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In June, the Treasury’s Federal Insurance Office (FIO) released a report assessing climate-related risk and gaps in insurance supervision, Insurance Supervision and Regulation of Climate-Related Risks. The report represents another response to the Executive Order of President Biden back in May of 2021 with the objective to evaluate the challenges posed by climate-related risks to insurers and the regulatory efforts in place to help mitigate these challenges. 

The FIO announced an initiative and a request for input from P&C insurers back in October for a proposed data call for climate-related data aiming to assess U.S. climate-related financial risks by collecting and analyzing data, specifically current and historical underwriting data on homeowners’ insurance at the Zip Code level. 

The FIO’s recent report serves as a clarion call for a unified effort to address climate-related risks, fostering a more resilient insurance sector that can effectively safeguard individuals, businesses, and communities from the risks associated with a changing climate. It underlines the fact that climate-related risks are multi-faceted and ever-evolving, encompassing physical risks stemming from climate events, transitional-related risks related to shifts in technology and policies, and even litigation risks that could arise from these changes. As these risks become increasingly significant, insurance regulators are faced with the daunting task of ensuring the stability of the industry and its market in the face of environmental change and uncertainty. 

By analyzing patterns in insurance claims, underwriting practices, and risk assessment, the FIO aims to better understand how climate-related factors are affecting insurance availability and affordability. This, in turn, will enable policymakers and regulators to make better-informed decisions to safeguard the financial well-being of Americans in face of climate change-related challenges and catastrophic losses. With consistent, standardized, granular, and comparable insurance market data, this will help assess the potential for major disruptions of private insurance coverage in vulnerable regions.

The P&C insurance industry plays a critical role in managing risk and providing financial protection to individuals, businesses, and communities. As climate change and its effects intensifies, insurers face the challenge of accurately assessing and pricing climate-related risks. The data collected by the FIO will contribute to a more comprehensive understanding of these risks, allowing insurers to refine their underwriting practices and develop products that address emerging risks. This initiative paired with industry participation and collaboration is likely to stimulate innovation within the industry as insurers seek new and impactful ways to manage and mitigate climate-related risks. 

Collaborative Approach

The report highlights the commendable efforts made by state insurance regulators and the NAIC to integrate climate-related risks into their regulatory practices. However, it also emphasizes that these efforts, while a promising start, remain in the early stages of development and will require the help and participation of regulators, carriers, technology providers, and other climate-related entities. 

To better understand the implications of climate-related risks for the insurance industry, as well as for the broader financial system, these groups need to work together to develop comprehensive strategies and a collaborative approach will be essential.

Tools and Processes for Enhanced Oversight

Existing regulatory frameworks offer state insurance regulators tools that can be adapted to incorporate climate-related risks. The report encourages regulators to prioritize the integration of these tools into their practices and procedures. Additionally, it recommends the creation of new tools and processes, such as scenario analysis and the utilization of NAIC’s Catastrophe Modeling Center of Excellence, to better assess and manage climate-related risks. 

As the FIO continues its work to assess and support efforts in the insurance industry, there’s hope that the collaboration and strategies implemented lead to a more robust and adaptive insurance landscape–one that can weather the storms of environmental change and emerge stronger on the other side. The result will provide a broader picture of the insurance market landscape in regions particularly vulnerable to climate change impacts.

Challenges – For Both Public and Private

The FIO states that access to high-quality, reliable, and consistent data will be necessary for accomplishing each of its initial climate-related priorities. The challenge is the mechanism and operation of this data exchange and access ability. In the FIO’s October announcement of the proposed data call for climate-related data from insurers, they stated seeking input from carriers on:

• Challenges to data collection, such as quality, consistency, comparability, granularity, and reliability
• Key factors for developing standardized and comparable disclosures, as well as assessments of the standards provided by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) and the NAIC Insurer Climate Risk Disclosure SurveySuch assessments will include supervisory practices and resources, including:
  • data availability and integrity
  • Structural barriers to assessing, managing, and integrating climate-related risks (e.g., accounting frameworks, other standards).
  • Insurance Markets and Mitigation/Resilience – Assess the potential for major disruptions of private insurance coverage in U.S. markets that are particularly vulnerable to climate change impacts; facilitate mitigation and resilience for disasters.

“Such assessments will include examination of the insurability of disasters that are produced or exacerbated by climate change, including wildfires, hurricanes, floods, wind damage, and extreme temperatures.”

Treasury’s Federal Insurance Office Takes Important Step to Assess Climate-related Financial Risk – Seeks Comment on Proposed Data Call

For carriers, there are clear risks and challenges associated with the implementation of the FIO’s initiative.  First and foremost is their and their respective insureds’ data protection, security, and its level of exchange/utilization transparency. 

HOW? Permissioned Open Governance Network Model & Strategy 

For both insurance regulators’ and insurers’ needs to be met effectively and securely, a true non-proprietary and non-profit intermediary is necessary. Trust and transparency will be paramount in this never-before implemented collaboration among these stakeholders to come to agreement on standardizations, frameworks, processes, and implementation. 

