Blockchain Technology

in the Insurance Sector

Quarterly meeting of the
Federal Advisory Committee on Insurance (FACI)
Jan 5, 2017
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
10 things you should know about Blockchain

1 Blockchain is a nascent technology with the potential to bring about step-function

improvements in efficiency and security to the financial industry - or it could simply be over-hyped
What is and unnecessary
blockchain?
2 >60 Nascent use cases1 exist across multiple industries with a primary focus in financial
services (~40%) and cost reduction (~70%)
3 Investment in blockchain is gaining momentum (~$1Bn of Venture Capital investment over the
last 24 months) and is expected to grow rapidly; the banking industry is expected to spend
What is the
~$400MM by 2019
implementa-
tion level 4 The success of these investments is highly dependent on the collaboration in an emerging eco-
across the system primarily driven by innovation in the Insurtech and fintech industry
industry?
5 70% of financial organizations are in the early stages2 of experimentation; most executives
expect to see material impact from this technology only in 5+ years
6 Most of the impact from blockchain in financial services is likely to come from payments, and
capital markets. Preliminary sizing of 4 use cases suggest significant value creation - the
estimated impact of these use cases alone is $70-$85B but feasibility varies significantly
What is the 7 However, blockchain is not the silver bullet solution for all the pain points in the industry
impact for
8 Enabling collaboration, shaping a positive regulatory environment and identifying clear
financial
business cases justifying the transition costs will pose the biggest challenges to implementation
institutions?
9 By overcoming these challenges, blockchain technology could reach its potential within 5 years
Organizations can unlock the value of blockchain through a deliberate five-step journey:
10
Education, Strategy, Solution design, Implementation, and Approach
1 Blockchain solutions other than solutions that are purely related to Bitcoin
2 Wait and see and Early equity investor stages

McKinsey & Company | 1

STATE OF THE INDUSTRY
Although institutions are at different stages of experimentation, most now
believe it could take 3-5 yrs for blockchain to have a material impact

One half of Institutions are in Wait & See mode Increasingly, impact expected to take 5 yrs
% of respondents1 % of respondents
50
46 49
Internal pilots
Feb
Fully imple- 20161
Partnering in
mented solution
a consortium 6
to design Financial
blockchain 26
technology
Blockchain solutions labs
accelerator 18 86
programs/ Venture capital
hackathons/ funds/ equity stakes May
position papers 6 20162
14
0

Wait and see Early equity Partnership or Fully 0 - 18 3 5 yrs >5 yrs or
investor internal pilot implemented months never
solution

1 N = 35 2 N = 15

SOURCE: Based on survey of senior executive leadership in financial institutions, Feb 2016 and May 2016 McKinsey & Company | 2
WHAT IS BLOCKCHAIN?
Blockchain could be one of the most disruptive innovations since the
1 advent of the internet

What on earth is a blockchain? How does it work?

A cryptographic or encoded Electronic message

distributed ledger, comprising a created (e.g.,
digital log of transactions that is transaction details)
shared across a public or private
network 1
Network repli- Sent to distri-
Database well suited for cates record buted nodes
6 2
applications requiring a rapid, of verified with unique
permanent time and date stamp transactions crypto signature
such as:
Payments
Block added 5 3 Economic race
Financial asset transfers to all to be first
Smart Contracts distributed to validate
4
Ownership splits and notary ledger copies transaction
services
A technology that brings
substantial benefits in terms of Confirmation
speed, security, convenience broadcast to rest
and costs of network

McKinsey & Company | 3

WHAT IS BLOCKCHAIN?
Core innovation and supporting elements in all blockchains
1
Core
innovation

First ever solution to the double spending problem / data conflict

resolution that doesnt require a central administrator or clearing agent

Decentralized solution Process integrity

Solving the double spending The randomness of verification
problem in this manner provides a agent selection is imperative to
decentralized, unbroken historical maintain the integrity of the
record of all data transactions database

Data security Valuable Redundancy

Messaging system with read-write Multiple copies of the same data
access protected by cryptographic across a large network reduces
keys, generated by latest security downtime and increases
technology resistance to malicious attack

McKinsey & Company | 4

WHAT IS BLOCKCHAIN?
Blockchain technology is applicable across multiple use case
2 categories as a static store of secure information or dynamic store of
tradeable information
Needs addressed by blockchain Description Real world example applications

