How a melanoma scare – and a great dermatologist – made me more serious about skincare

By Russ Banham

At my annual checkup, the doctor noticed an oddly shaped mole of a worrisome size on my back. “Have your wife take a peek at it now and then to make sure it doesn’t change,” he instructed me. He was pretty certain that it was just, well, a mole.

By “change,” he meant grow in size or height, develop asymmetrical borders, alter color, or otherwise evolve into something that it currently was not. I’d have monitored it myself were it not smack dab in the middle of my back. My life was in my wife’s hands, or so I told her. Was I worried? A little. My father and aunt had skin cancer.

I also hail from the Baby Boom generation of kids whose moms implored us to “Go outside and get some color on your face.” Being too pale was considered the sign of a recluse, someone with poor athletic skills who read Archie comics indoors all the time. As teenagers growing up in Queens, New York, summers with my pals were enjoyed at Jones Beach, ogling the waves (yeah, right) for hours at a time. In the dog days of August, my attire was a pair of cutoff jeans and sunglasses, no shirt or shoes. The sun had most of my body to burn to a crisp. I was a sitting duck for solar radiation, tallying up more sunburns than I can count.

After one month of watching the peculiar mole, my wife gave up. “I can’t tell if it’s changing,” Jenny sighed. “This is too much to ask.”

Who could blame her? She wasn’t a doctor. So I contacted the real thing, a dermatologist a friend recommended.

Will Kirby, DO, is a local celebrity in Los Angeles, where I live. Will won the Big Brother competition in 2001, taking home enough money to finish his medical training. In his younger years, he had a basal cell carcinoma (a type of skin cancer) removed from his leg, which set his life’s course. Will took one look at the mole on my back and said “Not good.” He snipped it off and had a biopsy performed of the tissue. The diagnosis: A dysplastic nevus, a precursor to melanoma, a skin cancer. A nevus is a mole; dysplastic is atypical.

Within days I was on my stomach as Dr. Kirby removed more tissue from the site of the mole, then sutured a two-inch long line. Three months later, he took a peek and liked what he saw. “Not to worry,” he said.

Since then, Dr. Kirby and I have become friends. This is often the case with a skin cancer patient and his dermatologist. Every three months for the next two years, I was in his office. Dr. Kirby surveyed the landscape of my body, circling suspicious moles with a pen. In the eight years of my visits to date, I’ve had three more dysplastic nevi (plural of nevus) removed and multiple other moles snipped away before they could get worse. “That’s what we do here — snip, snip, snip away cancer,” Dr. Kirby said when I called for an interview. “The key is to be vigilant. The sooner we snip, the better the outcome.”

So far, so good: None of the three types of skin cancer I’ve attracted have entered the thornier territory of Stage 2. I even had a topical procedure done on my face, the site of several snips to reduce the risk of future cancers. The medication contained a substance called ingenol that kills abnormal cells that lead to skin cancer. My face looked like a deflated football for a week, until the dead skin sloughed off. I’m promised at least five years of a cancer-free face, at which point I will undergo the same procedure.

This is now my future. Certainly, I’m to blame for the sun exposure of my youth. While I apply sunscreen with SPF 50 every morning, and wear a hat on hikes and the rare weekend at a Malibu beach, the blistering sunburns of my youth will forever take their toll. I will always develop odd-looking moles. Dr. Kirby will give them the once-over and snip when he must. He’s my younger big brother now, looking out for me for life.

When found and treated early, the estimated 5-year survival rate for melanoma is 99%. But new therapies offer hope for even advanced cases. In 2015, former President Jimmy Carter, then 91, beat metastatic melanoma that had spread to his liver and brain. Ask your primary care physician for a skin cancer screening at your next physical. 

The Future of Initial Coin Offerings

By Russ Banham


Until recently, Initial Coin Offerings, or ICOs, were perceived as a great way for startups to raise capital, in large part because of the unregulated nature. Experts pegged the amount of capital raised through ICOs from $4 billion to $6 billion in 2017, and nearly $3 billion to date this year.

Now this spigot is slowing due to growing legal and regulatory scrutiny around ICOs. The U.S. Securities and Exchange Commission (SEC) maintains that the sale of tokens that gives investors ownership in startups falls within its jurisdiction. But several other regulators, including the Federal Trade Commission (FTC), the Commodities Futures Trading Commission (CFTC), and the Comptroller of the Currency (OCC), have weighed in that they, too, should regulate ICOs and the sale of tokens.

This alphabet soup of oversight is making investors pause before plunking down on cryptocurrency. The caution is to be expected, said Joel Telpner, a partner at New York-based law firm Sullivan & Worcester, where he heads up its blockchain practice.

“ICOs, cryptocurrencies, and the blockchain technology that underpins them are such radically different concepts that they’re completely beyond current regulatory regimes,” Telpner explained. “Regulators are struggling to understand what these are, whether they should be regulated, and how that might happen.”

When a Rose is Not a Rose

As investors hesitate, ICOs are taking a breather. Funds raised in May are nearly one-third the amount raised this past December, according to ICO research firm Autonomous Next, which blamed the sluggish conditions in large part on “continued regulatory uncertainty.”

At its simplest, and ICO entails investors seeking a share in the startup venture to purchase virtual tokens, assuming enough capital is raised to launch the company. While the primary use case for ICOs is nothing new—“just another capital raising concept,” Telpner called it—the atypical nature of ICOs has caught the attention of myriad regulators, baffled if the tokens are a form of currency, a security, a utility or something else.

If deemed a security, then the SEC wants to regulate ICOs. “Some players have marketed the tokens at a discount to investors that get in early, giving them the opportunity to sell the tokens at the time of the ICO to make a quick return,” said Telpner. “To the SEC, that sounds a lot like a security.”

However, the blockchain platform that serves as the foundation of the ICO has the appearance of a utility, since the tokens also provide a way to access the blockchain’s products and services. Complicating the picture is that tokens also can be used to verify the data on a blockchain platform. Businesses or consumers wanting to access this data pay for that opportunity with tokens.

“In these situations, tokens are used as commodities or to buy or sell goods, making them different than a security,” Telpner said. “You’re now dealing with a form of commerce in which the tokens are equivalent to a real currency. You don’t take a share of Starbucks’ stock and buy a cup of coffee.”

These various scenarios emphasize why various regulators are giving closer scrutiny to ICOs, blockchain platforms, and cryptocurrencies. In May, for example, the FTC issued a temporary restraining order against four cryptocurrency investment ventures.

Under the Microscope

Although it may be too soon to predict the future regulatory landscape, companies dealing in blockchain and AI solutions are nonetheless optimistic that the current pause in ICOs is temporary. Still, Telpner said he would not be surprised if ICOs are regulated by several government entities at different stages.

“There is some talk now that a token would be regulated as a security the first year after the ICO, and then morph into a utility token afterwards,” he said. “Another idea floating around is to create different types of token categories—some securities, some commodities, and some utilities. Depending on the circumstances, different regulators would be involved.”

As the ICO market matures, at least some regulation is likely. “These are such radical technologies in their earliest stages of development; regulators are just trying to get a bead on what this all is and how it may change going forward,” said Telpner. “That’s a good thing, as it allows for more thoughtful treatment.”

The ongoing work of the Congressional Blockchain Caucus is to study blockchain technology for use by the government and industry, and to examine the actions of states like Arizona, that is writing its own legal definitions. “In Arizona, the legislation would allow an ICO to raise a certain amount of funds without risking violation of securities laws,” Ron Wince, founder and CEO of Myndshft, a healthcare AI and blockchain solution, said.

This regulatory action, most believe, is a good start. “The more clarity, the better for all concerned,” Wince stressed. “If regulators try to regulate this new animal using old regulations, we’ll just end up with a patchwork quilt. We need regulations, but we also need them to be as innovative as the technologies they regulate. Shortcuts are not to anyone’s advantage.”

Russ Banham is a Pulitzer-nominated business journalist and author who writes frequently about the intersection of technology and business.

Extraordinary Re’s Extraordinary Idea

By Russ Banham

Carrier Management

Imagine there’s a way for institutional investors to trade insurance risks much like they trade stocks. Well, imagine no more. A new and unique reinsurer, Extraordinary Re, has hit upon the novel idea of creating a trading platform run by Nasdaq for investors to trade assets tied to insurance liabilities.

The Extraordinary Re platform, which will be launched this year, offers the opportunity for investors to diversify their portfolios outside traditional stocks and fixed-income assets with a new investment class that does not correlate with the risks of other investments. For insurers and reinsurers, the platform presents an innovative way to access the capital markets to buy reinsurance capacity to absorb a wide range of risks.

If this sounds like insurance-linked securities (ILS) or catastrophe bonds, it should. But there’s a difference between such financial instruments that are bought by insurers and reinsurers on a one-off basis and what Extraordinary Re has in mind. First of all, the company’s trading platform would comprise property and casualty risks beyond property catastrophe, such as terrorism, aviation, marine, workers compensation and product liability exposures. Even life and health insurance risks are on the menu.

That alone is disruptive. But where Extraordinary Re shatters paradigms is the idea of creating a trading platform composed of these diverse perils, in which an investor can sell an interest in a Florida hurricane risk to invest in a business interruption exposure or the mortality risks of people in their 60s.

“We’re building the world’s first liquid marketplace for a wide range of insurance and reinsurance risks,” said Will Dove, Bermuda-based Extraordinary Re’s chairman and CEO. “Hedge funds, pension funds, sovereign funds and other large investors interested in balancing or readjusting their investment portfolios with short-tail, long-tail and even life insurance risks will soon be able to do that.”

Dove, an insurance industry and capital markets’ veteran, projects that the platform will unlock more than $20 trillion of existing liabilities held on insurance company

balance sheets while enabling institutional investors to access an attractive return from an uncorrelated asset class. “We see it as a 21st century version of Lloyd’s of London,” he said.

The comparison is apt. Like Lloyd’s, Extraordinary Re offers a marketplace in which people can examine different risks to determine their interest in absorbing some or all of the exposure. At Lloyd’s, these people work for insurers and reinsurers, while at Extraordinary Re, they’re investors. In both cases, if there is a loss, the insurers/reinsurers or investors pay up. If there’s no loss, they come out ahead.

This is a simplification of very complex transactions, of course. But it points to the innovations under way today that could disrupt the historic functions of the insurance industry.

