Everyone is familiar with insurance, whether it’s for a home, an automobile, or healthcare. The concept is simple: Individuals or entities pool their money to protect the group against risks. Fewer, however, are familiar with the concept of reinsurance, but it’s equally important for the smooth functioning of our financial markets and the protection of insured entities and individuals around the world. Reinsurance is what the name implies: insurance on insurance. Insurers or other entities providing insurance-like solutions take out reinsurance to protect against various risks. While it may sound obscure, it can have a direct impact on organizations and individuals, as exemplified by the pension risk transfer contracts we’ll be discussing in this blog post.
One challenge faced by the reinsurance market is the high degree of complexity inherent in these contracts. What’s more, setting them up can be a labor-intensive exercise. Parties and counterparties must verify and agree to complicated business rules. Contrast this with consumer insurance policies that can be set up in a few clicks.
At Legal & General (L&G), we use blockchain to break through these challenges to make complex reinsurance more efficient, affordable, and effective. L&G is most prominently known as the largest provider of retail life insurance and investment management in the United Kingdom, with more than US$1.27 trillion in assets under management.
We are also a provider of reinsurance for the pension risk transfer business. In pension risk transfer, an insurance company provides a guarantee to pay the annuities for members of a pension fund for the rest of their lives.
L&G has demonstrated success in this market, winning multiple awards by combining expertise in investment management and defined benefit pension provision, an in-depth understanding of mortality trends and longevity risk, and proficiency in payroll, administration, and communication services. As part of our passion for moving the industry forward, we are pursuing innovative approaches to setting up contracts using blockchain.
Even though property and casualty insurance has been an early adopter of blockchain, we believe it is equally suited to the life and annuities sector and particularly the pension risk transfer business. We considered several existing systems, but none could deliver the combination of security, flexibility, and auditability of the blockchain. We are convinced that blockchain is uniquely suited to the long-term nature of annuities, as it allows data and transactions to be signed, recorded, and maintained permanently and securely over the lifetime of these contracts, which can span more than 50 years. It enables parties to exchange and agree upon data, to digitally and cryptographically sign the data, and to ensure that the data is perfectly traceable over any period of time—all without the need for a centralized authority. All members maintain a copy of the ledger database, providing greater transparency and independence.
Numerous benefits flow from this approach. First, blockchain provides a single version of the truth that remains immutable for the entire lifetime of the contract. At any point in the future, we can “turn back the clock” to any point in the lifetime of the contract, whether 5 years or 50 years in the past. We will be able to clearly understand what happened: who made which changes and when, who agreed to them, and the effects they had on the agreement. Given that pension contracts can last for decades, this is an essential feature.
Second, blockchain enables the use of smart contracts, which embody the business logic of a contract in code. This enables rapid execution of agreements and reconciliation of transactions, which are not possible when tracking contracts in Excel spreadsheets or using a ledger database technology with SQL-like interfaces. With a smart contract, we can automate complex transaction logic, enabling one-click execution. In our solution, we use smart contracts to manage pricing, claims, financial reporting, and collateral, providing an end-to-end ecosystem to streamline the reinsurance marketplace.
Our solution, known as Estuare, replaces multiple processes and systems traditionally used to support each function of reinsurance. The participants are L&G, direct insurers, and other reinsurers we partner with. We are exploring extending the system to more partners and insurers. Estuare has proven to cut monthly reconciliation from weeks to minutes. We expect it to lower costs, increase agility, and reduce risk for the pension risk transfer market. For the thousands of individuals whose pensions depend on risk management, this is exceptionally good news.
As the foundation for this solution, we chose Amazon Managed Blockchain. Because it runs in the cloud as a fully managed service, Amazon Managed Blockchain enabled us to quickly set up, manage, and invite partners to a new blockchain network without the cost and complexity of deploying the foundational infrastructure on our own. This lets us focus on building value-added business applications for our customers and ensures that we have the security and scalability we need to support a growing market.
Using Amazon Managed Blockchain, we were able to design, build, and deploy a market-ready platform in significantly less time than if we had to manage the blockchain technology at a low level. We can also develop a wide range of applications that consume the same unified data. The result is a solution that helps us transact at greater speed to help pension providers reduce risk in a timely fashion while cutting costs. We are also able to drive transparency and security in an increasingly interconnected market.
Feedback from clients that have piloted the system has been positive, especially about the simplicity and clarity of the underlying smart contract and the auditability it creates over any period. We are tremendously excited about the potential of blockchain to transform the life and annuities marketplace—and working closely with AWS to realize it.