Blockchain’s Role in Digital Transformation: A Perspective for the Intermediaries & Reinsurance Underwriters Association

May 16, 2018

PwC’s Digital Services 0 Confidential information for the sole benefit and use of IRUA 77% of CEOs rank technological advances as the most disruptive megatrend impacting their business - PwC

PwC’s Experience Centre – China and Hong Kong PwC Emerging Technology | 1 Source: PwC’s 19th Annual Global CEO Survey (2016) 1 Companies will spend $3.5 trillion on Emerging Technology in 2017*

*Source: Gartner

PwC’s Experience Centre – China and Hong Kong PwC Emerging Technology | 2 2 What is What is bitcoin? blockchain?

An unregulated digital virtual currency A decentralized public ledger of all based on blockchain technology. It is transactions, essentially blocks of used to process P2P transactions and validated and cryptographic offers lower transaction fees than transactions chained together by traditional online payment mathematical algorithms mechanisms

PwC’s Experience Centre – China and Hong Kong 3 A crypto-currency is merely one Blockchain, does not require crypto- application of crypto-technology, currency. allowing the transfer of value via transactions recorded on a Blockchain. The platform can be constructed to handle a varying set of rules and There are many existing crypto- configurations. currencies, most notably Bitcoin. Related technology, such as smart Specific to crypto-currencies a key contracts, can greatly improve process benefit include preventing double efficiency, transparency, reliability spending. and reduce risk.

PwC’s Experience Centre – China and Hong Kong 4 4 Here’s how blockchain works…

…and the key technical Distributed ledger Cryptography Every participant in the network Integrity and security of the concepts that come has simultaneous access to a view information on the blockchain are together to make it of the information ensured with cryptographic functions work and different Consensus Smart contracts Verification is achieved by The ability to run additional business from existing solutions participants confirming logic means that agreement on the changes with one another, expected behaviour of financial replacing the need for a third instruments can be embedded in the party to authorise transactions blockchain PwC’s Digital Services 5 Blockchain enables Reduction of costs & Shared trusted Reduction of fraud these business benefits complexity transactions in a shared ecosystem…

Audit trail & Security & Resilience transparency Immutability

…and here are the Multiple parties share data Intermediaries add complexity multiple participants need views of removal of intermediaries can reduce cost and characteristics where common information complexity blockchain makes Multiple parties update data Time sensitive interactions multiple participants take actions that reducing delay has business benefits sense need to be recorded and change the data

Requirement for verification Transactions interact participants need to trust that the actions that transactions created by different are recorded are valid participants depend on each other PwC’s Digital Services 6 …and here are a few other examples of the different categories in which blockchains can add value

Supply Chain and Finance Loyalty Asset Logistics Effectiveness Programs Condition Accelerate payments and Tracking goods along their Treating loyalty points as a Tracking part changes and settlement through real time route to accurately estimate cryptocurrency increases service events throughout purchase order updates and arrival time and collect data utility and value of loyalty lifecycle of useful life (i.e. automating settlement programs Asset “Health Record”)

Digital Identity Digital Records Audit and Management Currencies Management Compliance Authenticating identity on a Decentralized currency Blockchains provide an engine Enable real time transaction blockchain for accelerated log crosses borders and eliminates for collecting and maintaining level assurance and provide in and increased data security intermediaries verifiable records additional transparency to stakeholders

PwC’s Digital Services 7 One of the key considerations for enterprises looking to embrace blockchain technology is related to Public vs. Private blockchain

Public and private blockchains are both decentralized peer-to-peer networks, where each participant maintains a replica of a shared append-only ledger of digitally signed transactions. Public and private ledgers both use consensus protocol to provide guarantees on the immutability of the ledger Description Examples • Completely open and anyone can join and participate in the network by purchasing or • Bitcoin, Ethereum mining a token and most • Utilizes an incentivizing mechanism to encourage more participants to join the network (i.e. Cryptocurrency/ mining to obtain Cryptocurrencies) Crypto Asset Public • Substantial amount of computational power necessary to maintain a distributed ledger at a distributed ledgers large scale • To achieve consensus, each node in a network must solve a complex, resource-intensive cryptographic problem to ensure all are in sync • Little to no privacy for transactions • Network places restrictions on who is allowed to participate in the network, and only in • Quorum (Private certain transactions Ethereum Offshoot), Consortia/ • Once an entity has joined the network, it will play a role in maintaining the blockchain in a Hyperledger, R3’s Private decentralized manner Corda, Ripple • Only the entities participating in a particular transaction will have knowledge and access to it • Permissioned blockchains permit greater scalability in terms of transactional throughput