“We’re rethinking how risks are transferred,” said Dove. “There is no particular reason why a single [insurance or reinsurance] company must be responsible for underwriting, marketing, distribution and service to provide all the capital for a risk. A distributed value chain, on the other hand, will result in more flexible availability of capital, reducing overall expenses that lower the cost of products for consumers.”

This value chain is Extraordinary Re’s digital underwriting platform, which offers new ways to connect risks with capital. When the company is up and running—by the end of the year, if not earlier, Dove said—an insurer, reinsurer or broker would present a typical submission for risk capacity, much like the current process. Once received, Extraordinary Re’s underwriters will prequalify the submission to ensure it is a class of risk its platform can support. Assuming this is the case, the submissions are posted electronically.

Investors now come into the picture, reviewing the submission to determine if it fits their portfolio diversification objectives. This is somewhat similar to how the Lloyd’s market operates—brokers calling on insurance syndicates to determine their interest in a submission. “The difference with our platform is that it happens electronically and much more quickly,” said Dove.

Of course, that’s not the only difference, but it is helpful to understand the platform in the context of current practices. For instance, multiple investors would participate in different tranches of a specific risk, much like reinsurers do today. This limits the investors’ loss exposure and gives them room to assume portions of other risks in additional tranches, increasing their portfolio diversification.

In essence, investors would create portfolios of different insurance liabilities, trading in and out of them as they see fit. Hence the “liquid” nature of Extraordinary Re’s trading platform. (See related article: Liquid Gold.)

With regard to the platform, the company worked with Nasdaq to adapt the firm’s proprietary matching-engine technology to suit its needs. While Nasdaq will host the platform, Extraordinary Re will manage the underlying transactions. “Will and his team came to us and expressed an interest in deploying our current technology platform to trade insurance-linked securities,” said Paul McKeown, senior vice president of market technology at Nasdaq Inc., a provider of trading, clearing, depository and surveillance solutions in addition to its well-known public company listing services.

Following Extraordinary Re’s launch later this year, the company plans to work with Nasdaq to deploy a blockchain-based ledger system to enable its investors to subscribe to real-time data feeds of transactions in the investors’ accounts at Extraordinary Re.

The blockchain technology will capture and transmit insurance underwriting and exposure data to the investors. “We’re giving investors access to more detailed and timely data than many traditional reinsurance companies ever see,” Dove said, adding that a possible future application of blockchain technology is the ability to create smart contracts between Extraordinary Re and insurer clients.

Pouncing on Cat Bonds

Aside from its strategy to create an insurance liability trading platform, Extraordinary Re is disrupting the catastrophe bond market by reimagining how investors and insurers/reinsurers come together to execute deals.

Three main parties currently are involved in the issuance of a catastrophe bond—a sponsor, the investors and a special purpose vehicle (SPV). Sponsors include insurance companies, reinsurance companies, large multinational corporations and governments—all looking to spread the risk of loss from hurricanes, earthquakes and other natural disasters. Investors generally are pension funds and hedge funds looking to diversify their investment portfolios with a new asset class. An SPV is typically a tax-exempt company that issues the catastrophe bond in a tax-friendly domicile like Bermuda, Ireland or the Cayman Islands.

Liquid Insurance Contracts

By creating a new nexus between the sponsors and investors, Extraordinary Re does away with the need for an SVP, offering liquid insurance contracts as opposed to a multiyear bond. For many investors, the ability to trade in and out of an investment position in an insurance liability will be more attractive than investing in a bond that doesn’t pay out for a certain number of years.

“One of the valid criticisms of catastrophe bonds is that there isn’t a lot of liquidity,” said Robert Hartwig, associate professor and co-director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business. “While the yields might be relatively high and the risks are generally uncorrelated with traditional economic and financial risks, liquidity has been a weak spot.”

The lack of liquidity—the ability for investors to trade in and out of catastrophe bonds—made some institutional investors leery of catastrophe bonds as an asset class, he said. “What Extraordinary Re is doing is bringing together as many different market participants as possible to participate on its platform in a wide variety of insurance-linked securities that provide the same traditional benefits as high-yield and uncorrelated returns as cat bonds but with real liquidity,” said Hartwig, who teaches insurance and finance at the university. “The benefits of liquidity will expand the pool of investors and traders willing to participate.”

He added, “The fact that this is more than just catastrophic property damage risks also will be of interest, as it eases the way for institutional investors to create a portfolio of uncorrelated insurance risks.”

Not only can investors diversify their portfolios to include uncorrelated catastrophic property risks—the case for the past 20 years with catastrophe bonds—they now can further diversify their portfolios with a growing variety of other uncorrelated insurance liabilities like cyber exposures and mortality risks.

“There’s a lot of innovation going on here—not just the platform but also the company’s use of blockchain technology,” said Hartwig. “Most InsurTech startups tend to be involved in building a better mousetrap for distributing insurance. Extraordinary Re is bringing together new ideas in a completely novel platform that relies on several disruptive technologies.”

At the Helm

The company’s chairman and CEO is no newcomer to insurance. Across Dove’s nearly 30-year career in the property/casualty insurance and reinsurance industry, he’s been an actuary, underwriter and senior executive with such leading companies as Centre Re, ACE Ltd., Cigna, Continental Insurance and Tower Group International. At ACE, he was a member of the team that put together the company’s first ILS issue in 2007, giving him entrée to the capital markets.

Dove’s expertise is a key factor in Extraordinary Re’s appeal to deep-pocketed backers, among them Silicon Valley’s premier startup accelerator, Plug and Play Tech Center, an early investor in Google, Dropbox and PayPal. Asked what encouraged the venture capital firm to invest in Extraordinary Re, Ali Safavi, a Plug and Play principal and global head of InsurTech, said it was a combination of its leadership team’s domain knowledge of both insurance and the capital markets as well as the positive feedback the firm received from insurers and reinsurers it had contacted about the trading platform.

“We’re also aware that the model used today to spread risks is old and cumbersome,” Safavi added. “The technology is legacy, and innovation is needed. We also liked the connection to Nasdaq and especially the team’s connections with brokers, carriers, reinsurers and investors in the insurance and capital markets spaces. Ultimately, we felt they were approaching the problems from the right angle.”

The proof is in the pudding, which won’t be fully cooked until Extraordinary Re makes the leap from concept stage to actuality—possibly this summer, if all works according to plan.

Still, just the sheer invention at play evidences how new technologies will change the way insurance risks are absorbed and spread in the future.

Russ Banham is a Pulitzer-nominated business journalist and author of 27 books.

Catastrophe Bonds A to Z

By Russ Banham

Carrier Management

A reader of this publication, the president of an insurance agency, recently wrote to say he kept hearing about catastrophe bonds but had little knowledge of what they were. He was curious if these instruments would replace traditional reinsurance and was particularly concerned about a scenario that would result in the catastrophe bond market’s collapse, resulting in widespread financial problems for primary insurers and economic calamity.

His timing was excellent. Catastrophe bonds, also known as cat bonds and insurance-linked securities (ILS), passed an important threshold in 2017, successfully weathering Hurricanes Harvey, Irma and Maria, three of the five costliest hurricanes in U.S. history. Altogether the storms produced $217 billion in damage-related costs, of which $92 billion was insured, according to Swiss Re’s research publication “sigma.”

“The final loss total will only be known once all claims have been processed, but even so, 2017 is likely to go down as one of the costliest North Atlantic hurricane seasons on record,” the publication stated.

While exact figures are unavailable on the losses endured by investors in the exposed catastrophe bonds, ILS analysis organization Artemis stated in April 2018 that the market had endured its largest losses to date. But it was the market’s ability to take a hit and recover that testified to its ongoing viability.

“In the first quarter of this year, a record $4.24 billion in new catastrophe bonds was issued in 17 separate transactions,” said Robert Hartwig, associate professor and co-director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business. “What this says is that cat bonds are no longer the interloper or the disrupter. They’ve become a mainstay fixture.”

Where There’s a Need

So, what are catastrophe bonds? First, a bit of history: In 1992, Hurricane Andrew caused $17 billion in insured losses in Florida—a loss figure double the modeling estimates at the time for the financial costs emanating from a severe hurricane. Several insurers were forced into bankruptcy, and reinsurance capacity dried up for the remainder. A new source of capacity outside traditional reinsurance was needed to fill the void. In 1996, according to Aon Securities, the first catastrophe bond drawing risk-bearing capital from the capital markets to satisfy this need was developed by St. Paul Re UK.

Two main parties are involved in the issuance of a catastrophe bond—a sponsor and investors. Sponsors include insurance companies, reinsurance companies, large multinational corporations and even governments, all looking to spread the risk of loss from hurricanes, earthquakes and other natural disasters. Investors generally are pension funds and hedge funds looking to diversify their investment portfolios with a new asset class.

For sponsors, catastrophe bonds are a complement to traditional reinsurance, presenting the opportunity to hedge the risk of loss from a natural disaster. The bonds function just like a reinsurance contract structured over several years or a single year. When the sponsor’s property damage losses exceed a specified indemnity trigger ($2 million, for instance), the bond kicks in to absorb the financial impact up to a stated limit (say $3 million), making it similar to traditional reinsurance, in which reinsurers assume layers of risk within a so-called tower.

Other catastrophe bond losses are pegged to parametric triggers like earthquake magnitude or wind speed. When a hurricane exceeds a 7.4 magnitude, for instance, the bond would kick in to pay losses up to the stated limit. Issuers have experimented with other payout scenarios, but most bonds involve an indemnity trigger. As a result of the development of this sector, there is now an additional option to spread catastrophic property damage losses.

“For insurers and reinsurers, cat bonds fill an ongoing need to spread catastrophic property losses,” said Hartwig. “They’ve allowed for an important extension of capacity on a global scale for a type of risk where capacity has historically been constrained.”

Catastrophe bonds also present value to investors. The yields generally are higher than traditional bonds like Treasuries, exceeding 5 percent in 2018, according to emailed comments from Daniel Ineichen, head of insurance-linked securities at Schroders Investment Management.

The bonds’ returns also trade at a slight premium to other investments like asset-backed securities and commercial mortgage-backed securities, said Paul Schultz, CEO of Aon Securities.

Catastrophe bonds generally have maturities of three to four years. The premium to acquire the bond funds are invested in high-quality securities like U.S. Treasury Money Market Funds and held in a collateral trust. These investment returns, in addition to the initial premium paid by the issuer, constitute the coupon payment to investors, assuming there are no losses.

