In today’s episode we focus on insurance regulatory reporting with the American Association of Insurance Services (AAIS). With us we have Joan Zerkovich, Senior Vice President of Operations at AAIS. Prior to the AAIS, Joan worked in information technology, with over twenty years as a CIO specialising in building large infrastructure systems.
Joan will talk to us about openIDL (open Insurance Data Link), the blockchain-based solution aiming to improve data sharing between insurance carriers, the AAIS and US state regulators.
Blockchain in two minutes
Blockchain is a technology that provides increased trust and security in data sharing systems. It enables users to upload records, data or transactions to a system, which are stored in a chronological order and cannot be modified or deleted. The records are encrypted and stored in blocks, with copies of those blocks then stored in the same away across the network. The immutability of the records and the secure storage across numerous computers on the network provides a level of trust and security never before seen in data systems.
Smart contracts are blockchain’s other distinguishing feature. A smart contract is essentially software that checks for specified transactions in the network and automatically executes queries without exposing any more underlying data than necessary. Combined with blockchain’s immutability, this ensures the trust of all parties on the system.
American Association of Insurance Services (AAIS)
The AAIS is the only non-profit, member-owned advisory organisation in the US. As the US insurance industry is regulated on a state (instead of federal) level, the AAIS was formed to provide a common platform across all the state-regulated markets. Joan is here to guide us through the US regulatory framework and how the AAIS helps insurance carriers navigate it.
To begin with, insurance carriers need to request state insurance departments permission to create and rate a new product. After a long approval process, the insurer needs to report to the department once they start writing business. This can be a very time-consuming and expensive process and it can delay a product getting to market by numerous years.
The AAIS employs a countrywide programme to make this simpler across all fifty states. This includes creating common forms and contracts, whose language is set primarily on a national level but is adapted to conform to state-level regulations. Once the programme is approved by the regulator, any member of the AAIS can go through it to write business much quicker, significantly reducing the time and cost involved.
Another feature of the US insurance regulation is that antitrust laws do not allow insurance companies to share pricing and rating data between them. However, the AAIS, as an advisory organisation, can collect policy and claims data from insurance carriers across all states. It then uses that data to to create new products, update loss cost and rating factors and share them back with insurance carriers.
Finally, insurance carriers have to report to state regulators. This is done by providing the data to the AAIS, which aggregates and anonymises it before passing it on to regulators. Overall, the AAIS makes it easier for state-based regulators to serve their communities while also ensuring consistency across all states and improving operational efficiency.
Data collection before openIDL
While data collection, reporting and filing of new products is now digital, data is nevertheless coming from multiple different systems across thousands of insurance carriers. AAIS has to normalise the data, do quality assurance checks and create a coherent data set that can be used for product development and industry reporting.
Traditionally this is done by members submitting their data to the AAIS statistical data management application. This is a web-based tool where members upload the data required for the application to perform quality assurance checks. After going through the checks successfully, the data is transferred to AAIS systems. In that way, the AAIS knows it has clean, aligned data it can use for statistical analysis and industry reporting.
Data sharing and granular data
Insurance carriers are generally not comfortable sharing their granular data, which means collected data is usually limited to the bare minimum carriers have agreed to provide to regulators. State legislatures and emergency response personnel, however, often request state regulators to quickly assess some activity, such as a flood, within their state bounds. This leads to regulators asking for ad hoc reports. As carriers are hesitant to transfer the required data to regulators’ systems due to security concerns, a slow and expensive negotiation process begins.
The results do not meet the needs of any participant. The data does not make it back to the advisory organisation to improve its products and the regulators do not use the data to provide any industry reporting, meaning carriers get nothing in return for their sensitive data. With the current system being unable to meet the needs of today’s complex and sophisticated data environments, Joan informs us it was time for change.
OpenIDL is the first blockchain platform that enables the efficient, secure and permissioned-based collection and sharing of statistical data.
1. Creating openIDL
OpenIDL started out from AAIS asking what is the meaning of being an advisory organisation. It approached the dissatisfaction with the status quo as a business problem, instead of immediately focusing on technology. The AAIS brought together its key stakeholders, along with data providers and the academic community in a design thinking session to discuss how the current process can be improved to solve existing problems. The result was openIDL.