PwC’s Digital Services 8 Blockchain enabled transformation poses ecosystem challenges

Participant Trust Adoption Legal & Regulatory Framework • Safety: Re-assuring participants Proper Incentives: Potential • Regulatory Body: Currently there is no • that their transactions are secure participants will need to be sold global regulatory body to set standards on on the value of the platform blockchain transactions • Public vs. Private: What are key differences and criteria for private Consensus Needed: • Real-Time Auditing: Changes nature of • and public blockchains? Participants must come to group audit from forensic analysis to real-time agreement on platform and transaction monitoring that has yet to be Information Accessibility: Are standards acceptable to all • tested or standardized participants willing to expose more information to participate in a network

PwC’s Digital Services 9 …and technology challenges

Blockchain Maturity Interoperability/ Integration

• Young Technology: May not • Interoperability: Ability to operate at scale without integrate with participant existing compromising on security, speed client systems and processes or cost • Architectural Role: How will • Cost: Hard to convince low blockchain eliminate, replace, or work budget customers with current technological platforms

PwC’s Digital Services 10 …and companies will have to make critical decisions around the commercial model that they will employ

Factors Option Description Analogue Level of Ability to Ownership & Considerations Investment Drive Value Governance • Costs, benefits, and buildout considerations are borne by owner 1 and services are charged to other participants in the network Sponsor Leading sponsor of • Owner determines standards to which shared ecosystem Blockchain participants would have to adhere Led infrastructure and standards • Owner can publicly declare market leadership and license the software to other market participants • Requires large players who can effectively “make the market”

2 • Costs, benefits, and buildout and standards are jointly borne by Co-owner of ? ? co-owners with services charged to other participants Co- Blockchain • Co-owners can publicly declare market leadership/ innovation Ownership infrastructure and ? standards • Co-owners could create a new entity to license the software and share in IP ownership and revenues

3 • Principle funding and control considerations including IP Utility/ Founding or joining ownership Consortiu member of an industry • Ongoing commercial impact of utility services where m Driver consortium or utility cost/benefit is mutualized • Expanding the base to develop commercial success

4 Leverage regulatory • “Wait and see” approach could alleviate competitive advantage Regulatory drive towards • May slow down innovation mindset Follower Blockchain infrastructure and • Could be more cost-effective as investments may be limited standards prior to regulatory guidelines PwC’s Digital Services 11 11 Blockchain in Insurance

12 Claims Management Proof of Concept

Facilitated a two day workshop with Insurance industry stakeholders including: • Brokers • Claims Experts • Insurers • Third Party Administrators Collaboratively identified a number of painful processes. We focused on the slow and error prone nature of claims creation and management.

Duration: 6 weeks Technology: Eris

Demo & Video Available

13 Bordereaux Replacement Collaborative Workshop Successfully demonstrated the Worked directly with stakeholders concept of placing a ‘claim on within the insurance space, using chain’ in 6 weeks workshops to identify the problem and ideate over the solution

Outcome Constant Feedback Simplifying Claims of Claims Management Delivery approach based on Beginning to take a convoluted area like continual demonstration and claims and simplifying the process engagement feedback to stakeholders on a bi- using Blockchain’s key features, weekly basis primarily transparency

Market Appeal Rapid Turnaround Demonstrated to industry From conception, ideation and players within the London use case development to Market working software within 6 weeks

14 Policy Placement Proof of Concept

Completed insurance industry study in collaboration with Z/Yen To understand the wholesale insurance market and develop suitable use cases. The study is available online.

Duration: 6 weeks

Technology: Multichain

Demonstrates how to put policy placement on the blockchain.

Demo & Video Available

15 Policy Placement Delivery Successfully created the concept of An opportunity to showcase our creating and sharing a policy on the team’s product delivery capability blockchain in 6 weeks in addition to our blockchain Outcome specialty of Policy Placement engagement Minimal Viable Product Awareness Product delivery using an agile Demonstrated to various approach, iteratively delivering insurance industry MVP on a bi-weekly basis stakeholders

Software Collaboration Demonstrated working A proposed consortia involving major software as opposed to theory and insurers to be established to look into slideware further opportunities

16 Ceded Reinsurance The reinsurance process across cedants/brokers/reinsurers/ Possible Proof of Concept retrocessionaires is fraught with inefficiencies across the value chain