Institutional investors are particularly interested in catastrophe bonds because of their portfolio diversification benefits, since catastrophic property damage risks do not correlate with the risks of other asset classes. “A hurricane or earthquake is not correlated with movements in interest rates or the stock market, making them a valuable hedge for investors,” Schultz said.

Added up, the bonds have legs. “With more than $100 trillion, the capital markets have the potential to be the most efficient provider of catastrophe reinsurance the world has ever seen,” said John Seo, co-founder and managing principal of Fermat Capital, an investment management company specializing in structuring catastrophe bonds.

A Long Time Coming

For investors, on the other hand, their hunt for yield played a major role in the growth of catastrophe bonds following the 2008 collapse of the subprime mortgage market, ushering in the financial crisis and Great Recession.

“When all other markets like fixed income and equities were going south fast, a huge uptick in capital suddenly flowed into cat bonds, which offered more attractive yields,” said Judy Klugman, managing director and global co-head of the ILS team at Swiss Re Capital Markets. “After that, the market really took off and hasn’t lost steam since.”

Others agree. “It took 10 years for investors to accept cat bonds as tried and true,” said Seo. “Finally, after 20 years, the ILS market is accepted and appreciated by both parties—investors and insurers/reinsurers. Their sound performance through the 2008 financial crisis was the reason.”

Record Highs

Since then, the market has been on a tear. Aon Securities’ 2017 year-end report tallied 35 catastrophe bonds issued by 31 different sponsors during the year, hitting a total capacity of $10.7 billion—a first-time achievement. If the remaining quarters of 2018 duplicate the first quarter’s record catastrophe bond figures, the year will be the best by far in the ILS market’s history.

“At present, total reinsurance capacity including cat bonds is at record highs with stable pricing, despite last year’s hurricane losses,” said Hartwig.

The exact amount that catastrophe bonds paid out last year has not yet been tallied, although Artemis posited that the losses were heavy. Why then has pricing remained stable?

“There are two ways to read this: either the ILS market is well structured and priced to pay out only in truly extraordinary circumstances, or the modeling associated with cat bond risks has dramatically improved to become quite accurate,” Hartwig replied. “In either case, investors can have some confidence in terms of understanding the risks they’re assuming.”

These risks are not for the fainthearted, given the ferocity of recent storms. Investors must proceed with caution.

“Insurance-linked investment funds span the full spectrum of risk—from ‘you could lose it all’ to a high level of protection for investment principal to everything in between,” said Seo. “Most catastrophe bonds absorb catastrophic risks modeled with a 1-in-50-year risk of loss, although there is a material part of the cat bond market that absorbs risk at the 1-in-10-year level.”

More than 600 catastrophe bonds have been issued since the first one in 1996, according to Aon Securities. Given the record issuance of catastrophe bonds in the first quarter, it is obvious that the hurricane losses of 2017 have not deterred demand from investors.

“We assumed everyone would trade forward, but the speed and quantum of dollars was much faster and bigger than what we had anticipated,” Schultz said.

Seo agreed. “Despite the financial impact of the three major hurricanes, the active returns helped offset the losses to deliver a net positive return [to investors],” he said.

For Klugman, who has been structuring catastrophe bonds since Swiss Re unveiled one of the first ones in 1997, the market’s robustness is especially sweet. “I was hired from Morgan Stanley in 1999 to find an institutional investor base for this,” she recalled. “When I sat down with investors, they had no idea what a cat bond was, much less reinsurance. I had to give them a primer. Today, the investors know what this is, how it works, understand the risks and realize there will be losses. This hasn’t diminished the value they see in the asset class.”

A similar optimism prevails among sponsors, with issuers running the gamut from insurers and reinsurers to big corporates and governments. The latter include Mexico, Colombia, Chile and Peru, among others. Some insurers have sponsored multiple bonds. USAA, for instance, has sponsored dozens of catastrophe bonds through the years to spread its risks from natural disasters in different indemnity layers. The company’s most recent $175 million bond included aggregate protection for automobile policy flood losses—an industry first.

Too Good to Be True?

All the interviewees (other than Hartwig) are engaged in the ILS market, so their optimism must be leavened with a pinch of skepticism. Yet, Hartwig, a finance and insurance professor with a Ph.D. in economics, also believes catastrophe bonds fulfill a unique need for issuers while presenting an alternate class of investments for investors.

“There’s little question that the catastrophe losses of 2017 put cat bonds to the test and they performed admirably, with record issuance in the aftermath,” he said. “This speaks volumes about their value.”

Returning to the reader’s query about the possibility of insurance-linked securities causing a global financial calamity along the likes of the 2008 financial crisis, the interviewees downplayed the risk, citing fundamental differences between catastrophe bonds and credit default swaps and subprime mortgages.

“For one thing, carriers own their policies and are forbidden to sell them onward, whereas mortgage originators are allowed to sell their mortgages into the securitization markets,” said Seo. “As a consequence, carriers use cat bonds to manage their risk, not to rid themselves of all responsibility for all time.”

Unlike mortgage-backed securities portfolios that were leveraged 30 times and more, catastrophe bonds are not generally leveraged.

“In the cat bond market, leverage financing is not widely available,” said Seo. “Even when it is, the gearing is modest—maybe no more than two times capital on a practical basis.”

Schultz noted that catastrophe bonds are collateralized entirely with high-grade collateral solutions like U.S. money market funds. The bond offerings also are “very transparent” in terms of risk assessment and documentation, and an independent assessment of risk is included in the offering materials, he said.

“With no leverage in the products, risk-free types of underlying collateral, and transparent and independently assessed risk analysis, we don’t see any way that an analogy could be made to highly leveraged derivative products with minimal to no disclosures,” he concluded.

Hartwig concurred that these fundamental differences create a sound foundation for catastrophe bond market stability. “While it’s true that a mega-catastrophe or series of mega-catastrophes could produce losses across a broad range of cat bonds, the losses would be confined to these securities for the year in which they occurred—unlike credit default swaps and mortgage-backed securities that mushroomed as the contagion spread,” he said.

Effects of Rising Interest Rates

A more likely challenge to the ILS market is rising interest rates, he said. “There’s a case to be made that the surge in interest among investors in cat bonds over the years was due to the global collapse in interest rates,” Hartwig explained. “Institutional investors in search of yield found what they were looking for in the ILS market. For several years running, they enjoyed relatively high yields with very few bonds being triggered. It seemed like a money-making machine.”

This machine may grind down as interest rates continue to turn upward, encouraging institutional investors to take a closer look at rising yields in both government bonds and corporate bonds.

“I wouldn’t call it an existential threat,” said Hartwig, “but it may result in diminishing interest in 2019.”

Russ Banham is a Pulitzer-nominated freelance business journalist and author.

Data Marketplace: Sharing Data in the Insurance Industry

By Russ Banham

Leader’s Edge

In Lloyd’s coffee house in London more than 330 years ago, the property and casualty insurance industry was formed to spread the risks of cargo-carrying ships plying the world’s seas. The industry grew and prospered, with little change in the underlying model. Now, an entirely new structure is taking shape.

The compelling reason for building this new model is the existential threat of keeping things as they are. If insurers and brokerages don’t begin to share their own and client data in novel ways to reduce acquisition costs and operating expenses, some other entity—like, say, a giant technology company—might squash them like a stack of yesteryear’s CDs.

“The cost base from which we all are working is fast becoming unsustainable,” warns Alastair Burns, chief marketing officer at London-based insurance holding group Navigators International. “A war on cost must be waged in the insurance marketplace.”

This cost base is predicated on the traditional ways of providing insurance to businesses that have not changed much since Edward Lloyd ground his first cup of coffee. Companies from the largest corporations to the smallest Main Street businesses rely on an insurance broker or agent to understand their risks and transfer them to an insurance carrier willing to absorb these exposures. The insurer then spreads these risks through global reinsurance markets.

This system has worked pretty well for centuries. Then along came data analytics—the ability to search through massive volumes of data to discover useful information for decision-making purposes. This technology and others—machine learning, robotic processing automation and artificial intelligence—have created a dangerous entry point for non-insurance entities to potentially compete against brokers and carriers, leveraging capital in some cases from institutional investors.

Other industries have collapsed from such incursions. The new insurance model under discussion would fortify the barricades. By sharing client data, brokers and carriers can reduce the cost of insurance, pave the way toward the development of innovative new types of insurance, and, most important, keep non-insurance entities at bay.

“Whoever has data is king,” says Jonathan Prinn, group head of broking at Ed Broking, a wholesale insurance and reinsurance brokerage company based in London. “If this data isn’t shared amongst us, we will fail to provide value to our clients. And if we fail, someone else will provide this value.”

Need for a New Model

One of the clear concerns facing the industry is client acquisition costs, which are much higher than the acquisition of new customers in other industries. Prinn blames high acquisition costs for Lloyd’s of London’s dismal 114% combined ratio in 2017, meaning the venerable insurance marketplace paid out more money in claims than it received in premiums.

“The cost of underwriting and broking commissions at Lloyd’s was about 42%, which is unacceptable and untenable in the world going forward,” he says. “No intermediary model I know of is anywhere close to 42%.”

In the United Kingdom, Prinn says, “real estate agents charge around 2%, credit card companies like Mastercard charge around 1.3% and moving $2 from a bank account to buy coffee using Apple Pay is free.”

The 42% figure he cites is composed of 30%-plus broker commission levels and the carriers’ administration costs, which last year ranged between 10% and 12%.

One could argue these expenses are less in the United States—according to A.M. Best, incurred broker commissions/expenses plus underwriting expenses are between 30% and 31%—but that’s beside the point. “Too much of the money that comes into the system is now consumed by acquisition and operating costs,” says Jamie Garratt, who heads the digital underwriting strategy at Talbot Underwriting, a London-based underwriting services provider.

The culprit, the interviewees contend, is the traditional linear process of transacting insurance, whereby a business goes to a broker who goes to a carrier that goes to a reinsurance broker who goes to a reinsurance carrier. The alternative is the sharing of data among brokers and carriers in a free marketplace. “If brokers share client exposure data with all and not just some insurers, everyone’s cost base reduces,” Burns says.

Garratt agrees. “If we can move data quickly and with much less friction between a client and the end risk bearers,” he says, “we can remove the replication of work up and down the value chain, reducing the high cost this produces for all of us.”

