On Tuesday, the blockchain insurance industry initiative B3i, released the latest version of its Property Catastrophe Excess of Loss Reinsurance application. In this post we provide some observations about B3i, but primarily consider what the digital future of specialty and reinsurance placement could look like.
B3i: Cat XoL ledger application
B3i is an industry initiative. Its eighteen shareholders include many of Europe’s largest insurance and reinsurance groups including Ageas, Allianz, AXA, Generali, Hannover Re, Liberty Mutual, Munich Re, SCOR, Swiss Re and Zurich.
B3i’s Cat XoL is built on distributed ledger technology (blockchain). The application supports end-to-end digitisation of the placement process from cedent to reinsurer, involving a broker if relevant. The product enables parties to negotiate terms, agree rates and complete placements. It also has a chat capability and allows parties to upload files such as pricing models.
We have previously written on our blog about the challenges of applying blockchain technology to insurance. However, the distributed ledger technology is a key differentiator of B3i’s value proposition. Data entry and reconciliation happens just once: there is one version of the contract (with a track changes capability) and changes are shared between versions subject to approval by all relevant parties.
As this benefit suggests, the objective of the Cat XoL application is to eliminate the inefficiency caused by email-based communication such as document versioning, data integrity and general process inefficiency.
B3i is now live and able to be deployed to insurers’ live production environments.
What’s the digital future of specialty and reinsurance placement?
We’re interested in the surge of digital placement platforms in the specialty and reinsurance markets in the last 3 years. Aside from B3i, well-known InsurTech players are:
- Tremor (Impact 25 Member, Bitesize profile) – a “programmatic reinsurance marketplace”
- Whitespace (an Impact 25 Member) – a well-known player in the London Market and Lloyd’s
- AkinovA (Link) – an “electronic marketplace for the transfer and trading of insurance risk”
At the same time, there are various industry propositions, for example:
- Aon – who announced the launch of their reinsurance auction platform in Monte Carlo
- Swiss Re – who runs SwiftRe (link), a placement portal for fac risks
We are curious about how this space will evolve: who will be the winners in the future?
Applications vs. infrastructure
The first question is the delineation between applications and infrastructure. B3i has decided to provide only infrastructure, encouraging insurers and brokers to build front-end applications on top of it.
It remains to be seen if applications and infrastructure will split as intended (like in the banking world, for example, where Visa provides the pipes and companies like Stripe provide the front end). There is a strong ‘macro’ argument for building consistent plumbing for the industry, but businesses often grow in the ‘micro’. All of the platforms mentioned above currently have their own infrastructure and work independently of B3i. They will pursue the path of least resistance to growth. It feels like B3i’s shareholders will need to heavily promote the use of B3i’s infrastructure for the standards to be widely adopted.
On the application side, we see two possible scenarios.
1. Brokers redefine themselves as providers of technology and advice
In this scenario the broking model will be built around a technology proposition. The reinsurance broker’s pitch will be an efficient and transparent digital placement experience with advice on strategy and tactics but none of the ‘dark arts’ of the current placement process.
It is likely that the brokers will want to own proprietary systems in this scenario, and clearly that is the route that Aon is taking so far. One could imagine a tech ‘arms race’ amongst the brokers as they develop these systems and try to stand out amongst in the market.
2. Cedents see an opportunity to gain control of the placement process
In our second scenario, we imagine cedents using emerging technology to gain greater control over the reinsurance placement process. They might engage with the technology providers directly and invite their brokers to advise them on the tactics of the placement, like the structuring of the programme and the markets to invite. This is how Tremor’s strategy is currently evolving.
In this scenario, brokers may find themselves with reduced power as they can provide only advisory services. As they do not control the technology, they may be more interchangeable. An analogue might be accounting: many accountants now advertise that they are Xero partners (Xero is an independent, cloud-based accounting system), but fundamentally they provide a commodity advisory service and the client can quickly switch them without having to change system.
We believe that the platforms are more likely to remain independent companies in this scenario.
The risk for the industry is that one of the platforms becomes dominant and starts to charge outsized ‘rent’ from the industry. A parallel would be the cat risk modelling area, where RMS and AIR have a high combined market share. However, we believe that this market will be an oligopoly (at worst); there are some network effects that push the industry toward a small number of systems (e.g. reinsurer integration with platforms), but no obvious ‘winner takes all’ features.
Opportunities for all
At Monte Carlo this year we spoke to one reinsurer who spoke of the frustration of doing the same data transpositions on the same placement each year. This is exactly the kind of problem that digital placement platforms should be able to solve.
Whilst it is unclear how exactly the landscape will develop, it seems clear that there are opportunities for insurers, reinsurers and reinsurance brokers who are willing to invest in their strategy, operating model and technology / data strategies.