored on the blockchain; who should be able to access the information; deciding if data should be stored anywhere in the world) have yet to mature. In an industry where multiple regulatory agencies and industry associations will likely have concerns and questions, it is crucial for carriers to understand current regulations and their implications, identify gaps, and confirm actions to take before embarking on this journey. From Concept to Reality: Taking Blockchain to the Next Level Blockchain has the potential to significantly alter the way carriers operate. Yet given that only a handful of these companies are testing the waters, the technology has yet to achieve widespread adoption. As of this writing, Aegon, Allianz, Munich Re, Swiss Re and Zurich have formed a consortium (Blockchain Insurance Industry Initiative B3i) aimed at conceptualizing, prototyping and testing blockchain-based use cases applicable for insurance. They have begun piloting a proof-of-concept for inter- group retrocessions. 20 We believe that the time is ripe for insurance carriers to start thinking about, exploring and experimenting with blockchain. With this in mind, we recommend a three-phase adoption framework (as outlined in Figure 6 above). Figure 6 The First Steps DEFINE • Understand the blockchain ecosystem and potential applications in P&C insurance. • Identify the target line of business (e.g., personal, commercial) and business function (e.g., sales and distribution, underwriting, policy administration, claims, billing). • Develop hypotheses to solve business problems; prioritize the hypotheses. • Evaluate blockchain entry models to explore – in-house, partnerships, investment. • Perform a market scan to identify blockchain providers and integrators. • Evaluate blockchain providers and explore partnership options for the prototype phase. • Develop use cases for the prototype, based on the chosen hypotheses. • Develop business case for the chosen scenario. • Start small by quickly ideating, prototyping and validating the selected hypothesis with business and technical users. • Modify the prototype based on feedback; update product and service concepts as needed. EXPLORE - • Based on prototypes results, establish partnerships with respective blockchain providers; outline the cost structure. • Develop the business case, considering the revised scale of business; define key performance measures to monitor success. • Develop measurable/achievable roadmaps; determine operational and technology requirements/investments. • Analyze regulatory impact; proceed with larger-scale pilots. SCALE

15. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 15 Moving Forward As carriers begin to explore and experiment with blockchain, they can turn to well-known entry models for partnerships, in-house development or making investments. For example, as an investment, Santander created a venture fund to invest in blockchain startups such as Ripple and Digital Asset Holdings. 21 In terms of in-house development, Citibank created Citicoin cryptocurrency in-house. 22 From a partnership perspective, UBS and Clearmatics partnered to create a securities settlement system. 23 Realizing the potential of blockchain requires being open to change, and a willing- ness to invest in new technologies and talent. We recommend a “test and learn” approach, and continuous experimentation to stay in touch with key developments over time. Footnotes 1 “R3 blockchain consortium sheds light on Concord project,” Finextra.com, August 2016. https://www.finextra.com/newsarticle/29351/r3-blockchain-consortium- sheds-light-on-concord-project/. 2 “Decentralized Uber Arcade City”: “We Will Submit a DAO Proposal,” bitcoin.com, May 2016. https://news.bitcoin.com/decentralized-uber- arcade-city-use-dao/?utm_source=facebook&utm_medium=social&utm_ campaign=SocialWarfare. 3 “Barclays used blockchain tech to trade derivatives,” http://www.ambankers.net/ article/26694/barclays-used-blockchain-tech-to-trade-derivatives. 4 “Nasdaq Opens Blockchain Services to Global Exchange Partners,” coindesk.com, May 2016. http://www.coindesk.com/nasdaqs-blockchain-services-global-exchange/. 5 “Meet the 25 Banks Working with Distributed Ledger Startup R3,” coindesk.com, November 2015. http://www.coindesk.com/meet-the-25-banks-working-with-distributed-ledger-startup-r3/. 6 “State of Delaware Unveils Blockchain Initiative to Leverage Potential of Smart Contracts,” Prnewswire.com, April 2016. http://www.prnewswire.com/news-releas- es/state-of-delaware-unveils-blockchain-initiative-to-leverage-potential-of-smart- contracts-300245870.html. 7 “New Australian Political Party Seeks to Popularize Blockchain Voting,” coindesk.com, February 2016. http://www.coindesk.com/australian-political-party- blockchain-voting/. 8 “Gem Partners with Philips for Blockchain Healthcare Initiative,” coindesk.com, April 2016. http://www.coindesk.com/gem-philips-blockchain-healthcare/. 9 “Factom’s Latest Partnership Takes on US Healthcare,” Cointelegraph.com, April 2015. https://cointelegraph.com/news/factoms-latest-partnership-takes-on-us- healthcare/. 10 “The Blockchain Will Help Google Improve Their Authentication Services,” Botcoin.com, December 2015. https://news.bitcoin.com/blockchain-will-help- google-improve-authentication-services/. 11 “Microsoft blockchain-as-a-service gains momentum with banking partnership,” Techrepublic.com, April 2016. http://www.techrepublic.com/article/microsoft-blockchain-as-a-service-gains-momentum-with-banking-partnership/. 12 “IBM Watson is Working to Bring AI to the Blockchain,” coindesk.com, April 2016. http://www.coindesk.com/ibm-watson-artificial-intelligence-blockchain/.