Record Manage registry of asset Land title

keeping 1
Static ownership Gift card ownership
Registry Provide automation of Chain of custody
specific assets
Securely store, confirm and Store bank/ credit card identity info
2 Identity distribute identity-related info on blockchain to enable user to
Stores of Revise personal/ other data easily access proof of identity
static
Smart
Create and execute semi- Insurance claim payouts
information 3
contracts
autonomous contracts on Cash equity trading
distributed digital platform Release of new music

Transactions Dynamic
Exchange of physical and Streamlined low transaction
4 digital assets on a digital settlements to address liquidity
registry
platform mismatches in loan funds

Payments
Efficient payment transfers Peer-to-peer lending through the
5 with lower friction, improved Bitcoin blockchain, dis-
infrastructure
record keeping intermediating banks
Registry of
tradeable Verifiable
Store of information and Event tickets
information 6
data
easy access to secure, Registry of independent artists work
dynamic information Protection of Intellectual property

McKinsey & Company | 5

WHAT IS BLOCKCHAIN?
Across at least 80 nascent but real opportunities to apply
3 blockchain technology1, nearly one quarter exist in insurance
Distribution of current non-Bitcoin, blockchain solutions1
Number of use cases, % by category For the Insurance use cases

Idea stage
6 Revenue
In development
Other2 12
17 (no output yet) 12
Arts &
Entertainment 5 Tested but Risk
Public Sector not yet 47
11 commercialized 18
Consumer

Healthcare 9
Financial Services (50%)

Insurance 6
Commercialized
22 Not scaled 64 Cost 41
Securities
Identity 2
Register of 6
ownership
9
Commercialized
Payments
13 Scaled2
0

Lifecycle Primary intention3

Industry
1 Blockchain solutions excluding solutions that are purely related to Bitcoin; 2 Annual revenues US$1+ MM
3 In many instances use cases have a secondary intention

SOURCE: McKinsey Panorama, web search McKinsey & Company | 6

IMPLEMENTATION LEVEL ACROSS THE INDUSTRY
Investment in blockchain has already started to gain momentum and is
4 expected to grow at a very high pace in the near future
Venture capital is pouring in, developers are excited and And the banking industry is expected to spend
industry players are taking note... ~$400MM on distributed ledger technology by 2019

Investments in blockchain-related startups Estimated capital market spending, 2014-2019e

(USD MM) (USD MM)

400

+31% p.q.
315
235
+59% p.a.

160 210
136 140

101 130
87
77
59 67 59
67
26 39
17 10
3

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 e2016 e2017 e2018 e2019

2013 2014 2015 2016

SOURCE: AITE Group, Tabb Group, CoinDesk McKinsey & Company | 7

IMPLEMENTATION LEVEL ACROSS THE INDUSTRY
Effective use case execution will depend highly on strong collaboration
5 among players in an ecosystem (financial services example)
Associations Fintech companies Regulators
Explaining blockchain use cases with few actual Leading the innovation in connection with No strong focus yet, likely to
experiments and multiple roundtable blockchain technology grow as blockchain
proliferates

OSFI
CFTC
Banks/financial institutions
Growing interest in disruptive blockchain
solutions with ~$400MM estimated capital market OCC
spending by 2019 Blockchain
ecosystem

Central bank
Strong interest in block-
chains evolution, certain
publications (especially on
Bitcoin)

Industry utilities/platforms
Much attention from industry utilities paid
to blockchain developments due to the risk
Non-banks of disintermediation of utility functions
Assessing the potential of blockchain technology Platforms interested in deploying
blockchain, leading implementation

SOURCE: Expert interviews, web search McKinsey & Company | 8

IMPACT FOR FINANCIAL INSTITUTIONS
McKinsey has identified 7 genuine use cases and associated pain
6 points; all of those sized could generate ~$80B to 110B in impact
Application by
Value generated by Examples of type of bank Impact levers
blockchain ($B) Blockchain benefits impacted players Drivers of cost today CIB Retail Cost Revenues Capital