An Architecture Emerges

How might this new model look and operate? Instead of the customary linear progression, clients would share operating, financial and other data with brokers; the brokers would evaluate and package these data into discrete elements of risk; these elements would be submitted to the global insurance markets for their review; and insurers and reinsurers would decide whether to assume these risks based on their underwriting appetites and portfolio diversification objectives.

Prinn provided the example of how this might work in the commercial aviation insurance market, which is currently divided between one set of carriers that provide insurance to smaller courier-type aircraft and another set that services large commercial airlines.

“The reason for the split in the market is risk—smaller aircraft take off and land a lot to drop off freight, and the biggest risks in flying occur when landing and taking off,” he explains. “Consequently, the risks for the smaller air carriers are significantly higher.”

Assuming all aircraft owners provide their altitude, speed, turbulence and other data to a broker, cost theoretically would come down. “Airplanes produce an extraordinary amount of data coming off sensors that could be dropped into a blockchain or other type of distributed ledger technology,” Prinn says. “If the data from every airline was available in this platform, there would be many thousands of data items related to every step of the journey, fundamentally changing how insurance is structured.”

The job of the broker would be to gather and assess these granular levels of exposure data and present them to the insurance markets for consideration. Were this to occur, Prinn describes what might happen next: “An insurance carrier might say it will insure this many planes taking off to 1,000 feet in particular regions of the world; this many planes going from 10,000 feet to 20,000 feet across the Atlantic; and this many planes going from 25,000 feet to 35,000 feet across specific land masses.”

The carrier might also decide to insure similar elements as the plane makes its descent to the ultimate landing. “If this happened,” Prinn says, “the need to separate the aviation insurance market into two sectors would be eliminated.”

What he has just described is a far cry from the current model of providing commercial aviation insurance, in which a broker representing a specific airline submits that company’s breadth of risks to an insurer with which the broker often does business. The new model would democratize the process to offer pieces of risk to all aviation insurance carriers in a free marketplace.

Can the risks of other industries be similarly sliced and diced by brokers and offered to the insurance markets? “Absolutely,” says data scientist Henna Karna, chief data officer at global insurer XL Catlin. “We’re continually looking at data that exists in our environment and creating ways to measure it.”

These data are not limited to a company’s internal financial and operating data. “Exogenous credit data, political risk data, cyber risk data, and unstructured data can all be part of the picture,” Karna says. “The goal is to model the risk by considering every available and quantifiable factor that may affect it. We’re getting closer and closer to mining, analyzing, modeling and managing all this data for insurance purposes.”

Better Data, Better Risks

The sharing of detailed client exposure data in a digital platform provides the opportunity for insurers to diversify their risk portfolios by reducing exposure accumulations in specific areas. Karna provides the example of a global manufacturing plant that operates 9 a.m. to 5 p.m. Monday to Friday.

“Say the data coming from the sensors attached to factory equipment indicate the company makes most of its products on Tuesdays and Wednesdays, with the bulk of these items coming off the production line between 9 a.m. and 11 a.m.,” she says. “A blackout or machine glitch during this period on a Tuesday or Wednesday would cause a much bigger business interruption risk than other times of the day the rest of the week.”

Today, the company’s insurance policy from a single carrier does not distinguish these risk factors. By breaking up the risk into difference pieces, and bringing in other quantifiable data like seasonal weather and machine maintenance, other carriers have the opportunity to choose which exposure elements they may want to bear. In turn, this helps the insurers balance their risk portfolios with exposures that are uncorrelated, Karna says.

Burns agrees. “By modeling and sharing risks, carriers can avoid aggregating too much of a single risk,” he says. “Insurers have a finite amount of exposure they can take. Their balance sheets are only so big.”

The new model would present a way for brokers to spread risks among different insurers to their clients’ benefit. “If we have a system where brokers share client risks with all the insurance markets in a centralized shared services model,” Burns says, “this would be a far more efficient way for insurers to spread their risks and for clients to receive more competitive premiums.”

Current expenses up and down the insurance value chain would wither, Garratt says. “If clients share their data with brokers, and brokers share this data with insurance markets, it will result in reduced costs for all parties,” he explains. “All those inputs, calculations and equations that each broker and carrier must do on their own would be removed from the process. There would be no more need for rekeying all this data as it’s passed along the value chain. Instead, the exposure data would move seamlessly and transparently from the client to all potential risk bearers, dramatically reducing acquisition and operating costs.”

This would certainly be a positive development for business clients. “If a broker presents a good commercial risk to all the insurance markets—which is apparent in the client’s exposure data—carriers can compete to charge less in assuming this risk, based on their respective underwriting appetites,” Garratt says.

Although the new model would produce less traditional income for brokers, the loss of revenue would be offset by heightened efficiencies. “Brokers have significant operating expenses that are a reflection of the current inefficiencies in the market,” Garratt explains. “If you remove these inefficiencies, brokers can reduce their costs to maintain current profit margins.”

Moreover, the broker’s enhanced knowledge of clients’ exposures presents the opportunity to become more involved in mitigating clients’ risks. “If a broker comes to us with a client whose exposure data indicates is risky, we would charge more to assume the risk or not take it at all,” Garratt says. “But crucially for the client, the broker and the underwriter now have the ability to help the client manage these exposures, working to reduce the activities and behaviors that resulted in the company being perceived as a higher risk.”

This creates value for the client and possibly a new revenue stream for the broker, while furthering the closeness of the relationship brokers enjoy with clients. “Less money is consumed by process and transaction, and more is used to pay claims, provide value-added services and develop new products,” he adds. “The outcome in all cases is better, quicker and cheaper service for our clients, which is what we all must focus on.”

Customized, Complex Products

By participating in the proposed data-sharing model, brokerages and insurers will be in a more opportune position to create bespoke insurance products. “All that exposure data in the hands of a carrier or a broker can be an engine of innovation,” Karna says.

She provided the example of a large retail chain caught in the crosshairs of a reputational disaster. By mining social media data, the company’s broker may learn that flash mobs are forming to protest the business in a variety of store locations.

“For the sake of argument, let’s assume the organization has comprehensive property insurance absorbing losses caused by vandalism that occur in its stores’ parking lots, which generally have 300 to 400 cars parked per lot,” Karna says. “Now let’s assume the financial limits on this insurance policy are $1 million. Would this amount cover the potential vandalism of cars in the aggregate?”

Possibly not. Even if it did, how much of the total limit would be left over to absorb additional property losses throughout the remainder of the policy duration? “The opportunity now exists for the broker to craft a bespoke insurance policy absorbing the one-time property damage losses caused by vandalism and present it to carriers for their consideration,” Karna says.

Prinn cites similar value. “Brokers and carriers have the ability to take a very complex commercial insurance program like one sees in the oil and gas sector and ferret out comparisons across different oil and gas companies,” he says. “You now can take a common look at these risks, which wasn’t possible before, allowing complex (insurance) products to be packaged.”

There is even the opportunity for brokers and carriers to share customer data with other industries, assuming the owners of the data opt in for this use to avoid privacy regulations.

“Wouldn’t it be great if I bought travel insurance and the carrier shared this data with a rental car agency to set up a vehicle for me when I landed?” Prinn says. “Or the pension side of my insurance company knows I have children and recommends setting up a college plan at a local bank? The future broker or carrier might well be able to help with these things, which is very exciting. And we’re still really at the beginning of all this.”

Nevertheless, he is confident the current model of insurance will be relegated to the trash bin of history. “I was a street broker at Marsh placing Fortune 500 risks for 20 years with carriers that I knew from pure personal experience alone could take on these risks,” he says. “I can tell you unequivocally that this art form is dying. The broker of the future will know how to use data and analytics to find the right insurance markets for their clients, as opposed to relying on experience alone. The model of tomorrow will be a blend of art and science.”

Whenever he talks on the subject, Prinn frequently mentions his 10-year-old daughter’s interest in playing the online game Minecraft. She listens to the YouTube videos of a young man in his 20s named Daniel Middleton, a professional gamer who plays Minecraft and comments about the game’s intricacies to his online listeners.

“I mention Dan because last year he made something like $16 million,” Prinn says. “If you told me five years ago that some guy who sat in his home commenting to kids on a video game would make this kind of money, I would have fallen over laughing. In no way could this have been predicted.”

He feels the same way about the new model of insurance. “Ten years ago, if you told me the traditional model would change so the customary parties to the transaction could share data, I would have dismissed it out of hand,” he says. “And now it is upon us.”

The Tools Are Here

Change is tough for any industry, but the alternative is stark. Just look at the many industries that failed to heed the disruption caused by a technology interloper. “If a broker believes its future value remains as a middleman, where it is being paid merely to access an insurance market, it is dead before it knows it,” Prinn says. “The entire industry is under siege by technology companies that will create better models unless we do it first.”

Down the line, as the internet of things becomes ever more mainstream, millions of sensors will produce an abundance of data, sharpening the ability of brokers to analyze complex risk exposures to a fine point—if they take pains to make this happen.

Yes, there are obstacles to be overcome, including the need to structure data into common formats. But these are relatively easy hurdles to surmount, and organizations like ACORD are already tackling the problem. “Once we have structured data, the entire ecosystem can move in sync to share information and bring down costs,” Burns says. “There’s no going back to the ways things have been.”

Others agree. “We now have the tools to do things we’d only dreamed about before,” Karna says. “Much of our work here now with data is focused on seizing these opportunities.”

The future is as bright as the industry allows. “There’s a tremendous amount of excitement now why the traditional insurance market must change and how this can occur,” Garratt says. “And that can be a catalyst for needed change to occur at a really fast speed—to the benefit of the insurance market and our clients.”

Banham is a Pulitzer Prize-nominated business journalist and author who writes frequently about the intersection of technology and insurance.

Payments Push: As a new era of real-time payments dawns, companies must weigh the benefits against arguments for early caution.

By Russ Banham


Today’s gotta-have-it-now mindset often seems more ingrained in the United States than anywhere else. It’s odd, then, that the country has lagged behind many others in building the infrastructure to make near-instantaneous electronic payments.

Finally, though, change is underway, in the form of a new inter-bank payments system dubbed RTP, for “real-time payments.” Lightning-fast settlements — versus next-day automated clearinghouse (ACH) transactions, wire transfers (which can take days to clear), or, worst of all, checks — could provide a host of benefits for businesses.

The advantages range from freeing up working capital sooner for strategic investment to accelerating supply-chain operations.

It’s not all about speed, though. In fact, other aspects of RTP, including the provision of standardized data relating to payments and transaction confirmations that payments are final and certain, may hold greater appeal.