2. How openIDL works
OpenIDL uses blockchain to improve communication between carriers and regulators while also enhancing trust and security. AAIS created a new environment in which the statistical data is stored, along with any additional data requested by carriers and regulators. Additionally, openIDL contains a web-based interface to communicate the need for and the willingness to share ad hoc data.
This was all done within AAIS’ existing framework. While the technology was updated, AAIS did not have to change anything about the way it operates on principle.
3. Enhancing trust and security
Blockchain was fundamental in solving the security issues and lack of trust between carriers and regulators. The data carriers provide is stored on the blockchain network. The way data is stored on the blockchain, ie using encryption and storing multiple immutable copies on the nodes in the network, allows carriers to share the data in a secure manner while retaining ownership of it.
From the perspective of regulators, they can request data on the openIDL web-based interface and offer to provide an industry report in return. This creates an incentive for carriers to provide the requested data. The fact carriers don’t have to transfer the data directly to the regulator makes the process even simpler. Once carriers have agreed to be part of the report, they authorise the AAIS to use smart contracts on the blockchain to access and aggregate the relevant data and provide it to the state regulators.
In that way, only the necessary data has been provided to regulators, and it has been done so in an aggregated and anonymised form. The regulators then get the report they need and share it to the market. This resolves the security issues, enhances trust and incentivises carriers to share data.
4. The importance of blockchain
Critics might argue that, since members trust the AAIS, the same functionality could have been achieved using a large database managed by the AAIS. This is neither a possible nor the best solution.
It is not possible due to the security and trust issues in sharing data. Not using blockchain would mean carriers would have to transfer data to the AAIS environment. The complex cybersecurity and data protection regime carriers operate in leads to carriers being legitimately hesitant to transfer data outside their control.
Using blockchain for openIDL is also a better option as it enables the AAIS to shift the value it provides its members. It is an opportunity to change the role of advisory organisations and move away from being a statistical reporting agency. Traditionally, if a carrier sends data to an advisory organisation, they may later pay to gain access to statistical reporting.
Blockchain provides a better way. The data will be stored on the blockchain and ownership will remain with members. Instead of members paying to access aggregated data, they will receive market insights and improved information to enter new markets and develop new products in return for their data. As Joan says, the AAIS’s core function had always been to create new products and keep them up to date for the benefit of the insurance industry.
5. The challenges in adopting openIDL
Unlike what we often hear in the context of private organisations adopting blockchain, AAIS members were eager to adopt openIDL.
The AAIS board of directors, which is comprised of CEOs of insurance companies, were excited about using blockchain to improve efficiencies and decrease costs in data sharing. Members were easy to convince as the AAIS made the transition very easy. OpenIDL’s first pilot project did not require members to do anything, using 2.5 million records already on the system. The AAIS then provided members the tools required for a smooth transition to the platform. The end result is that all AAIS members are participating in openIDL without incurring any expenses.
6. Goals for the future
Success for openIDL entails a technical and a cultural aspect. From a technical perspective, the goal is for all members to have a key data sharing infrastructure in place in the future. That blockchain-based infrastructure will provide value to its members and also enable them to connect with other industry networks.
The AAIS also aspires to bring a cultural change with openIDL. Joan hopes the ease, security and transparency of openIDL will make members excited about sharing data. Seeing how openIDL can lead to new products quicker, help regulators and provide carriers with industry insights, we believe this is definitely possible.
OpenIDL is built on IBM’s Hyperledger Fabric. Joan believes blockchain interoperability is achievable and Hyperledger Fabric will make this possible. While every blockchain network will have its challenges, advantages and disadvantages, Hyperledger Fabric is run by the Linux Foundation, the most successful open-source, open-platform software organisation, making interoperability more likely.
Additionally, the Linux Foundation has been excellent in providing support and IBM’s expertise has been invaluable. A global network of developers has been quick to support the AAIS with any problems it encountered, helping openIDL reach 2.5 million records on the blockchain and a fully operational web-based system in just seven weeks.
Joan provided a great overview of openIDL’s development and explained how blockchain can become the catalyst behind a cultural change in data sharing.
If you liked this episode please do review it on iTunes – your reviews make a huge difference. If you have any comments or suggestions on how we could improve, please don’t hesitate to add a comment below. If you’d like to ask Joan a question, feel free to add a comment below and we’ll get her over to our site to answer your questions.
Thank you Joan!