Identified Lower cost and Paper-based and labor

64 >60 viable
use cases
from a
Trade
A finance 14 17
operational risk, faster
turn-around, increase
heavy structure
Error-prone processes
in revenues Capital that is locked up
database of in the TF processes
>200 fintech
startups,
Cross- Lower cost and fees High fees and slow
press
50 60 Increased security
processing due to
clippings, B border B2B intermediaries
and payments and speed
High operational costs
research

Lower cost and fees Paper-based

Cross- from competition, High fees due to lack of
C border P2P 3-5 increased security and intermediary competition
payments transparency Capturing incorrect
Focused on

24 24 financial
services
applications Repurchase More effective netting
receiver information

Inability to net the

agreement Lower systematic risk obligations
D transactions 2-5 Reduced operational Counter-party risk
(repos) costs Credit sensitive repo
buyers

Reduced operational Manual and duplicative

OTC costs and capital due data entry and verification
E Derivatives 4-7 to streamlined processes
processing and High capital requirements
Selected 7 settling
7 use cases
for analysis,
based on KYC / AML
Reduced duplicative
efforts in on-boarding
Manual and duplicative
data entry and verification
initial F manage- 4-8 customers processes
hypothesis ment Improved transaction Low visibility into
of potential monitoring transactions
for
disruption Secure storage of ID Direct losses due to fra-
and size of Identity credentials udulent activity (90-95%)
impact G fraud 7-9 More secure account Fraud prevention
opening, transaction infrastructure and
authentication processes (5-10%)

SOURCE: McKinsey analysis McKinsey & Company | 9

IMPACT FOR INSURANCE INDUSTRY
In Insurance, blockchains have potential for impact across
7 the entire value chain NOT EXHAUSTIVE

Product Policy/ Risk capital &

Pricing/ Payment &
development and Claims administration and investment
underwriting collections
distribution back offices management

Potential

Use blockchain as a Using blockchain as Leverage blockchain Use blockchain for Make data available
reliable registry for payment infrastruc- for information about onboarding of new for re-insurers or
Potential
on-demand / usage- ture (especially insured goods and customers or other parties in a
use cases
based insurance or across multiple events in order to verification of policy- controlled way
micro-insurances countries) fight fraud holder identity
Offer P2P insurance Use blockchain for Automate payments Automate claims Use smart contracts
via blockchain for P2P insurance through smart triggering and to automatically
Potential
customer to underwriting, include contracts evaluating handling with smart determine payouts
use cases
customer promotion external data, smart conditions for paying contracts, and e.g., e.g. triggering
with smart
and sales, and contracts and peers out claims with sensors (IOT) process of
contracts
automated ops with (humans) to catastrophe swaps
smart contracts determine tariff and bonds
Reduce cost related Reduce cost of Reduce cost and Reduce average Reduced admin cost Reduce admin costs
to commission and operations increase speed for claims cost related to and speed-up Automate and
sales and operations Reuse platform for payments Claims process for increase reliability,
Increase trust of other types of administration onboarding auditability and
Key benefits
customers due to insurances Damage from fraud speed for financial
open, distributed Include external and fraud detection instruments
system data for (semi-) Improve identification transactions based
automatic pricing of claim events on defined events

edgelogic

Examples1
Allianz
Risk
Transfer

1 Not all insurance-specific

McKinsey & Company | 10

APPLICATIONS FOR INSURANCE INDUSTRY
Applications of blockchains in P&C Insurance (including true P2P
7 insurance contracts) will improve efficiency and customer experience
Applications Shortcomings of current landscape
Consumer data is especially valuable in
telematics and Usage-Based Insurance
Data But, insurer, not customer, owns usage
continuity data and associated benefits
Consumer data does not migrate with
customer from one insurer to the next
Claims typically processed manually,
requiring extensive central validation
Manual processing can introduce both
decision subjectivity and errors
Smart Subsequently claims processing is
contracts slow, complex and subject to human
error
Tracing provenance relies upon faithful
Valuables record-keeping along with item
provenance No secure documented trail back to
origination of article (e.g., art, diamond)
Growing threat from fraud based on
false claims for staged incidents
Fraud Claims often made against several
reduction policies held by independent insurers
Fraud detection almost impossible
without cross-party industry data
Blockchain enhancements
Consumer data exists independently of insurer
Data access can be granted by consumer through their
public key to any third party
Enhanced risk-assessments and underwriting made
possible by more complete behavior history
Automated insurance policy written into a smart contract
which enforces and pays out against insurable event
without manual administration
Claims processed and paid on a logic-based system
requiring all information to be complete
Distributed validation network ensures only legitimate and
complete claims are paid out on basis of independently
verifiable oracle feed
Claims processing and management is transparent,
accurate and irrefutable
Initial provenance recorded with immutable time and
date stamp and proof of existence (e.g., photograph)
Subsequent ownership and location can be recorded in
secure, immutable, chained history of object
Distributed network independently validates (by
consensus) contracts and claims to be paid
Network verifies true identities and rejects multiple claims
for same incident
Storing history of claims in distributed cross-industry
database enables detection of fraudulent behavior patterns
McKinsey & Company | 11
INSURANCE USE CASES
And a growing number of companies is working on
7 blockchain use cases for insurance