At the same time, don’t expect to see hordes of companies rushing to update their internal systems to accommodate the new payments technology. Reasons for caution abound, at least in these early days.

Unceasing Movement

The new payments era launched on Nov. 13, 2017, when BNY Mellon initiated the first-ever real-time payment in the United States. Faster than you can say “show me the money,” $3.50 was successfully transferred from an account at BNY Mellon to one at U.S. Bank.

Those two banks and four others — Citibank, JPMorgan Chase, PNC Financial Services Group, and SunTrust — now have the capability to execute inter-bank payments within three seconds. Nineteen additional large commercial banks are working toward joining the party by 2020.

RTP is the first new core payments structure in the United States in more than 40 years. In developing it, the 25 banks are partnering with The Clearing House (TCH), a banking association and payments company. TCH wrote the code for RTP and is the system operator.

RTP exemplifies the unceasing movement toward real-time execution in business. Many activities are in that mode now, from the gathering of customer transactional data for gauging buying preferences, to the second-by-second analyzing of social media imprints, to the continuous accounting (in some companies) that automatically reconciles millions of transactions each day.

Speeding up electronic payments is particularly ripe for this environment, given the “just-in-time” supply chain pressures that companies sometimes face. If a company buys a product from a supplier with which it doesn’t have a credit relationship, but the buyer needs the product to ship right away, RTP can ease the concerns of a seller worried about the timeframe in which it will get paid.

Payment speed is especially attractive to midsize and small companies, which generally aren’t very adept at cash-flow forecasting.

“The instant availability of funds and the fact that payments are final and irrevocable are great things,” says Andrew Kirk, CFO of Trion Solutions, a provider of HR outsourcing services. “You’re getting immediate liquidity, as opposed to waiting for funds with crossed fingers. It gives you the opportunity to invest the dollars sooner to grow the business.”

The near-simultaneous transfers can occur 24 hours a day, every day of the year, as opposed to banks’ current Monday-through-Friday systems.

Need for Speed?

A business technically can receive RTP payments without doing anything, as the money will be in its bank account. But as a practical matter, it must update its accounts receivable system to automatically apply the payments.

Speed usually ranks third among the factors that may drive a company to adopt RTP, says Steve Ledford, senior vice president of product and strategy for TCH. He polls groups of corporate officials on that question when he makes presentations on the new technology.

Better handling of data and certainty of payment typically come out on top, Leford says. Indeed, he notes, TCH named the new system RTP rather than Real-Time Payments because “we’re trying to inch away from the focus on speed.”

With RTP, a standard set of data is guaranteed to arrive simultaneously with the payment. That eliminates confusion and creates efficiency.

“Some wires lack the necessary details explaining what the payment is for, creating accounting delays for the recipient company as it researches days of transactions,” says Patrick Villanova, controller and principal accounting officer at software provider BlackLine.

Notes Jennifer Lucas, executive director of financial services advisory for the payments practice at Ernst & Young, “The beauty of RTP is that the amount paid, what it was for, who paid it, and confirmation of payment are all transmitted without any manual processing.”

The information associated with a payment can be as simple as an account number, but it can also be specialized and complex. For example, automotive manufacturers buy a variety of parts from multiple suppliers, and they often claim allowances for parts damaged in transit or for other reasons.

RTP’s standard message format, ISO 20022, is based on the way data is handled in web and mobile applications. Every piece of information is tagged to facilitate automating much of the back-office payment-processing work. That “saves labor costs, reduces errors, and accelerates the entire purchase-to-pay cycle,” says Ledford.

A set of real-time messaging functions related to payments is also part of the value proposition for finance. In addition to “Payment Confirmation,” these include “Request for Additional Information,” “Request for Payment,” and “Remittance Detail.”

“The notifications create frictionless customer-facing interactions, replacing today’s frustrating and costly back-and-forth interactions between payers and recipients,” says Villanova.

For example, a payment confirmation can free the accounts payable department from the familiar exercise of paying a bill and then contacting the recipient to make sure it received the payment.

“Such operational hassles eat up money and time and adversely affect customer and trading-partner engagement,” says Ledford. “The bane of cash management is inherent uncertainty. Neither side knows exactly when the cash will be there.”

Taking It Easy

Here’s what the new payments model is not: a wholesale replacement for ACH transactions, wire transfers, checks, credit cards, and good old cash.

Rather, RTP is an option.

“CFOs now have more tools at their disposal insofar as how they want money to settle,” explains Carl Slabicki, director of immediate payments at BNY Mellon. “If they want a payment to clear within seconds or on a weekend or at night, they now have the opportunity.”

But while it’s likely that RTP will be used increasingly, there are good reasons why business adoption will occur at a gradual pace.

First, there’s currently a $25,000 limit for RTP payments. That might make the technology a big yawn for CFOs of large companies, notes Art Brieske, head of faster payments at JPMorgan.

The ceiling eventually will be lifted, however. “That makes now a good time to do what’s needed internally to get ready for opportunities, like improved cash forecasting, that RTP provides,” Brieske says.

Second, while RTP has features that make it well suited for a variety of applications, businesses may prefer other, existing payment methods for certain kinds of transactions, similar to how consumers particularly like using credit cards for travel and dining.

Third, RTP is new. A company may want to try it on a small scale before committing to it as a primary payment method.

But the biggest limiting factor of all is resource constraints. “If an existing process is working well with established payment options, it may not make sense to divert budget and IT staff to convert the accounts receivable function to accommodate RTP,” says Ledford. “ACH is cheap and effective, especially for recurring, low-risk payments.”

Frank D’Amadeo, director of treasury operations at electric utility Consolidated Edison Company of New York, acknowledges that RTP could improve the utility’s cash flow. “But,” he says, “and this is a big ‘but,’ it would require us to customize our ERP system.”

An alternative solution would be for the major ERP vendors like SAP and Oracle to modify their systems. But D’Amadeo isn’t high on that either.

“Unless they could provide a cookie-cutter, out-of-the-box customization, we’d have to pay them to modify our internal systems, which would be costly and chaotic,” D’Amadeo says. “We need standardization in the ERP industry without the vendors looking to nickel and dime us for customization. Until that happens, we’re going to do nothing [to move to RTP].”

Aware of the issue, TCH is addressing ERP integration in several ways.

For one, it’s reaching out to ERP vendors through its member banks to reinforce the importance of RTP to the payments industry, notes Jim Colassano, the organization’s vice president of product development and strategy.

TCH is also educating some vendors about the opportunities RTP offers them and their corporate clients.

Further, it’s teaming with several partnering banks to test the concept of an industry utility for B2B payments. The utility would support integration of RTP across vendors’ platforms, obviating the need for customization.

SAP and Oracle are huge, influential organizations, but the sheer clout of TCH’s member banks may well force the vendors’ hands. “It will come. It’s just a matter of time,” says EY’s Lucas.

Risk Avoidance

Another stumbling block to widespread adoption of RTP is the need to link it to a directory of databases for purposes of verifying user identities. Without that capability, banks may run afoul of strict Know Your Customer (KYC) regulations.

“Without a business directory maintained by an independent third party that verifies the authenticity of customers, RTP is just a dream,” says D’Amadeo.

TCH is tackling the issue on two fronts. At the retail end of the banking spectrum, it’s working to integrate its platforms with an existing directory operated by Zelle, a digital payments network owned by seven large banks.

On the wholesale banking side, TCH is looking to develop a secure model that would allow banks to reliably access one another’s business credentials.

Yet another perceived hurdle to RTP relates to cybersecurity. For RTP, security must be embedded in a company’s operational processes at the item-based level rather than at merely the batch-based level.

A related issue is fraud. “One benefit of today’s somewhat antiquated system is that we have traditional checks and balances to detect fraud in funds withdrawals and transfers,” says Villanova. “Banks have at least a full day to make that assessment.”

If those hurdles are overcome, RTP may have a lasting effect, moving organizations closer to real-time accounting.

“If everyone migrates to RTP and uses a cloud-based finance and accounting solution that provides real-time transaction matching — identifying cash in and out and then linking it to the corresponding invoices and payables — a business could theoretically do a virtual close of the books at the end of each day,” says Villanova. “A company would know every single day exactly where it stood from a financial standpoint.”

Armed with this data, organizations could make better, more strategic expense-control and resource-allocation decisions and adjustments. In fact, if enough U.S. businesses combine RTP and continuous accounting, they could arguably have a positive influence on the entire economy.

“A country’s economy is heavily dependent on the velocity of money—the speed at which the same dollar bill turns over,” Villanova points out.

Similarly, notes Ledford, “Every company deals with the problem of stranded cash that can’t be used. Making working capital more accessible instead of idle will have a big impact.”

And it’s not just the U.S. economy that may benefit. Many nations are looking to support platforms that enable real-time payments across all accounts globally.

That vision may come to pass—eventually. In the meantime, cautious though CFOs may be, RTP offers plenty of potential for achieving a less-glamorous but just-as-important goal: saving finance departments time, money, and endless headaches.

Russ Banham is a Los Angeles-based freelance business journalist and author

sidebar: Better Now Than Never

U.S. banks were in no rush to develop and adopt the RTP system.

U.S. companies have long awaited real-time payments. Early RTP-like systems were in place in Japan in the 1970s and Switzerland in the 1980s.

The United Kingdom has been out in front technologically since 2008 when it introduced its Faster Payments Scheme Limited, or FPSL. Today, 400-plus U.K. financial institutions offer the service to more than 52 million accountholders.

Within the past few years, India, Sweden, Singapore, and Thailand are among at least a couple of dozen countries that have adopted real-time payments, according to Steve Ledford of The Clearing House, operator of the new U.S. RTP system.

The U.S. system, launched last November, is part of a new wave that includes the European Union’s SEPA Instant, introduced a week later, and NPP, initiated in Australia and New Zealand early this year.

It wasn’t until 2015 that the U.S. Federal Reserve Bank created its Faster Payments Task Force, to identify and evaluate different approaches to speeding up payments.

Why so late to the party? The need in other countries was more urgent. They lacked ACH-type capabilities and were coping with three-day settlements. In the United States, in addition, the vast number of financial institutions—more than 100,000 entities in all—was an impediment.

“We wanted to learn what we could from other countries’ experiences with real-time payments to create a model that suited all U.S. financial institutions,” says Ledford.” | R.B.

hinking like a turnaround CFO: When a company is in crisis, turnaround specialists can save the day.

