How do you pay a claim before a customer realizes they've experience a loss?

Today, Lloyd’s has released two new reports, one with experts at Queen Mary University: Centre for Commercial Law Studies on Smart Contracts, and a Market Insight report that is available to Lloyd’s Managing agents only on parametric insurance, that has been produced with St John’s University: School of Risk Management, Insurance and Actuarial Science.

Lloyd’s commissioned these studies because the world is changing. Technology and data analytics are disrupting traditional business models, and the industry needs to react to these rapidly evolving business and risk environments so we can continue to provide customers with the support and protection they need to grow and prosper.

And we are really excited about these concepts because they sit at the heart of the Future At Lloyd’s prospectus, which looks at how we could evolve Lloyd’s so it continues to be successful in the future.

The Future At Lloyd’s document sets out six possible ways we could achieve this. One of these options focuses on building a next generation claims service that pays a claim before the customer realises they have experienced a loss. Smart contracts and parametric insurance could help make this happen.

Parametric insurance... is available at Lloyd’s (and has been for quite a while)

Now it feels a bit unfair of me to point out that second report and tell you that you can’t have it if you’re not in the market, but we are creating some publicly shareable content, because somehow there is this myth out there that Lloyd’s doesn’t provide parametric solutions… which is an odd statement because I’m sure Meteo Protect, JumpStart, and Stable Price would have something to say about that! And I’d be really interested if you could share this with your networks, so others can add their Lloyd’s parametric products in the comments below. Help me prove the naysayers wrong!

If you’ve never come across the concept before, parametric insurance pays out a pre-determined value once the triggering of a parameterised loss has been verified. For example, if the flood waters hit X height, and the satellite imagery shows flooding in that defined area, you’re getting £1,000 in your bank. However, it isn’t a case of choosing parametric insurance or traditional indemnity cover. Parametric insurance can also be purchased alongside traditional policies to ensure an injection of cash to keep businesses or individuals afloat while the loss adjusters come in, or finance disaster relief work by triggering pre-agreed services. There are so many possibilities, from price volatility to flight delays. It is another tool in the financial kit, and customers should ask their brokers where parametric products can bring certainty, and what they need to understand about trigger points, basis risk, product design, and the importance of trusted data.

Smart contracts: what, why, how

On the next step of insurance innovation we have smart contracts, and I’m really excited about these. Smart contracts are pieces of computer code that are designed to start carrying out tasks automatically in response to external ‘triggers’, such as receiving storm or flood data. They are used to carry out contractual obligations, in whole or in part. A simple contract might be coded in its entirety; a more complex contract would use smart contracts to carry out just some of its obligations.

There is no universally agreed definition of smart contracts yet there are common, agreed features that indicate how they could be developed and put into practice:

• Smart contracts are not written in traditional legal language but are expressed in computer code
• Obligations set out in smart contracts are fully automated and resulting agreements are intended to be self-executing
• Automated, self-executing transactions are cheaper because they are self-contained and do not require legal enforcement
• Smart contracts can be linked to trusted third-party data sources

Smart contracts could have two main functions:

• To enhance existing processes within the insurance sector, including risk placement and premium payments, warranty enforcement, and claims assessment and settlement
• To enable new ways of doing business by facilitating new product development and other factors that help achieve this

These capabilities provide the opportunity to do some really great things. Automation and efficiency gains. Now talking about efficiency and process networks aren't the most exciting topics out there, but it is what they enable that is exciting for me (and should be for you). Smart contracts could automate a number of insurance functions, including:

• Initiating workflow actions (text the customer and tell them flood levels are getting high, and asking if they want help moving their art collection?)
• Initiating claims-agreement processes (automatically hire a local loss adjustor and send them to site)
• Notifying follower insurers that claims payments have been approved (“Imagine a world where a claim is paid before a customer realises they’ve experience a loss”)
• Paying claims based on trusted information sources (pulling in data via APIs, such as national weather services or airport delay trackers)

We’re not the only people thinking about them. Lee Bacon, Nigel Brook, and Gary Nuttall over at Clyde and Co. launched Clyde Code, which offers the full range of smart contract products and services, and bridges the gap between the legal and technical aspects of smart contracts implementation. In the Lloyd's Lab, Cohort 2 team Optimiz Claims have a proof of concept built in a sandbox ready to go. Smart contracts aren’t future navel gazing – they are here, and our industry should be thinking about how to make them happen, and what standardisation we need to ensure their full potential can be unlocked. For me it really brings all the TOM and PPL work to life.

Insurance classes where smart contracts could be used

That is what our study looks to do. It provides 101 information on smart contracts and their use in insurance to make risk transfer more efficient (Section 2). It also sets out how smart contracts could help create new insurance products for different customers, including individuals, binder business, and regional and national governments (Section 3). To help think about the practicality, four ideas are set out and are intended to stimulate ideas in other insurance classes in which full claims and/or workflow automation could be used today, and to harness wider initiatives in the Lloyd’s market in the future.

• Cargo: this is a class in which the prospect of switching to products featuring smart contracts triggered by data from independent sources is looking increasingly realistic.
• Contingency/Aviation: smart contracts for automated pay-outs in aviation could be applied to add-ons or as replacements for parts of existing insurance contracts. Automatic pay-out pursuant to the triggering of a smart contract may be suitable for two add-on products: business interruption related to adverse weather conditions or technical defects.
• Agriculture: Smart contracts as part of parametric insurance covers might work for crop failure in the agricultural sector. An insurance product that operates as a smart contract would have to cover against the causes of crop failure, with an automated pay-out occurring when agreed thresholds are reached, that would indicate damage or failure – this could be tiered.
• Property catastrophe: Parametric products are already available in the Lloyd’s market for areas prone to natural disasters, and could feature smart contracts that execute automated claims pay-outs when these events occur.