Pre-Sale Marketing & Reinsurance Placement Renewals Servicing & Change “The reinsurer that helps me take Requests Claims Bind Ceded Cedent Ceded Reinsurance Ceded Reinsurance out 20 or 30% of my back office Ceded Reinsurance Reinsurance Officer Officer Officer Officer costs is going to get my business” – Premium Renewals & Chief Reinsurance Officer Global Insurer RFP 4 3 Change Proposal Reinsurance Requests Contract Contract This quote is from a recent conversation Specialist Commission Broker Bill Broker Broker Broker Terms & Claims with a senior insurance executive (his Conditions Brokers Specialist preceding comments pertained to Internal Contract 1 Broker Experts Specs Reinsurance reinsurer-based offers of analytical & risk Contract Broker Renewal Terms & advice, which he neither needed nor *Internal expert contribution on Pricing reinsurance placement and Quote 2 program design varies depending wanted, in contrast to cost relief, which Reinsurance on cedent and risk characteristics Underwriting Claims Reinsurer Underwriter was at the top of his agenda) Underwriting Processing Retrocessionaire In this sense, blockchain-generated cost reductions can be viewed as not only Pain Points operational (or within a specific firm) in Contract iteration & Data Premium & Commission Claim Tracking between Workflow nature, but strategic as blockchain 1 2 Security 3 Tracking 4 Cedent & Reinsurer could enable reinsurers and brokers to 1• No effective solution to connect major tasks, control •3 Premium tracking and commission payouts between cedents, brokers, help their insurance clients realize workflow, and facilitate documentation and money flow reinsurers, retrocessionaires are not standardized/difficult to reconcile significant ceded re cost savings 2• Numerous iterations between all parties to finalize 4• Claims tracking and payments between cedents, brokers, reinsurers, reinsurance contracts while maintaining data security retrocessionaires are not standardized or effectively automated

17 DRAFT

How do we get started?

18 Blockchain Implementation Framework – Key Considerations

PwC’s Blockchain How does Blockchain align with the strategic Implementation Framework What should we consider from a technical direction of our organization? standpoint? • Use case(s) identification (e.g., design think, etc.) • Infrastructure choice & scalability • Business case development (SWOT, economic model, • Distributed ledger fabric risk assessment, etc.) • Consensus and validation models • Competitive landscape assessment Strategic Technical • Data hosting security requirements • Owner/operation (commercial) model (e.g., sole vs. • Data transport co-ownership, utility/consortium, etc.) • Hardware • IP protection • System integration • Ecosystem partnerships • Deployment • Alignment with broader organizational strategy, incl. technology vision and roadmap (e.g., early adopter vs. • UX/UI Design fast-follower approach, overall cloud strategy, etc.) Operational • Testing approach • PR strategy

How do we operationalize our approach? • Implementation plan and roadmap (e.g., MVP, PoC, iterative sprints, etc.) • Governance model and Leadership support • Communications framework (external and internal) • Metrics (i.e., KPIs) definition, tracking, and reporting • Product development oversight and reporting • Scaling considerations (i.e., depth vs. reach, etc.) • Change management / HR 19 Once one or more use cases have been chosen, the blockchain journey generally follows the path below

Production

launch Implement plan and track performance

Execute proof • Configure/build logic and of concept rules based on use case(s) • Initiate mock-simulations • Conduct technology • Make adjustments to experimentation in sandbox configuration and logic and environment (iterative) refine data sets as necessary • Coordinate with selected (iterative) channel partners on specific data sets required for Conduct pilot Identify simulation Plan opportunity areas • Confirm channel partner Establish action plan and arrangements finalize business case for moving forward on blockchain expansion, Identify potential adoption, and channel partners implementation • Define goals and success factors • Engage selected channel partners for • Confirm use case(s) for proof of partnership and innovation piloting • Evaluate platforms / blockchain technology concept (POC) • Gather transaction metrics • Determine which product/customer vendors to the vision, capabilities and requirements Gather • Assess key learnings segment offers the highest value to • Confirm business case for support POC validation • Confirm blockchain vendor partnership pilot metrics arrangements expansion

20 Why a Proof of Concept (PoC)?

Business problem over Working prototypes over processes and tools excessive documentation PwC's agile methodology Start with the business issue and select Adopt agile delivery methodology that’s allows our clients to make a tools based on “What problem are we light on documentation to accelerate the trying to solve?” rather than begin with creation of an actual working product small initial investment to solution looking for a problem that enables real-user interaction collaboratively experiment, learn, and pivot quickly in a contained environment to produce a Minimum Viable Respond to change rather Customer collaboration Product (MVP) based on than follow a rigid plan over rigid contracts desired business outcomes Adopt a “fail fast” mentality that Take “outside-in” perspective where allows us rapidly achieve desired customer-user experience / workflow outcomes simplification drives product development

21 Proof of Concept Build proof of concept to verify the feasibility of solution

Technical Design Build Test

• Determine architecture to be used • Iterative build approach with regular • Functional validation of platform including choice of blockchain demos to validate completed features platform • User/business acceptance of features • Cloud based infrastructure • Agree approach for front end • Limited non-functional testing of technologies • Validation of key technical deliverables security, performance and resilience e.g. tamper-proof data