By Russ Banham

FM magazine

Money is everything in business, particularly when it is running out. A liquidity crisis caused by a crimp in cash flow is the beginning of the end for most companies. To turn around the dire situation before it’s too late, board directors, CEOs, and investors typically turn to the CFO.

But the CFO may be part of the problem. And even the most competent CFO may not have the requisite skillsets to assist with a turnaround.

Here, a different type of CFO is needed. Such individuals must have the fortitude and grace to make tough decisions regarding layoffs, lenders, and suppliers that the incumbent CFO may be disinclined to make, given the emotional considerations. Sharp negotiating and workforce management skills also are needed to keep cash flowing. In addition to extending accounts payable cycles, shortening accounts receivable cycles, finding new sources of external and internal capital, and reducing the timing of debt obligations, it may be necessary to decrease the size of the workforce.

It’s a tall order for anyone, particularly an incumbent CFO. “The person whose job it is to keep the train on the tracks does not often have the same skills to get the train back on the tracks,” explained Michael Epstein, global managing principal for restructuring services at consultancy Deloitte.


Many distressed companies reach out to CFO turnaround specialists. Amongst those specialists is James O’Connor Jr., founder and president of turnaround consultancy The O’Connor Group in Bedford, Massachusetts.

“By the time I arrive on the scene, most clients are concerned about hitting the payroll — the precipitator to a bankruptcy,” O’Connor said. “They’re about a week away from serious trouble and need someone like me with crisis management capabilities to identify the problems and priorities and execute a plan to keep the business afloat.”

While the incumbent CFO is aware of the perilous circumstances, the person often struggles to react, said Christopher Pizzo, senior vice president of Deloitte’s corporate restructuring group. “They freeze, panic, and shut down,” said Pizzo, who has served as an interim CFO on multiple occasions.

Russ Blain, a Seattle-based turnaround consultant, believes CFOs at companies that get into trouble share some common characteristics: They don’t understand the cost structure, have people issues they haven’t dealt with, and aren’t properly addressing the difficult situation with management, investors, and suppliers. “They think they will weather the storm, but they’re wrong,” he said.

Even the best CFOs may not be cut out for the thorny tasks ahead. “Basically, there are three types of CFOs — the deal-making CFO who is good at balance sheet restructuring and putting together M&A transactions, the accounting CFO who is good at closing the books and reporting, and the operating CFO, someone who really understands the purpose and mechanics of the business,” said Doug Yakola, a senior partner and leader of McKinsey & Company’s North American RTS practice, which works with companies on transformations and restructurings. “To regain financial health, a distressed company needs a CFO with all three skillsets.”

Rather than deal with what lies ahead, some CFOs make a peaceful exit and find a more secure situation. “Typically, the CFO is gone by the time I arrive on the scene or is soon to be shown the door,” O’Connor said. “By then, the company has stretched and borrowed and is in late decline. Alternatives are in mind.”

“We’re like an emergency room surgeon looking at a person who has come in after a bad car crash,” he added. “To save them requires a rapid assessment of the condition followed by decisive actions.”


Entrusted with turning around a troubled company’s financial condition, those who have served as interim CFOs said that the first priority is to develop internal sources of cash by more efficiently managing the working capital. “This is not about long-term strategy; this is about correcting the company’s near-term situation by regaining control over the cash flow pipeline, laying the groundwork for the long term,” O’Connor said.

Yakola, who has been an interim CFO, agreed. “The most immediate task is to look at the organisation’s cash levels and whether or not its cash forecasting estimates are accurate,” he said. (See the sidebar at the bottom of the page, “4 Steps for Rescuing a Capsizing Company,” for Yakola’s tips on immediate actions to take once it is apparent the organisation is amidst a cash flow crisis.)

If this is not the case, cash conservation and generation are in order. “You have to open the lines of communication,” Pizzo said. “You have to create a vendor relations strategy, letting the vendors know what is happening, why they’re not getting paid, and when they can expect payment. Obviously, you need to be diplomatic so they continue shipping to you, but you also have to be empathetic as they have a business to run, too.”

Nevertheless, tough actions are called for. “I’ll do things like look through the list of vendors to determine which ones can really hurt the organisation on an ongoing basis, and then shut off payments to the rest,” Blain said. “Obviously, this results in a lot of nasty calls. I then make sure to overcommunicate with these companies, pledging that we’ll do our best to make a payment by a particular date. Fortunately, some suppliers don’t even realise we’ve cut them off until six months later, which buys us time.”

Yakola said that interim CFOs often must perform triage. “Almost always there are multiple things that need to be put back on the rails to help the business survive the short term,” he explained. “These include whether or not the company is accurately closing the books, and its budget matches the going-forward business plan.”

Pizzo pointed out that when companies are confronting distressed conditions, evidence sometimes indicates that the former CFO had provided late, inaccurate, and/or misleading financial reporting to lenders and investors. “Consequently, the interim CFO has to re-establish lines of communication to regain their trust,” he said. “We explain that things will get worse before they get better, but we point out that we have a plan to restore cash flow.

“Now is the time for more communication, not less,” Pizzo said. “They want facts, and it’s our job to provide them.”

Often the first question from the debt funds is, “Why not simply liquidate the business?” said Blain. “In some cases, they may be right. But if I believe the business still has legs, I tell them I have a plan, re-emphasising the company’s intrinsic value and what it will take to get it back on its feet. If I tell them we have to reduce headcount 45%, I also point out how we will go about it — determining which job functions are critical to the organisation’s long-term growth and which aren’t. I’m a mercenary there to do a job, with confidence in the outcome.”


Generally, it takes several months to restore a company’s financial condition, although O’Connor once spent five years as the interim CFO of a midsize manufacturing business on the brink of bankruptcy.

“The company had completely tapped out its credit lines, vendors had stopped shipping it goods, and its main bank had just pulled funding,” he recalled. “The lenders were putting pressure on the CEO to quickly recover the debt, fearing the organisation’s assets were losing value daily.”

He negotiated first with the vendors, which agreed to resume shipping. He subsequently persuaded the bank to forgo interest and restore funding for a three-month trial period. In both cases, he underlined the fact that the company was the second-largest employer in the town and its demise would generate devastating economic outcomes, like lost employment and tax revenue.

He then turned his attention to the underlying problems that had resulted in the company’s dire straits. “It was an old guard manufacturer that had designed and built its own machines for years, with this vision of being vertically integrated,” O’Connor said. “It had all this inventory and hardware that was choking it to death, and didn’t comprehend that its real value was in satisfying customers.”

As the interim CFO, he sold off several equipment lines to generate immediate cash and outsourced this production to suppliers on a less-capital-intensive basis. That was three years ago. Today, the company remains in business and has a more traditional CFO.

Asked for the toughest turnaround situation he has confronted, Blain was quick to answer. “I was once brought in as an interim CFO at a company owned by four separate venture capital firms,” said Blain, who added that the firms were having trouble getting along with one another in such a difficult situation. “On top of that, there was a common shareholder who kept making noise, and an employee management team fighting to preserve their [stock] options. Worst of all, both the VC firms and the debt fund could veto any deal.”

Balancing these competing interests while plotting a comeback strategy required Solomon-like perspicacity. “If you’re financing a company that is growing, it’s relatively easy to reach consensus since the valuations are going up and everyone wants in,” said Blain. “Forcing someone to write off part of their investment is never an easy call, nor is trying to raise money from existing investors.”

Nevertheless, he pulled off a delicate balancing act. “It took six months of showmanship and listening to each person’s needs to devise a plan that was suitable to all the parties, even though no one got everything they wanted,” he said. “Ultimately, we reduced the labour force.”

Blain promised employees that the workforce reduction would be deep enough to constitute a once-and-done exercise, which provided a measure of relief. “You need to shoot straight, whether you’re dealing with investors, management, or the debt funds,” he said.

The company made a small profit in 2017. “Either you get everyone to commit to the restructuring plan and you ride herd on it for many months,” Blain said, “or you liquidate or sell the company and are out of there in no time.”


Interim CFOs need to plan for the future as much as they focus on the urgent needs of the present, Yakola said. “I see myself as truly interim, and people inside and outside the company know I’m not permanent,” he explained. “I’m putting in stopgap measures to move the organisation forward. In fact, one of my most important conversations with the CEO and the board is the plan to hire a new and more permanent CFO.”

4 steps for rescuing a capsizing company

No company is immune to trouble. Typically, the first sign of distress is liquidity — not enough money in the till to pay the bills.

If this appears to be the case at your company or business, here are some ideas on what to do next from Doug Yakola, a senior partner and leader of McKinsey & Company’s North American RTS practice, which works with companies on transformations and restructurings:

  • Be honest. It’s tough for C-level executives to face the truth of a sinking company, given that their pride and reputation are at stake. But that’s exactly what they must do — pull back, take a frank look at the success of the business plan, and criticise its shortcomings.
  • Cash is king. The basics of business are pretty clear — you look at anticipated expenses and revenue and make sure the former aren’t bigger than the latter. If this looks not to be the case next quarter (or next week), now is the time to get back to the basics. Forget for the moment the alphabet soup of performance metrics such as NPV, EBIT, ROI, and EVA, and focus instead on cash — how to get it and how to conserve it.
  • Craft a narrative. When ships start to sink, people jump off and swim for the nearest shore. The same situation confronts a business sending up a distress signal. To retain their top talent, companies need to create an urgent and compelling “change story” that explains the organisation’s current troubles and all the smart things being done to correct course. Craft this in plain language, in just a few words, so everyone gets the gist.
  • Focus on quick wins. Certainly, a company in a turnaround situation needs an overarching strategy to win the day, but that takes time and a full team effort. Quick wins can be cost-focused, cutting off demand for some external service that’s not really needed, or policy-focused, such as introducing more stringent travel expense policies.

Russ Banham is a freelance journalist and author based in the US. 

If You Think Your Small Business Is Too Small For A Network, Think Again

By Russ Banham

Setting up a network is a good way for a small business to get more use out of its computers and peripherals, helping users share files and other software resources more easily. The challenge is putting these plans in motion.

Many small businesses are reluctant to implement new technologies, despite the efficiencies and profitability they provide. The foot-dragging is evident in the 45 percent of small businesses that still don’t have a website (of those that do, only 36 percent use the website to reach out to customers and potential customers).

