Smart Legal Contracts in (Re)Insurance - Part 1

Why the Global Reinsurance and Large Commercial Insurance community can do better...

There's nothing inherently wrong about the state of technology in the global commercial insurance and reinsurance market and nothing wrong with the direction of travel. A lot of it is heading in the right direction but it could be SO much better. Over the next few weeks this series of articles will shed light on why.

In terms of pure reach and global appeal we have been blessed with two powerhouses of ingenuity in the last 25 years. Both Steve Jobs and Elon Musk looked at problems differently and single mindedly changed our world because they saw through the trappings of groupthink and, to use an oft repeated GE phrase from 20 years back, 'imagineered' the future.

They didn't do it on their own of course - they gathered people around them to help and created space to think "what if we did things like that?" A lot of effort was put into thinking about a problem in the right way, developing new ways of doing things to bring different technologies together, and iterating until the collectively whole Product made sense. Take the iPhone for example. Not much in the product itself was new but the collective whole was revolutionary. This is a pattern that is as old as human history : the advent of a transformational collectively whole product made up of smaller advances accumulated over time that changed the way we lived our lives. In other words : a wheel isn't much use without an axle and only provides value when brought together with other developments to meet some purpose like moving goods from A to B. When you add an engine and create a road network then that really changes things!

It's not like nobody is trying to effect transformational change in the Reinsurance and Large Commercial Insurance industry but it seems there's a lot of attention right now on recreating what we know rather than discovering that which we must become. As if merely re-establishing the same processes onto new technology will solve all the problems. This means that, sadly, we're still systems and technology focused and not client focused as a collective group. With the way that the ecosystem has functioned for 40 years since the advent of computing it's hard not to be blinded by the comparison of the technology in our hand to the 'mainframe in a frock' systems that we all work with day to day. It's hard to pick through what is valuable and what needs rethinking.

Rethinking from the ground up is precisely what 'Computable', and ultimately 'Smart Legal Contracts' is about, but it's hard not to be blinded by technology especially with the advent of Blockchain, ChatGPT and properly useful Artificial Intelligence and Machine Learning systems. These things are being paid a lot of attention and rightly so as they are part of emergent solutions whose impact goes beyond what we can see on the current 'initiative horizon'.

The questions we need to ask about the future of the industry start with a recognition of the purpose of insurance and reinsurance. The answer is straightforward : it is the purpose of Insurance to protect individuals and society from unexpected loss. At a macro level this is an expensive undertaking so it is desirable to reduce the cost of Insurance and Reinsurance products overall and by the reduction in cost enhance the protection they afford to the buyer.

Unfortunately there are costs embedded in the industry today that are very difficult to remove without large scale, cross organisational, transformational change. This change will not occur unless the right group of people come together and figure out what a truly new collectively whole ecosystem needs to look like. If this doesn't happen collectively then the market is primed for a motivated individual with the right team, unconstrained capital and motivation to change everything.

Strategically this means Brokers and Carriers need to figure out what the future looks like and Vendors need to help them deliver it. That's where the Ruschlikon group comes in.

acord.org/standards-architecture/ruschlikon

June 2023 saw a gathering at the SwissRe Centre for Global Dialogue for the Ruschlikon Community's 15 year anniversary. It was the usual mix of souls from across the industry being brought together to, firstly work intensely together on various subjects, but also to celebrate and cement hard earned relationships fostered all too often these last few years via Microsoft Teams.

Workshops went on for 2 days and many issues were resolved but on the 3rd day the meaning of the Ruschlikon initiative was brought into clear perspective. Day 3 was devoted to the 15 year anniversary celebration and during one presentation Beatrice Andrade delivered the quote that encapsulates what the initiative is all about.

"If you want to go fast go alone but if you want to go far go together..."

What is always noticeable in Ruschlikon meetings is the real willingness to listen, to share ideas and to face the reality of the working processes in the industry. Every discussion is entertained in a spirit of openness whilst simultaneously not divulging the recipe to each organisation's secret sauce. All communication is also performed in English the irony of which is that the group develops common syntax and language for Electronic Placement and Technical Accounting while speaking a common language.