16. 16 KEEP CHALLENGING November 2016 13 “Lloyd’s Sees Blockchain’s Potential for Insurance Markets,” coindesk.com, November 2015. http://www.coindesk.com/lloyds-sees-blockchains-potential-insurance-markets/. 14 “Allianz Tests Blockchain to Boost Catastrophe Bond Trades,” coindesk.com, June 2016. http://www.coindesk.com/allianz-blockchain-smart-contracts-boost-catastrophe-bond-trading/. 15 Ibid. 16 “LenderBot by Deloitte and Stratumn to bring insurance to the sharing economy using bitcoin’s blockchain,” Bravenewcoin.com, July 2016. http://bravenewcoin. com/news/lenderbot-by-deloitte-and-stratumn-to-bring-insurance-to-the-sharing- economy-using-bitcoins-blockchain/. 17 “Everledger and the immutable protection of provenance through the block chain,” Dailyfintech.com, July 2015. https://dailyfintech.com/2015/07/23/everledger-and- the-immutable-protection-of-provenance-through-the-block-chain/. 18 “Meet the 25 Banks Working with Distributed Ledger Startup R3,” coindesk.com, November 2015. http://www.coindesk.com/meet-the-25-banks-working-with-distributed-ledger-startup-r3/. 19 “Teambrella – A PeertoPeer Insurance System Using Bitcoin,” blockchain.com, May 2016. http://www.the-blockchain.com/2016/05/09/white-paper-teambrella- peer%C2%AD-to%C2%AD-peer-insurance-system-using-bitcoin/. 20 “Insurers Launch New Blockchain Consortium – B3i,” blockchain.com, October 2016. http://www.the-blockchain.com/2016/10/19/insurers-launch-blockchain-new- initiative-b3i/. 21 “ Santander’s added $100m to its fintech venture fund,” Cityam.com, July 2016, http://www.cityam.com/245684/santanders-added-100m-its-fintech-venture-fund/. 22 “Codename Citicoin: Banking giant built three internal blockchains to test Bitcoin technology,” Ibtimes.co.uk, July 2015. http://www.ibtimes.co.uk/codename-citicoin- banking-giant-built-three-internal-blockchains-test-bitcoin-technology-1508759/. 23 “UBS Blockchain Partner Clearmatics Taps Investors for Funds,” Bloomberg.com, November 2015. https://www.bloomberg.com/news/articles/2015-11-18/ubs-blockchain-partner-clearmatics-raises-funds-for-digital-coin/.

17. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 17 About the Authors Agil Francis is a Senior Principal/Senior Director with Cognizant Business Con- sulting’s Insurance Practice. Agil has 12-plus years of management consulting experience in the insurance industry, where he has advised senior executives on strategy, operations and technology issues across sales/marketing, distribution, underwriting and claims. Agil can be reached at Agil.Francis@cognizant.com | LinkedIn: https://www.linkedin.com/in/agil-francis-86322537 Vikas Jain is a Senior Manager with Cognizant Business Consulting’s Insurance Practice. He has 15 years of management consulting experience in the insurance industry, where he advises senior executives on strategy, operations and transformation issues across underwriting, claims and distribution functions. Vikas can be reached at Vikas.Jain@cognizant.com | LinkedIn: https://www.linkedin.com/in/ vikas-jain-b02a0724 Gauthaman Krishnamurthy is a Senior Manager within Cognizant Business Con- sulting’s Insurance Practice. Gauthaman specializes in the P&C industry, and has 11 years of business consulting and program management experience, advising clients on operations and technology issues across marketing/distribution, underwriting, policy administration and claims. Gauthaman can be reached at Gauthaman.Krish- namurthy@cognizant.com | LinkedIn: http://www.linkedin.com/pub/gauthaman- krishnamurthy-ains-api/4/1b/b83 Vinodh Stanley Stephen is a Senior Consultant within Cognizant Business Consulting focused on the insurance industry. Vinodh has over six years of business consulting experience in the insurance industry, working with senior executives on process transformation, IT systems modernization, digital strategies, and roadmap definitions across underwriting, claims and distribution within the personal and commercial space. Vinodh can be reached at Vinodhstanley.Stephen@cognizant. com | LinkedIn: https://www.linkedin.com/in/vinodh-stanley-stephen-50206218 Acknowledgments As part of our research and brainstorming, the authors would like to thank Satish Venkatesan (Senior Director and Innovation Experience Center Lead) and Sinoj Gopal (Senior Director and Senior Client Partner) from our insurance business unit for their valuable insights on this topic.

18. 18 KEEP CHALLENGING November 2016

19. THE BLOCKCHAIN IMPERATIVE: THE NEXT CHALLENGE FOR P&C CARRIERS 19

20. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 207 297 7600 Fax: +44 (0) 207 121 0102 infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 inquiryindia@cognizant.com © Copyright 2016, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. Codex 2360 About Cognizant Business Consulting With over 5,500 consultants worldwide, Cognizant Business Consulting offers high-value digital business and IT consulting services that improve business performance and operational productivity while lowering operational costs. Clients leverage our deep industry experience, strategy and transformation capabilities and analytical insights to help improve productivity, drive business transformation and increase shareholder value across the enterprise. To learn more, please visit www.cognizant. com/consulting or e-mail us at inquiry@cognizant.com. About Cognizant’s Insurance Business Unit Cognizant is a leading global services partner for the insurance industry. In fact, seven of the top 10 global insurers and 33 of the top 50 U.S. insurers benefit from our integrated services portfo- lio. We help our clients run better by driving greater efficiency and effectiveness, while simultaneously helping them run differ- ently by innovating and transforming their businesses for the future. Cognizant redefines the way its clients operate — from increasing sales and marketing effectiveness, to driving process improvements and modernizing legacy systems, to sourcing business operations. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 255,800 employees as of September 30, 2016, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

The Blockchain Imperative: The Next Challenge for P&C Carriers

The Blockchain Imperative: The Next Challenge for P&C Carriers

The Blockchain Imperative: The Next Challenge for P&C Carriers

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