This apprehension is misplaced. Not only is the process of setting up a network relatively straightforward, but also the cost is minimal when compared with the returns: greater efficiency and productivity.

“There is no more efficient way for people to interact with each other or to share resources,” said Michael Fauscette, chief research officer at G2 Crowd, an online review platform focused on business technology solutions.

Networks, Explained

A computer network basically comprises hardware and protocols that enable connectivity and communications. Hardware includes equipment like routers, switches, bridges and hubs using cables or Wi-Fi technologies. The protocols determine how two or more devices in the network communicate. If the network is a highway, the protocols are the traffic signs.

Among the many benefits of a network are the ability for employees to work anywhere and still be able to access critical data at all times of the day.

“A network makes it simple for people to share data, find documents they need and communicate with each other via electronic mail on an intranet,” said Destiny Bertucci, who has the title of head geek at SolarWinds, a provider of IT management software to small businesses. “Best of all, since files are stored on the network server, it doesn’t matter which computer is used to do work.”

For small businesses, use of a network slashes software costs because the company does not have to buy separate licenses for each computer. And instead of purchasing a single printer, fax and scanner for each employee, companies can have employees share these devices.

“Does a small business really need six separate printers for six people when all six can share a single printer on the network?” Fauscette asked.

Without a network, Millennials, who represent the bulk of the American workforce, will resort to using their smartphones for business purposes, Fauscette said.

“If you don’t offer them a way to work that they are used to working, they’ll take matters into their own hands, sending important documents to colleagues and third parties on their phones,” he explained. “This information is now at risk of interception, as the company has no control over its security.”

Setting up a network isn’t a once-and-done exercise, according to Bertucci.

“Several vendors produce different hardware devices and software applications, and without coordinating these parties, there can be chaos,” she said.

Fauscette agreed, noting the array of different moving parts like business-grade routers, hubs and switches.

“Although these are not hugely complex technologies, if you don’t have someone on staff with expertise in their implementation, you need to bring in an outside expert,” he said. “Seemingly simple things like making sure the Wi-Fi is secured to protect your data, or whether you need four or six switches throughout the building, are better left to the experts.”

Steps Toward Success

Companies like Cox Business can help small-business owners take the steps needed to implement a cost-effective network.

The first step is network standardization, which will allow the computers to communicate with each other on the network.

“Adopting network standardization is a key aspect of setting up a network, as identifying a device’s location and importance to the system is a key part of managing and preventing network issues and outages,” Bertucci said.

Other considerations include embedding security and monitoring. Without a solid security posture, an organization is low-hanging fruit for cyberattacks and data breaches. Monitoring tools, on the other hand, provide visibility into the network for security and performance purposes.

“By monitoring the devices, companies can identify and address anomalies within the network infrastructure before they become bigger headaches,” Bertucci said. “You want to learn from these experiences to bounce back quickly.”

Lastly, she advised small companies to invest in a network that can grow, in case the company wants to add features like video surveillance, Voice over Internet Protocol (VoIP), or any new piece of technology that has yet to emerge.

Russ Banham is a Los Angeles-based freelance writer.

Robo-Accountants Are An Accountant’s Best Friend

By Russ Banham


he manual nature of accountants’ work is evident in the unflattering phrases used to describe their job—“numbers crunchers” and “bean counters.”

“Many of us accountants spend so much of our time today doing routine manual work—punching in the same journal entry, the same reconciliation, every month,” said Tammy Coley CPA, chief strategy officer at Los Angeles-based BlackLine, a publicly traded provider of financial and accounting automation software. “The instructions are laid out for us—go find this number, put it there, and do the calculations—careers have been spent doing this.”

Yet now, much of this crunching and counting is performed by robotics processing automation (RPA), software with artificial intelligence (AI) and machine learning capabilities to handle high-volume, repeatable tasks previously performed by humans. In the case of accountants, RPA has liberated them to do more of what they were trained to do: analyze the financial and operational results of the business to drive better strategic and tactical decisions.

A Game-Changing Partnership

According to an analysis by Accenture, nearly 40 percent of transactional accounting work will be automated by 2020, allowing accountants to spend more than three-quarters of their time analyzing performance.

“We’re now able to spend our time doing important things—like evaluating the best way to account for a new big contract the company has just signed,” Coley said. “CPAs are trained for just these sorts of activities and events that require our professional analysis and judgment.”

The arrival of RPA is just in time, given the profession’s mounting workload. “The volume of data that accountants have to work with today is enormous and growing,” said David Perlmutter, executive director at global consulting firm EY. “Accountants are being asked to do more and more. If they’re still using paper-based processes and spreadsheets to do this work, the burden is tremendous.”

Automation has been game-changing not just for accountants, but also for their employers, Perlmutter said. “In the mad rush at the end of the accounting period, the finance organization often must retain additional accountants on a temporary basis to close the books on time,” he explained. “Balances must be validated, records need to be consolidated, journal entries have to be adjusted, and financial statements must be prepared. Relying on the current staff alone may not get the job done.”

With robo-accountants, employers can shoulder some of this workload, reducing corporate spend on additional live accountants.

“Robots can be programmed to perform the repetitive period-end accounting tasks typically performed by accountants, such as account reconciliations, journal entries, and transaction matching,” Coley. “The bots can do this work faster, better and more accurately than a human being can because they’re programmed to do routine things the same way every time.”

Robo-accountants also work on a 24/7/365 basis, never need coffee breaks, don’t use the facilities, and are never sick. “To be fair, they do need to take time off for routine maintenance now and then,” Coley said.

Extracting Maximum Value

It’s a small wonder why businesses are inviting a veritable army of robots into the workspace. According to a 2018 survey by Deloitte, more than 1,700 finance and accounting professionals marked increasing efficiency and internal controls in the coming year—through the use of robots for transaction processing—as their top priority.

“Well-honed RPA programs can help organizations improve the quality of their governance, risk mediation, predictive insights, working capital management, and financial reporting,” explained Dave Stahler, Deloitte risk and financial advisory partner.

Yet, robo-accountants are just part of the efficiency play now underway in finance and accounting organizations. Companies already use financial and accounting software for account reconciliations, transaction matching, inter-company transactions, and resolving variances. (It’s the backbone of finance and accounting.) RPA, then, is a tool used to perform repetitive processes against these other tools.

Humans still need to use financial and accounting automation software to look into the details of transactions and other financial data. This software resides on top of the corporate Enterprise Resource Planning system to perform accounting tasks.

“To extract full value from automation, companies need to be able to validate the accuracy of information,” said Perlmutter. “To do that, you need financial and accounting automation software.”

Down the line, technologies like machine learning and artificial intelligence will enhance the software’s efficiency. “We’re at the beginning of partnering machine learning with RPA,” said Coley. “Once AI becomes more mainstream, there’s a whole new world of possibilities out there, where the software begins to think and make judgments based on the data.”

Making Room for Humans

These days, it’s impossible to think about automation without also considering what this means for the workforce. According to McKinsey & Co., over the next 13 years, as many as 70 million workers in the U.S. will be displaced by robots to find others ways to make a living. This isn’t, however, the end of the story.

In-depth analysis by London’s Center for Economic Research shows that, in the long run, automation helps businesses run more efficiently and cost-effectively. The study of robot use across 14 industries in 17 settings indicated an annual growth in labor productivity and GDP by 0.26 percent and 0.37 percent respectively.

For many companies, that growth will likely translate into the potential to hire more people, who are better supported, down the line. “I don’t see robots replacing accountants,” said Coley. “Rather, I see them evolving our role and augmenting our effectiveness to provide the most value we can to the finance and accounting organization.”

There’s no going back to counting beans by hand, anyway. “Today’s younger generations expect things to work with fewer clicks, where they can quickly access and consume information and then move onto the next thing,” said Perlmutter.

Like most technology solutions, RPA will eventually vanish into the process itself, becoming a routine part of performing a work task. As Permutter sees it, “Automation will be so deeply embedded into finance and accounting that no one will refer to `robo-accountants’ doing the mundane work in the background.”

It will just be human nature.

Russ Banham is a Pulitzer-nominated financial journalist and author.

Trust It’s Verified: Blockchain Takes the Insurance Industry By Storm

By Russ Banham

Leader’s Edge

Anyone who has ever been in an automobile accident is familiar with the back-and-forth interactions with the insurance agent and carrier. It’s a worrisome, frustrating and time-consuming process. olicyholders aren’t the only people aware of these miseries—so are brokers, carriers, reinsurers and other parties to an insurance contract.

In a world where transactions occur instantaneously, the business of insurance—sales, underwriting, distribution, claims and so on—remains unduly sluggish. That’s about to change for industry players and their customers, thanks to the convergence of three technologies: blockchain, artificial intelligence and predictive data analytics.

Four consortia have been created to leverage blockchain technology for the purpose of sharing policyholder data and other insurance-specific information. When people think of blockchain technology, they typically consider its use in the development of crypto-currencies such as bitcoin. While true, this is only a small piece of the value the underlying blockchain and distributed-ledger technologies will provide for the insurance industry.

Blockchain is a live network of distributed ledgers used to record and verify transactions. A ledger is distributed to participants or members in a transaction network, each having the ability to store a copy of the ledger on a computer called a node. The members don’t need to trust each other to know that the ledger is accurate. That is because transactions are validated prior to inclusion on the blockchain, are unable to be changed after they are posted, and are highly secure because the distributed, immutable nature of the network makes it very difficult to attack.

Among the most promising blockchain consortia in the insurance industry is RiskBlock Alliance, a not-for-profit consortium of 27 insurers, brokerages, reinsurers and third-party industry participants collaborating to make the repetitive, manual process of insurance more efficient. Its goal is to develop a blockchain-enabled platform in the cloud to gather, store and automatically exchange a wide variety of information from insurance brokerages, carriers and third parties to create an insurance ecosystem, allowing for more cost-effective insurance processes to the ultimate benefit of policyholders.

The alliance is the brainchild of The Institutes, the insurance industry’s venerable professional education organization. It is owned by alliance members and administered by The Institutes, with assistance from a roster of well known partners like Accenture and Deloitte.

“This is an industry-driven effort—our members decide what is being built,” says Peter Miller, president and CEO of The Institutes. “For several years running, we’ve seen AI, blockchain and other technologies come on-stream, all of them proclaimed as the industry’s savior. Separately, they provided some value, but now we are at an inflection point where their convergence puts us at a watershed moment. What we’re doing has the potential to transform the industry.”

