By Pat Renzi, Principal and CEO, Life Technology Solutions, Milliman
The insurance industry, more so than others, has a history of taking a cautious, steady and at times skeptical approach toward innovation. Fraught with time consuming processes and heavy regulatory requirements, insurance companies can easily fall behind in today’s on demand world. While the industry takes a hard look at how it must reinvent itself in the wake of demanding digital transformation, one emerging technology in particular holds great promise for helping insurers keep pace with the times: blockchain.
Blockchain, the technology base for verifying payments, is already disrupting the financial industry and we can expect to see it completely overhaul financial services in the near future. For example, blockchain is drastically reducing settlement periods by digitizing the cumbersome process, saving the industry $65-$80 billion a year[i]. Global currency exchange and practices are also made more manageable, fast and secure.
Blockchain opens up new opportunities and benefits to hundreds of other industries that work with clients and depend on security and confidentiality in their transactions, including insurance.
Since confidentiality and security are non-negotiable requirements for insurers, blockchain provides the ideal platform for secure and efficient transactions. Despite security being top of mind for insurance companies, fraud is still an expensive problem that plagues our modern, digital world. Across all lines of insurance, $80 billion[ii] is lost to fraud every year. In the U.S. and Canada, fraud accounts for as much as5-10 percent of claims costs[iii].
Blockchain, which also serves as the backdrop for cryptocurrency and secure payment methods like bitcoin, is a stepping-stone on the path to greater visibility and security for the industry as a whole. As its name suggests, blockchain transactions are made up of a series of stored blocks linking to each following block, making it significantly challenging for hackers to steal data along the way as they would have to alter every block that followed. Each transaction is time-stamped and unalterable making identities far more secure and data more trustworthy.
No technology is perfect however, and there are plenty of headlines about devastating blockchain attacks. What’s important to note, is that it is not the blockchain itself being hacked but the software that sits on the blockchain. Any insurance application would be open to similar vulnerabilities, so it is critical the industry take a cautious and careful step forward into blockchain. As the technology cycle matures, exposed vulnerabilities will pave the way toward best practices while regulatory agencies and law enforcement will be better equipped to prevent attacks and prosecute those responsible. Industry experts anticipate these developments to evolve over the next few years.
For the insurance sector, blockchain serves a particularly useful function in cutting out the middleman and conducting transactions solely across relevant parties. Delivering data, invoices, contracts and more is made significantly more secure and instantaneous – catering to our need for on-demand, real time responses.
As the world turns toward digital options ever more quickly, the ability of brands and companies to reach their customers directly also grows. In fact, it has never been easier to communicate directly to customers in the moments they are most likely to engage.
Not only are communication channels expanding in this digital age, the digitization and security offered by blockchain allow for greater efficiency in time-consuming, necessary processes like onboarding new customers, underwriting, claims handling and contract delivery.
Smart contracts are a noteworthy stride in keeping time with the digital world. Because they can carry out only the specific functions assigned to them, smart contracts behave with blockchain-like similarities, as each action within the contract is traceable and irreversible. Legal insurance contracts or death benefits can now be shared electronically, putting information right into the hands of the customer.
While this technology offers greater speed and accuracy, and the potential of saving hundreds of man hours on time-consuming processes, the truth remains that regulation holds the key to further innovation and widespread adoption. For example, regulations in some jurisdictions still require paper contracts, and unless this change, innovations like smart contracts may take a backseat.
Aside from regulation, the question remains whether blockchain is scalable enough to operate at the level needed by insurance providers. Blockchain is still three to five years away[iv] from feasibility at scale. Any blockchain adoption and advances in this area would require technology capable of handling the high-volume of claims, contracts and more. Ethereum, a cryptocurrency platform built on blockchain[v], manages around 14 transactions per second, and Bitcoin only seven[vi]. As it stands, these particular blockchain-based platforms couldn’t support the hundreds of thousands of transactions that would occur between insurers and their customers. However, the blockchain revolution marches on and the future looks promising.
Providing proof of insurance is often the first step in receiving other financial services. Yet the reality is many in the developing world don’t have access to coverage. Opportunity to serve these markets is critical and global economic growth is dependent on it.
In the Philippines, it is estimated insurance penetrates only four percent of the market[vii] – yet even that is a noticeable jump from Indonesia where penetration is just one percent. These markets are incredibly underserved making it significantly more difficult to climb the poverty ladder. Without the protection that insurance offers, the financial status and needs of millions of people in these areas remain volatile.
Insurance companies have the ability to protect the assets and livelihood of those in developing countries. Natural disasters hit frequently, often without warning, sometimes leaving desolation in their wake. Sudden acts of nature aside, individuals also require insurance to protect against the ups and downs of life – everything from crop failure to home damage to loss of income due to illness or injury. Enabling individuals in these markets to access insurance through mobile phones, with blockchain as a foundation, could prove to be the break in the cycle of poverty.
In a new digital-first world, legacy IT systems cause inconsistencies and inefficiencies within the insurance industry. As they fade into a thing of the past, new doors open for digitization within the industry. Blockchain provides an unprecedented platform for the faster and more secure delivery of data, information, contracts and more. It provides the means to access new markets in need of the benefits insurance has to offer. Armed with the potential of blockchain, the insurance industry, like many other sectors, can continue to strive toward modernization as it faces digital transformation.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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