Yesterday insurance blockchain consortium The Institutes RiskStream Collaborative announced a new working group for Surety Bonds, which are usually required by government and construction contractors to ensure they fulfill their obligations to their client. The focus is on verifying power of attorney registration. If it launches in 2022, it’s estimated that by 2025 the use case could save $175 million in costs.
The consortium, which boasts more than 40 members, is working with the International Credit Insurance & Surety Association (ICISA) for this solution.
“We feel the amount of use cases for blockchain and distributed ledger technology within the Surety Bonds sector are limitless, so the power of attorney working group is likely just the beginning,” said Christopher McDaniel, president of The Institutes RiskStream Collaborative.
There have already been a few surety bond blockchain solutions, which have targeted different aspects, per McDaniel’s comments. For example, in Italy the problem has been companies duped into paying for fake Surety Bonds. So there’s a blockchain consortium where companies can verify that an insurer or bank issued the bond. Another solution was developed by Accenture for Zurich but focused more on workflow.
How it works
However, in some ways, the power of attorney solution is an alternative approach to a similar problem the Italian consortium is addressing. Most surety bonds are sold by agents called bond producers who issue the surety bonds on behalf of the insurer (also referred to as the surety). The Power of Attorney confirms the producer has the right to issue the surety bond on behalf of the insurer.
And the organization that will benefit from the bond if there’s a default – the obligee or contractor’s client – will want to be confident that the power of attorney is valid. Otherwise, the surety bond isn’t worth anything. So the three parties that are initially targeted in this use case are the producer, the surety and the obligee/client.
This is a classic multi-party process where blockchain can provide a single source of truth.
There are existing systems that deal with electronic bonds. But the problem is there are several software offerings and separate solutions for each type of participant. That creates an interoperability challenge to maintain power of attorney registries.
Hence, a blockchain solution would be the glue with both requests for powers of attorney and approvals funneled between the various participants’ software via the blockchain platform.
“Many of the industry’s trade associations have envisioned a powers of attorney repository for a number of years,” said Liberty Mutual’s Greg Davenport, chair of ICISA’s Surety Blockchain Working Group. “ICISA has invested the resources to demonstrate that Blockchain is the technology to finally enable such a repository for Europe, the United States, Canada, and other surety markets around the world.”
Facilitated by RiskStream Labs
This solution is being managed via RiskStream Labs. While RiskStream is a member-focused body, projects run via Labs can involve external parties as well, including other blockchain consortia or, in this case, industry associations like ICISA.
It’s also an agile environment. “RiskSteam Labs aims to bring together a network of stakeholders to discuss an underlying shared business problem and potential solution. RiskStream Labs stage-gates the use case development project into phases,” said RiskStream’s Patrick Schmid.
“The first phase begins with open design sessions, which specify pain points with the current process, design and set requirements for a solution using distributed ledger technology and analyze the potential benefits of an adopted solution. If participants want to move to proof-of-concept (POC) development in phase 2 (which is generally low cost), participants in the project provide a moderate amount of funds to build out the POC. If enough participants sign-on, it provides a signal that the project should move forward. If they do not, the project fails fast and RiskStream moves on to another opportunity.”
Schmid continued, “If the POC from Phase 2 is supported and prioritized by RiskStream’s Advisory Board for Production build, it moves to Phase 3 where production build would occur leveraging capital from member fees and other areas.”
Notably, this Surety Bond Working Group is one of the first publicly announced RiskStream projects targeting commercial insurance, although it has previously shared plans to extend its personal auto proof of insurance application to the commercial sector as certificates of insurance. A third use case revolves around underwriting workers’ compensation.
RiskStream has yet to launch its first application into production, the First Notice of Loss for auto insurance. COVID-19 hasn’t helped and for now, the estimated launch date is the second half of 2021.