Serious Business

The Institutes is seizing the moment, retaining a veritable “Who’s Who” of consulting and technology partners—Deloitte, Accenture, IBM, EY, Amazon Web Services and Capgemini—to create the RiskBlock technology platform called Canopy. With help from these partners, the 27 (and counting) members of the alliance are collaborating on more than two dozen use cases involving different aspects of the insurance transaction.

“If you think about the various processes that occur in insurance, they are all part of a supply chain,” says Bennett Neale, an enterprise architecture consultant at Farmers Insurance, an alliance member. “Each use case, like proof of insurance and first notice of loss, represents a link in this supply chain. Proof of insurance, for instance, leads into the first notice of loss, which leads into subrogation (another use case). The data related to these processes is not shared at present. Each carrier does their own thing, resulting in tremendous inefficiencies and costs.”

Other alliance members agree. “All too often, we in the insurance industry go off and do our own thing,” says Mike Annison, head of global operations for Marsh’s claims practice. “As a result, we’re plagued with multiple processes that don’t align with a common agenda. You’ve got all this data that sits with the broker and all this data that sits with the carriers, but none of it syncs up on behalf of the client.”

Synchronizing the disparate data is the blockchain. As a secure, decentralized way to register and store digital data online, the technology presents a way for industry participants, as well as third parties like state motor vehicle departments, weather stations, auto repair shops, utilities and the ever-expanding array of internet-connected sensors in the internet of things, to automatically process insurance payments and transactions through prearranged “smart contracts.”

Miller provided the following example. “Suppose I have a water sensor in my basement,” he says. “On the blockchain is a rule that says if the internet-enabled sensor measuring moisture reaches a certain threshold, all the water will be shut off in my house. Otherwise, a pipe may burst. The sensor instantly sends this information to Canopy. A smart contract is automatically executed to signal the utility to turn off the water, since I may not be home to do it myself. Another smart contract automatically contacts a plumber to check the situation.”

What might have resulted in a substantial property loss for the policyholder and its insurer has now been avoided. “In my example, no longer is insurance purely a risk-financing activity for brokers and insurers,” Miller says. “It’s risk mitigation at its best.”

Under the Canopy

Three other industry-driven blockchain initiatives also are simultaneously under way—B3i, R3/ACORD, and Hashed Health, the latter involving health insurance. Each are engaged in proofs of concept. Taken as a whole, these efforts indicate that the outmoded processes inherent in insurance transactions will change dramatically in the years ahead.

This is certainly the expectation of Christopher McDaniel, the former lead of Deloitte’s insurance blockchain practice whom Miller recruited as RiskBlock’s president. “I’m the one driving this crazy bus,” McDaniel says. “Originally, I got involved with The Institutes in doing the strategy engagement on the platform. The value proposition was so good I threw my hat in the ring. It’s much better to be a driver than a consultant.”

McDaniel brings a varied career to the task, including stints as a chief information officer and chief operating officer in both the insurance and insurance technology industries. He believes what The Institutes is piloting will result in an insurance ecosystem—a holistic community of interacting parties—as opposed to today’s disconnected processes and dissimilar data.

“From the beginning, The Institutes wanted to build the world’s first true enterprise blockchain framework,” McDaniel says. “The goal was to create a reusable insurance ecosystem that could support multiple applications, such as proof of insurance, first notice of loss, subrogation, and so on,” he says. “We think the Canopy framework will become the ubiquitous source of insurance information over the next few years. And we can see even more creative use cases emerging in the future that are not possible in today’s disparate data environment.”

The first use case to commence, conclude and go into production is proof of insurance. (See Sidebar: Proof of Value.) Alliance members collaborating in building out a digital application to verify evidence of policyholder insurance include Nationwide, Chubb, Marsh and Farmers Insurance. Although the app is now available for use by members, these businesses continue to meet and discuss other possibilities to enhance the process.

Nationwide was one of the first insurers to join the alliance. “Early on, it was decided that proof of insurance would be the initial use case, as it involves the relatively straightforward exchange of insurer data by two policyholders in an automobile accident,” says Seth Flory, Nationwide’s vice president of IT strategy and technology innovation.

This process is paper-based today. The objective was to create a digital application on Canopy that member insurers would provide to their respective policyholders.

“Using their respective Canopy applications on their smart phones, each party to a vehicle accident would generate a QR code that the other party would scan for insurance verification purposes,” Flory explains. “This information is simultaneously captured in the blockchain, triggering the next link in the insurance value chain—first notice of loss. We wanted to make this as digital and frictionless as we could.”

Alliance members and their automobile insurance policyholders can now use the proof of insurance application, which recently became available in Version 1.0 of Canopy. Carriers are expected to rebrand the application with the names of their respective claims systems.

Three additional digital applications will be provided to members once Version 2.0 of Canopy becomes available in the third quarter of this year. The apps address first notice of loss, parametric insurance (the use of weather-related data in establishing coverage and loss) and subrogation (the financial adjustment of the net payment of a claim between two insurers). (See Sidebar: Three for the Money)

Nearly 20 other use cases are in the works and will be part of Version 3.0. All the use cases (and future ones) are predicated upon enhancing the efficiency of processes for alliance members, thereby lowering their transaction costs for the benefit of policyholders.

Down the line, McDaniel sees Canopy as a trusted platform for insurers and brokerages to develop new insurance coverages and bespoke products. “Right now, 80% of the use-case work is focused on efficiency and 20% on new-product development,” he says. “In the next several years, as more data enters the platform from the industry, third parties and especially the IoT, this percentage ratio will reverse.”

There is also a level of data ownership that still exists in Canopy. “Only the members will be able to use the applications that eventually reside on Canopy, which is a private-permission blockchain,” Miller notes.

And if member Marsh were to want to look at specific data owned by member CNA Insurance for a particular purpose and period of time, the brokerage would request permission, which CNA could allow or disallow. “Each member would receive a notification to accept or deny another member’s request for information,” Miller explains.

Laying Down Arms

What’s interesting (if not revolutionary) about this industry-driven effort is that the alliance members compete against each other in the real world but are putting that aside in this collaboration.

During World War II, Boeing, Grumman, McDonnell and other competing aircraft manufacturers put aside their competition and joined forces to make planes for the war effort. While this initiative doesn’t carry the same historical heft, there is a sense of that sort of collaboration for the mutual benefit of alliance members and that of policyholders. For example, Farmers Insurance and USAA, two personal lines insurers in intense competition, are collaborating to develop a digital application in the first notice of loss use case.

Most alliance members are involved in more than one use case. Marsh, for example, is engaged in four: first notice of loss, proof of insurance, parametric insurance and subrogation. Many members were already working on internal blockchain initiatives when The Institutes knocked on the door.

“We’d been discussing blockchain opportunities and had the technological capabilities to build something on our own,” says Flory, from Nationwide. “We were investigating the various insurance consortia formed to leverage blockchain technology and discovered a lot of alignment in the industry around what The Institutes was looking to do.”

This alignment, he says, is needed for a blockchain platform to succeed. “The nature of the technology requires developing a network of participants that trust each other,” Flory explains. “The Institutes’ reputation made the decision very straightforward. Ultimately, we felt the alliance was the fastest path to market to deliver the value the industry was after.”

Ted Epps, leader of Deloitte Consulting’s insurance blockchain practice, agrees that the strategic value of RiskBlock is its creation of a network connecting diverse insurance industry stakeholders and third parties. “This is a fairly universal consortium of members launching a broad range of use cases that will culminate in actual production applications,” he says.

In good part, the speed of development of applications is attributable to the sophisticated expertise of The Institutes’ partners. Deloitte is the primary strategic partner and Accenture the primary technology partner, with other partners engaged in mainly security and applications development. Nevertheless, all the partnering firms are working together to develop the Canopy platform, the various use cases and the digital applications. “It’s an all-hands-on-deck approach to partnership,” Miller says.

In making the decision to partner with The Institutes, Deloitte and Accenture pointed to its sterling reputation. “If we were going to collaborate with one of the consortia developing an insurance blockchain, it had to be at the center of things,” says Deloitte’s Epps. “Since blockchain technology is all about trust—different entities sharing data in a network—it was critical for us to have major industry players involved. The Institutes’ reputation guaranteed that would happen. That said, I don’t see the other blockchain initiatives as competitors but as complements.”

Only the Beginning

RiskBlock began its work in earnest in 2017, creating the strategy and business model for the Canopy platform. An early goal was to make the platform “blockchain agnostic,” meaning it could run on all three available blockchain technologies—Ethereum, Corda and Hyperledger Fabric, as well as newer distributed-ledger technologies coming down the pike.

Another goal was to create an indeterminate number of digital applications addressing all insurance-related processes. Consequently, the use cases extend beyond personal lines and commercial lines property and casualty insurance to include life insurance, annuities and reinsurance. “Unlike other consortia, we’re not involved in proofs of concept or science experiments,” McDaniel says. “We’re developing real production applications that members can use as soon as they’re up and running.”

Yet another objective was for Canopy to be global, ultimately used by the insurance industries within Asia Pacific, Europe and Canada. A year or two from now, McDaniel predicts as many as 50 applications will be ready for alliance members’ use on the Canopy platform.

“Through our partnerships with Deloitte, Accenture, IBM and Capgemini, we’ve set up a virtual software factory to build as many as 20 apps per year both offshore and onshore,” he says. “As soon as a use case is completed, we’re able to scale very quickly.”

Not surprisingly, RiskBlock Alliance will be a growing, living ecosystem for some time. Matt Lehman, a managing director in Accenture’s insurance practice, says the firm’s involvement is expected to be long term. “Chris McDaniel is doing an unbelievable job generating interest in the industry in developing a wide-ranging set of use cases,” Lehman says. “The Institutes has a comprehensive vision and an endless amount of insurance processes to improve.”

Ultimately, the platform will be “all things insurtech” for the global insurance industry, McDaniel says, with data flowing into Canopy from countless sources outside the insurance industry, such as the IoT. “The combination of the IoT and blockchain technology, in addition to the use of predictive analytics and AI, will transform the insurance industry, creating new business models and revenue streams,” he projects. “Canopy will be all that is needed in the future for carriers and brokers to do what is best for their customers.”

If McDaniel is right, this future cannot come too soon for insurance-buying businesses and consumers and the industry as a whole. Time will tell.

Russ Banham is a Pulitzer Prize-nominated business journalist and author of 26 books. He writes frequently about insurance and technology.