The current state of affairs is that the language of Commercial Insurance and Reinsurance in ACORD GRLC is well defined for Technical Accounting, still being developed for electronic Placing but is only aimed at standardising the exchange of data utilising an electronic form of existing processes between organisations. It has been very successful of course with ever greater numbers of messages being exchanged and more and more organisations developing their capability to exchange data. There is positive intent in the Ruschlikon initiative but the fact remains that there are interfacing layers required between the disparate systems used by the organisations involved to support the transactions necessary for Insurance and Reinsurance to function. This is a layer of cost to the industry that ultimately is paid for by the end consumer of insurance products. It centres only on the fundamental need for the movement of money between parties but does not venture into the upstream value chain in any transformative fashion.

In the long term my belief is that there is an alternative to development of partner driven data standards purely to facilitate financial transactions even if they still have a part to play in 'pure data exchange only' engagement between Contracting parties. Standards will emerge over time around more processes as the componentry of Insurance and Reinsurance contracting operations evolve across organisations. We may even see islands of partnership centric Smart Contracting capability develop, caused by competitive and cost pressures, in a way that drives mergers and acquisitions activity. In the end, irrespective of how it happens, I believe that :

Insurance and Reinsurance Contracts need to exist and operate with a tight relationship between contractual prose, data and code in an ecosystem that delivers reactive and consumer centric co-authored products.

To begin to explain what that means and what an alternative looks like we need to look at different components for a new future in light of what exists now.

Right now there is/ are :

• Electronic paper
• Electronic means of data exchange
• Standards in the structure and content of Contractual prose
• Contracts that can be negotiated and signed digitally
• Data can be shared with others via electronic messages and ingested electronically into Policy Administration Systems
• Messages can operate as triggers and inputs to administrative processes
• Communication technologies that allow organisations to develop more deeply integrated and collaborative solutions with their trading partners
• Central platforms performing common service functions e.g Net Settlement

There are a lot of different technology components that have a place in a reimagined future but in the Commercial Insurance and Reinsurance contracting operations space we are yet to see a transformational collectively whole product. In short :

Data is being exchanged and used for some great things but it is not enough. A paper process has been taken and made better, faster and easier. This is no surprise - human beings do that!

One of the fundamental things that needs to happen to achieve large scale transformational change in a new ecosystem is that a common language must be developed by which Insurance and Reinsurance Contracts can be expressed. The interesting thing is that the language already exists : open up an Insurance or Reinsurance Contract and read it. It's a complex collection of prose, data and logic and most importantly the relationships between them. As humans we are able to learn the language of expression of Contracts and what it means in reality for the operation of those Contracts. We also have different forms of Contract placement and different rules that operate to achieve different outcomes. The Ruschlikon initiative has gone some way in creating the language of Insurance and Reinsurance but it has not yet gone far enough. We cannot however just rely on the ACORD GRLC Rosetta Stone to make the next conceptual jump in the capability of an industry to perform it's primary function - to protect individuals and society at large from loss.

A huge barrier is gaining enough perspective i.e seeing enough Insurance and Reinsurance Contracts and seeing enough ways of expressing the same thing. This is a pre-requisite to deciding what is the same and what can be rationalised to a common way for each and every (pun intended) contractual expression to be written so that everyone knows that which is meant. Another barrier that a wider perspective removes is in the emergence of consistent design principles and patterns of expression in contractual prose or data design that could represent it. All of these are critical points for the expression of Insurance and Reinsurance Contracts in prose, data and ultimately how code will automate products underpinning those contracts. For a complex product to be fundamentally useful it must, at all times, rely upon tenets of consistency so that complexity is overcome by human intuition borne of familiarity and consistency of expression. The rationalisation and increased use of shared language is one the elements required for consistent and common understanding of expression and meaning for contractual prose.

Coming soon : Part 2 of this series will discuss some of the future need for foundations of the expression of contractual language, Part 3 will get into the intersection with data for insurable interest and Part 4 will begin to lay out a vision for the future architecture of Smart Legal Contracts for Commercial Insurance and Reinsurance.