U.K.-based Legal and General (L&G), the U.K.’s number one retail life insurer, announced it’s launching a blockchain solution for pension risk transfer through Legal and General Reinsurance. The group has more than a trillion pounds ($1.27 trillion) in assets under management.
Update: questions and answers from L&G have been added at the bottom.
One often hears of large companies with pension deficits. The assets they have accumulated to support their defined benefit pension schemes are less than the liabilities for pension annuities. That’s often the result of investment returns differing from earlier predictions. One way to address the issue is to get an insurer to take on the risk of a shortfall, so-called pension risk transfer (PRT).
Legal and General had several separate systems that dealt with PRT and created a blockchain system that handles the entire reinsurance process. That includes pricing, claims handling, financial reporting and collateral. The new system dubbed ‘estua-re’ should lower long term costs, and according to the company, it will redefine how long term life reinsurance business is sold.
“We believe that blockchain is uniquely suited to the long term nature of annuities business as it allows data and transactions to be signed, recorded and maintained in a permanent and secure nature over the lifetime of these contracts, which can span over 50 years,” said Thomas Olunloyo, CEO of Legal & General Reinsurance.
The sector is booming. Last year in the U.K. about £20 billion ($25.4 billion) of pension benefits were insured, up from an average of £10-13 billion ($12.7 – $16.5 billion) since 2014. But the figures are still small in comparison to the U.K.’s £2 trillion ($2.54 trillion) in defined pension benefit liabilities. In the U.S., according to S&P Global, single premium pension buyouts were $23 billion in 2017 up from $13.73 billion in 2016. However, Legal and General Re only writes PRT business outside of the U.S. and U.K.
The platform was built using Amazon Managed Blockchain, which currently supports Hyperledger Fabric.
Rahul Pathak, General Manager, Amazon Managed Blockchain at AWS commented: “With Amazon Managed Blockchain, Legal & General Reinsurance can focus on building new business applications that enrich the experience for their customers and transform their business instead of dealing with the challenges of keeping a blockchain network up and running, all while taking advantage of the security and scalability the service offers.”
There’s been significantly less blockchain activity in the life and annuities sector compared to property and casualty insurance. In the U.S. LIMRA has teamed up with the RiskStream Collaboration for projects currently at the planning stage. And Generali and Accenture have launched an employee benefits solution.
L&G questions and answers
Q: What are the specific pain points?
There are two main pain points: Decentralization of data i.e. counterparties maintain data separately. Blockchain provides a single version of the truth that is stored securely and in an unchangeable manner every month for the entire lifetime of the contracts. At any point in the future, it will be possible to reverse the clock to any stage in the lifetime of the contract, whether this is 5 or 50 years, and very clearly understand exactly what happened. What changes were made, the effect these had, and who agreed them.
The second is the ability to use the data dynamically; building in the AWS managed Blockchain environment, we can develop a number of apps in estua-re to perform a number of core functions all using the same data at its heart. Data is the heart of our business and it is brought to life by estua-re.
Q: Was there a plan to replace the systems anyway?
This is new technology for our reinsurance business which is emerging from start-up. We considered a number of existing systems but none could deliver the combination of security, flexibility and auditability of the Blockchain. Blockchain is an ideal technology for PRT business.
Q: What made you arrive at Blockchain as the technology choice?
We believe that Blockchain is an ideal technology for PRT business given the ability to exchange and agree data between various counterparties, to digitally and cryptographically sign the data and to ensure that the data is perfectly traceable over any period of time given that it is stored in consecutive blocks in the blockchain.
Q: How long have you been working on the project?
The platform was conceived, designed, built and tested over an 18 month period.
Q: Do you have feedback from your clients who’ve piloted it?
Feedback from clients that have piloted the system has been very positive given the simplicity and clarity of the underlying smart contract and the auditability it creates over any period of time.
Q: Who is your client: the pension fund or an insurer?
L&G Re is a specialist reinsurer of PRT business. We provide insurance to direct insurers, who in turn provide insurance to pension schemes.
Q: So who are the participants that ultimately will use the platform?
The participants are direct insurers, ourselves and any other reinsurers we partner with. We are exploring extending the system to some of the Group’s pension scheme clients as well.
Q: What jurisdictions does it deal with?
L&G Re is focused on writing PRT business outside of the UK and US. We currently have clients in the Netherlands, Ireland and Canada.
On June 18-19 2019 Hanson Wade is running the Blockchain for Insurance conference in London. Ledger Insights is a media partner.