The Australia and New Zealand Banking Group along with IBM Corp. and banking company Suncorp New Zealand Ltd. today announced the development of blockchain distributed ledger technology aimed at easing payments and reconciliation in the insurance industry.

Blockchain technology is used across numerous industries as a way to secure distributed data in a decentralized manner that also makes it difficult to tamper with. Each transaction sent through the blockchain is cryptographically secured in a ledger that is shared between multiple parties and transactions are not added until all members agree.

After the transaction is added, each subsequent transaction strengthens that security. The blockchain also becomes a historical record of all past transactions that can be audited by third parties and regulators to ensure legal compliance or investigate data patterns.

A press release from IBM and ANZ claimed that this is the first insurance industry-related blockchain of its kind released in New Zealand.

“Reconciling policy information and premium payments made by a broker to an insurer on behalf of customers is a slow and painful process,” said Paul Goodwin, managing director at ANZ. “The blockchain solution will be much more efficient for the industry as well as being very secure.”

Blockchain solutions have been sought by the financial technology industry because distributed ledgers have a higher efficiency than traditional paper-based governance for transactions. For example, Nasdaq stock exchange has worked to implement blockchain transactions for securities to reduce settlement times down to as little as 10 minutes that normally take up to three days to process.

“Distributed ledger technologies are driving major efficiencies across many industries by enabling previously complex, manual processes to operate in real time with full transparency,” said Mike Smith, managing director at IBM New Zealand.

This insurance blockchain grew out of a proof-of-concept run by IBM and ANZ with a white paper released by the companies. It created a blockchain network for the purpose of recording and settling what are called “bordereau statements.” These statements are a list of premiums payable by a broker to an insurer, normally produced on a monthly basis. The transactions occur in bulk but allow premium payments to be broken down to the individual policy level.

As a result of the nature of bordereau statements, they can take a long time to settle each of the individual payments and reconcile all of the line items. That produces a massive workload each time one is submitted for the broker and the insurer, and that workload scales with the number of policyholders. That workload can also become extremely complex in the case of credits or adjustments.

IBM and ANZ expect that the blockchain solution will make automating credits and adjustments much more efficient. This is because every transaction, creation and settlement, in a bordereau statement is recorded to the distributed ledger and can be rapidly verified even if the individual policies in a single statement are themselves across separate organizations.

The traditional model for bordereau statements is also opaque, according to the white paper, and having all transactions visible in the blockchain will make the process more transparent. Today, insurers have limited visibility of expected payments, cash flow and settlements across the process. By supplying an agreed-to distributed ledger between all parties as a reference, this should increase the reliability of reporting.

The proof-of-concept also tested the capability of using encryption to maintain the privacy of policyholders’ transactions on the blockchain while still providing enough transparency for reporting. According to ANZ and IBM, it succeeded in its goals to show that it could provide efficient data transfer, consolidate data into one digital exchange system and automate allocation for bulk settlements down to the individual policy level.

Going forward, the companies involved also expect that the blockchain solution may be used to digitize other asset classes beyond bordereau statements, removing the need for paper-based management systems.

The white paper also said there’s a natural extension for this project into the digital ledger ecosystem linking to customer-facing applications, such as allowing brokers to provide insured parties with up-to-date electronic versions of insurance policies more rapidly.

Image: ANZ