How blockchain is reducing the fluidity of risk in marine insurance

How many industries can you name that are still based on the same working practices and business models that they had in the 17th century?

Despite the wealth of modern technology now available, marine insurance, a critical component of the global trade ecosystem, is still an industry based on the certainty of paperwork, emails, weather forecasts and a large amount of guess work. 

EY and Guardtime are working with Microsoft and key industry players to bring the industry into the next wave, to reduce risk and friction in global trade and thereby facilitate global economic growth.

A risky business

Marine insurance is characterized by the dynamic nature of the risk taken on by insurers.

“There are a lot of paper contracts written between insurers, brokers, shipping companies and captains of ships that often won’t be in place in time until the ship has left Belgium and arrived in Sydney,” says Shaun Crawford, EY Global Vice Chair – Industry. “It’s all based on experience and historical examples. The risk can change markedly as a ship travels from A to B. It may sustain damage, enter war zones or change its flag or captain.”

Any such variations require all parties connected to a policy to update their records. With all that paper floating around, this process is slow, open to errors and fraud. Error and uncertainty adds cost for all stakeholders at every stage of the value chain.

To keep pace with the next wave of the industry, marine insurance needs to modernize through digitalization, automation and increased transparency.

“From an insurer’s point of view they don’t have access to all the information underpinning the risk they’re taking. As a result they have to put a fair chunk of capital on balance sheets in case of the worst scenario ­­– a ship going down,” says Crawford.

EY and Guardtime, an enterprise blockchain company, collaborated with Microsoft’s Azure Blockchain team to develop a groundbreaking blockchain-enabled platform that can meet the needs of all the different parties involved in a marine insurance contract.

The platform digitizes the rules between buyers and sellers. “We’re automating the entire process by using smart contracts to minimize paperwork,” says Crawford. “Insurance companies can immediately update information online or see where a ship is anywhere in the world at any point in time, or how it’s changed.”

In an industry with so many stakeholders, collaboration is key. The platform is being developed in consultation with the world’s largest shipping company Maersk; a major international broker; ACORD (insurance industry standards body); as well as multiple specialty insurance firms.

Working directly with the end clients and parties throughout the supply chain, EY, Guardtime and Microsoft were able to gain the insights needed to not only develop a 20-week proof of concept trial, but to calibrate the real-world platform on Azure that the parties had developed so it has the potential to transform insurance beyond just the seas.

The strengths of blockchain

Blockchain and distributed ledgers’ strengths lie in their core ability to connect every party involved and make a collective database completely transparent and visible to all. It offers a solution that could be applied across the entire insurance industry, beyond the specifics of marine insurance.

The visibility of near real-time data, connected directly to smart contracts also improves decision-making, security and transparency, with third parties such as regulators or auditors also able to view the database.

“This more exact information means less liquid capital on paper and allows brokers who spend most of their time doing costly administration to be free to work on value-added services,” says Crawford.

But successfully integrating blockchain technology to its full potential across the industry is hugely complex. Multiple jurisdictions and regulators are an inherent part of marine insurance and make it challenging to implement widespread change across the entire ecosystem.

To successfully drive the industry toward this digital solution, EY worked directly with the insurers’ end client, in this case Maersk.

“If we only worked with insurance companies and brokers, nothing would have happened,” says Crawford. “But for a shipping company that spends hundreds of millions on insurance each year, a blockchain solution offers the opportunity for tighter premiums and better claims processes. There’s a much clearer value for them. We’re going to the end client to transform an entire industry process.”