Validating the business impact of selected use case is equally as important as proving out the technical feasibility PwC’s Digital Services 22 ● Joe Calandro is a Managing Director in PwC’s Insurance Advisory practice with over 25 years of broad industry, consulting, teaching, & research experience in the United States & internationally focusing on strategy/M&A/analytics, underwriting, performance/risk management

● Joe is also a Fellow of the Gabelli Center for Global Security Analysis at Fordham University, a contributing editor of Strategy & Leadership, & a member of the non-profit Progress Through Business Joe Calandro MANAGING DIRECTOR ● Prior to joining PwC, Joe led the Enterprise Risk Management function of ACE Group COMMERCIAL UNDERWRITING LEAD 203-906-6595 Holdings (now Chubb) where his responsibilities included a variety of analytical, credit, [email protected] underwriting, & correlation-related activities regarding management of the firm’s assets & liabilities. He was also a finance professor at the University of Connecticut where he taught in the MBA program

Areas of expertise ● Joe is the author of Applied Value Investing (NY: McGraw-Hill, 2009), & he has published ● Joe specializes in helping insurers develop & widely on financial subjects in the Journal of Reinsurance, Journal of Investing, enhance their underwriting, analytical, M&A, Journal of Private Equity, Strategy & Leadership, Risk Management & Insurance risk management, & performance Review, etc. management capabilities

● Solutions that Joe has developed/co- ● A list of his publications, some of which are downloadable, is available at his Social Science developed include: economic insurance Research Network author’s page: http://ssrn.com/author=357310 performance measurement (including P&C cost of equity & business unit hurdle rate analyses), liability portfolio analyses and ● Joe’s recent research includes: accumulations mgmt., commercial Underwriting Capability Maturity Model, claims ■ “Nonlinearity and Competitive (Dis)Advantage,” in development reserve variance and controls, and strategic risk mgmt. and emerging threat controls ■ “Disruption and Reinsurance - An Overview & Perspective,” Journal of Reinsurance, Vol. 25, No. 1 (2018), pp. 23-26

23 Meet Kris -

Kris is the Blockchain subject matter expert for our • Kris is leading a PwC team that brought key large Pharmaceutical Emerging Technology and New Services group manufacturers and wholesalers together as founding members of a focusing across industries on how crypto-assets consortia formed to address industry-wide challenges with pricing and and currencies and blockchain-enabled ecosystem contracting that both create widespread inefficiencies and negatively Kris Kersey applications will impact business models and impact patient/customer experience. PwC is building a pilot application shared business processes. and leading business case definition and analysis. BLOCKCHAIN DIRECTOR LEAD EMERGING TECHNOLOGY 412-427-4534 Over the last 16 years, he has advised major • For a large Reinsurance Company, Kris’ team is providing Senior [email protected] organizations in financial services, public sector, Management with strategic advice to help the clients assess a consumer and industrial products, energy, health successfully deployed pilot application to determine Go-To-Market care, technology and media firms in areas such as options and associated commercial implications. In addition, his team is creating a framework to map out the technical and digital business and technology strategies, business/governance dimensions/levers around what is required to go Areas of expertise operating model design and implementation, into production and achieve eventual scale. to help define pilot-to- ● Cryptocurrencies and Blockchain / Distributed performance re engineering and measurement, and production roadmap. Ledger Technologies large-scale technology-led transformation and program management.. ● Keynote speaker at numerous industry • For a large industrial client, Kris led a cross-disciplinary team to define conferences on Blockchain and Crypto- the vision and design of a blockchain-enabled solution designed to Kris joined PwC through the acquisition of Diamond Economics transform their Order-To-Cash process. The solution connects IoT Management & Technology Consultants in 2010 sensor data, predictive maintenance, ERP and customer systems to ● Agile, Design Thinking, New Product where he was a Principal in Financial Services. optimize the business process, improve receivables performance and Development, Enterprise Architecture & improve the customer experience. Operating Model Design Kris holds a combined masters degree from ● Cross-Industry experience, including Financial Carnegie Mellon University’s Tepper School of • For a large corporate treasurer and a large bank, Kris led the business Services, Industrial and Consumer Products, Business and the H.J. Heinz School of Public Policy and technology teams in the development of a blockchain pilot that Insurance, Health Care / Pharma, and Management. transformed credit instrument processes. The results were a greater Transportation, Technology, Entertainment and than 75% improvement in efficiency and reduction in cycle time. Energy sectors

24 Thank you!

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