The report does not go into detail about different smart contract technologies nor give legal advice, but does suggest feasible models and how to build them (Section 4). This includes design considerations for insurers looking to create smart contracts. There are also links to 70+ resources that are referenced throughout the report, so CEO’s? We’ve done the reading for you (you’re welcome!), and if you want to know more you’ll know where to look and where to direct your teams to.

Click here to go read the report

Conclusion

There is already a lot of change underway at Lloyd's. We are ensuring the market's underwriting, and the way in which we asses and price risk, is world-class through rigorous performance management and adherence to best-practice standards. We are also continuing to modernise the market, and embrace new technology and new ways of doing business.

The Lloyd’s Lab, which had its Cohort 2 demo day last week is one of the best examples of that, and the culture change we’re trying to enable (innovation is for everyone!). Cohort 3 applications have just closed, but for anyone working in this space I want you to keep Cohort 4 in mind, because we’re looking for solutions that have the potential to create true commercial value for the Lloyd’s market.

As the Future At Lloyd’s blueprint unfolds the shape of Cohort 4 is still taking shape, but I want to see smart contracts and parametric solutions in that group! Lloyd’s ambition is to ensure we have the appetite and expertise to protect customers from their most challenging risks, and that they will continue to find solutions for those risks at Lloyd’s, and these two ventures could make that a reality.

And finally, I want to thank all the participants in these projects. I spent time listing everyone in on this post to highlight the time, effort, and insightful comments that helped to bring these two projects to life – like anything at Lloyd’s, it doesn’t happen in isolation, and they represent the real collaborative spirit that has fuelled the Lloyd’s market for 330 years (and hopefully another 330 more!).

Smart contracts report:

Lloyd’s project team: Dr Trevor Maynard, Head of Innovation; Dr Keith Smith, Research and Development Manager, Innovation; Lucy Stanbrough, Associate, Innovation; Kevin Lazarus, Senior Solicitor; Flemmich Webb, Speech and Studies; Linda Miller, Global Marketing

Lloyd’s internal consultation: Paul Brady, Head of Policyholder & Third Party Oversight ; Lindsey Davies, Senior Manager, Customer Consents; Kevin Clarke, Manager, Salvage Arbitration Branch & Certificate Office; David Lawrence, Head of Agency; Anne-Gaelle Leillard, Coverholder Manager; Xuan Luu, Insights Analytics Specialist, Data Lab; Mateo Rubio, Research Associate, Class of Business; Guy Sellers, Senior Manager, Class of Business; Ian Shelley, Class of Business Manager

Lloyd’s market: Joe Mellen, Antares Underwriting; John Potter, Antares Underwriting; Parth Patel, Ascot Group; Justin Emrich, Atrium; Samit Shah, Atrium Underwriting; Dorian Langridge, AXA XL; Joji Mathew, AXA XL; Ghanshyam Patil, AXA XL; Jette Varnals, AXA XL; Walid AlSaqqaf, Beazley; Steve Flood, Beazley; William Skertic, Beazley; Lee Timms, Beazley; Emma Whiteacre, Beazley; David Arthur, Brit; Daniel Klinger, Brit; Dana Cullen, Channel 2015; Will Thorne, Channel 2015; Tom Graham, Chaucer; David McKenzie, CNA Hardy; Filip Wuebbeler, Markel; Victoria Mills, MIS Intelligence ; Adam Beatty, Nephila; Gina Butterworth, Nephila; Karl Stanley, RenaissanceRe; Jamie Garratt, Talbot; Hugo Lewis, Talbot

London market consultation: John Taylor, DXC; Sreenivas Bandi, LM TOM;

Parametric report:

Lloyd’s project team: Caroline Dunn, Head of Class of Business; Trevor Maynard, Head of Innovation; Albert Kuller, Senior Manager, Class of Business; Mateo Acosta Rubio, Associate, Class of Business; Inayat Ahmed, Research Assistant, Class of Business; Lucy Stanbrough, Associate, Innovation; Kevin Lazarus, Senior Solicitor; Flemmich Webb, Speech and Studies; Linda Miller, Global Marketing

Lloyd’s internal consultation: Tom Allebone-Webb, Head of Strategy; Ian Shelley, Class of Business Manager ; Chris Murlowski, Class of Business Manager; Elio Buffa, Synd. Business Performance Manager; Richard Rodriguez, Head of Reserving; Keith Smith, Innovation Manager; Sundeep Chahal, Risk Modelling Senior Manager;

Market consultation: Adam Beatty, Nephila; Hayley Budd, Liberty; Craig Churchill, International Labour Organization; John Donahue, Topa Insurance; Doss Steward, National Insurance Academy, India; Gabriel Gross, Meteo Protect SAS; DG Halve, formerly, AICIL, India; Thomas Holzheu, Swiss Re; Nihar Jangle, Microinsurance Academy; Jim Jones, Illinois State University; Ronald Klein, The Geneva Association; Michael McCord, Milliman; Diego Monsalve, Marsh Global Analytics; Monetary Authority of Singapore; Klime Poposki, Insurance Supervision Agency, North Macedonia; Pranav Prashad, International Labour Organization; Julian Roberts, Willis Towers Watson; Ran Ruo, University of Georgia; Clarence Wong, Swiss Re; Kate Stillwell, Jumpstart; Richard Counsell, Stable; Parth Patel, Ascot; Marek Shafer, Canopius; Joe Mellen, Antares; Miriam Goldby, Centre for Commercial Law Studies, Queen Mary University ; Chris Reed, Centre for Commercial Law Studies, Queen Mary University; Michaela Macdonald, Centre for Commercial Law Studies, Queen Mary University