InsurTechs, insurers and other companies are working

on blockchain use-cases for insurance Selected cases
Start-ups1 EXAMPLES
Tradle provides Know-your-customer application
to ease and speed up onboarding processes
(POC phase) Aug 2015

SafeShare has launched a blockchain-based

platform to register on-demand insurance in UK
(underwritten by Lloyds of London) Mar 2016
Insurers2

Allianz announced a successful prototype to

automate catastrophe swap transactions
Jun 2016

Others1
Blem, a provider of reinsurance solutions, is
working with z/yen group to record claims in a
blockchain for accurately dividing cost between
insurer and reinsurer May 2016

1 Activities not necessarily limited to insurance industry

2 Different types of activities: direct/indirect investments, participation in R3 consortium or own prototypes

SOURCE: McKinsey Panorama Database, Web search McKinsey & Company | 12

 PROOFS OF CONCEPT
Early successes have been achieved primarily by NOT EXHAUSTIVE

7 consortia working together, including in Insurance

Syndicated loans The insurance

Engineering and reference industry is
data processes Clearing
Insurtech and beginning to
settlement collaborate on
Trade
blockchain via
Finance consortia (e.g., B3i)
Catastrophe
Swaps/
Consortia are
Bonds developing Proofs
Retrocession of Concept using
insurance distributed ledger
Blockchain solutions to replace
consortia some part of the
traditional
Global money
transfers infrastructure to
Cross-border improve speed and
payments
reduce risk

McKinsey & Company | 13

IMPACT FOR FINANCIAL INSTITUTIONS
However, blockchain should be employed only under certain
8 conditions and requirements
5 key criteria for blockchain
1
Distributed
ledger

5 2
Economic benefit Remote
for participants independent writers

4 3
Causing Existence in
disintermediation absence of trust

McKinsey & Company | 14

IMPACT FOR FINANCIAL INSTITUTIONS
Shaping the regulatory environment is the biggest challenge to
9 unlocking the potential value of blockchain

Regulatory environment challenges Key considerations

Decentralized ownership Educate and involve regulators

International jurisdiction Propose solutions to unique

regulatory questions
Encryption and user anonymity
Communicate regularly,
Blockchain transactions of non- especially on uses related to
digitized assets will require legal consumers
consideration of off-chain settlement

Overall attitudes from NA regulators appear to be do not harm as distributed ledger

technologies evolve

McKinsey & Company | 15

IMPACT FOR FINANCIAL INSTITUTIONS
Based on the current rate of evolution, we believe blockchain
10 solutions could reach their full potential in the next 5 years
Future of blockchain
Dark age New era
Momentum Exploration Expansion of Commercial
Ages of Bitcoin age
and hype of use proofs-of- deployment
block-chain
building cases concept at scale

10-20
100+ 20-30 use
successful
solutions cases
business
explored tested
cases

Block-chain 3 initial hurdles 3 main hurdles

solutions & Only Bitcoin View on potential benefits ($) Establishment of legal / regulatory
Criteria for based solutions of use cases framework
survival Relevance to, and severity of Viability of business cases (incl.
current pain points and proof justifying costs of implementation
that Blockchain is the best incl. integration)
solution Agreement on key standards and
Critical number of players active collaboration across all
willing to move required players

2009 2016 2017 2018 2019 2020 2021

SOURCE: Mckinsey, expert discussions McKinsey & Company | 16