The Linux Foundation’s proven and historically successful Open Governance Model provides the foundation for this needed collaborative effort to emerge and be maintained with equal agency and decision power, enabling all parties and stakeholders to meet their ultimate goals.

With the openIDL framework built on trust, transparency, and security, the use of DLT ensures information is secure and exchange of data is efficient, standardized, actionable, and accurate. The framework

• enables insurance carriers to provide data to regulators in a standard and efficient manner while maintaining control over the data (their data never leaving their home)
• allows community generation of a standard data format to promote interoperability and future adoption
• stores the data in a cloud; each carrier has its own node, an analytics node, and an application for managing data calls (i.e. accept or reject calls for data)
• provides network architecture using Hyperledger Fabric and other technologies such as Kubernetes and JavaScript/Angular UI to create transactions and management of data.

Data Privacy

The primary challenge openIDL solves is the growing data privacy issue faced by insurance carriers. Carriers want to keep their data private and in their control, but if they constantly send data to regulators and other entities, control is inevitably compromised. openIDL allows carriers to provide data to regulators in a standard way while keeping the raw data in their cloud and only accessible through their node.

Standardization

openIDL implements data formatting, tokenization, and interoperability standards to ensure that multiple carriers can participate in the network. This will allow for future adoption and efficient data sharing, aggregation, and analytics applications.

Auditability

openIDL provides an auditable process for carriers to share their data with regulators and other entities. This visibility and transparency ensures that the data is managed properly and that carriers understand what will be done with their data.

Data Calls  

openIDL provides a secure and efficient solution for regulators to conduct data calls efficiently and securely. The carriers respond to the data calls, helping regulators better monitor the market activity, plan for future emergencies, and protect consumers by providing data, and the results of the data calls are visible to the regulator through an analytics node. The first step in a data call is for the carriers to load their data into the harmonized data store inside their cloud. The data is then put into a standard format and is only accessible through their node. The regulator can access the data call results through an application that is part of a Kubernetes cluster. The Hyperledger Fabric API is used to create transactions and manage the data on the ledger.

As the initiative progresses and the data is effectively and securely collected and analyzed, we can anticipate a more resilient insurance sector better equipped to navigate the market challenges of a changing climate. 

Co-author, Jason Perlow of The Linux Foundation

The insurance industry has arrived at the predicted inflection point between aligning its business with the technological advancements being leveraged successfully throughout other industries or staying put, carrying out business as usual, and slowly sunsetting one line of business at a time.

Common industry-wide challenges are expanding exponentially without viable solutions being implemented. Loss ratios are going haywire in certain lines of business, seen across every carrier’s reporting, yet each is trying relentlessly to solve for the losses within their own closed walls. Without a deliberate, collaborative effort among the various stakeholders (including carrier competitors), these shared challenges will continue to persist, and the alternative will likely be riskier in the long run. 

The real catch-22 is that for carriers open to exploring solutions rooted in collaboration, the fruits of their labor have not yet been adequately matched in returns because these models require participation from peers and competitors to produce. These collaborative models epitomize “more the merrier” in that, the more carriers and relevant entities participate, the greater the impact of the network and, ultimately, carrier bottom lines. 

So, what’s the hang-up? Trust, standards and governance, and the safeguarding of competitive advantage. The solution? An insurance-specific Open Governance Network.

What is an Open Governance Network?

The Linux Foundation (LF) is a non-profit organization and the world’s leading home for collaboration and open source software, hardware, standards, and data. Two years ago, the LF discussed the potential power and capacities of Open Governance Networks in a post, Understanding Open Governance Networks. The application of distributed ledger technology (DLT) is proposed as an efficient, secure, and scalable solution for highly regulated industries tackling shared challenges around data and its exchange. 

Open Governance Networks enable a highly-regulated industry to form a group of stakeholders and competitors (a consortium) that governs itself in an open, permissioned, neutral, and participatory model. Over decades of facilitating the world’s most successful and competitive open source projects, the LF best practices and governance models have proven, time and again, the business advancements and scalability resulting from collaborative enterprise-level solution development.  

A permissioned network consortium allows, upon consensus agreement, other organizations to participate and share operational, R&D-driven initiative, and development costs/software investments as well as sharing developed efficiencies, insights from data aggregation and analytics, and mutually-beneficial innovations leading to reduced time-to-market for individual products and services. Stronger security and data privacy standards, clear transparency, and increased data quality are inevitable outcomes through this network model’s governance.

Welcome to the decentralization of our evolving insurance industry.

openIDL and how it is different

As Open Governance Networks address the concern of neutral and distributed control in vertical industry use cases, there is no better organization than the LF to host and support the industry’s first of its kind, openIDL (Open Insurance Data Link). 

openIDL is an insurance-specific and permissioned DLT-based project building a network that harmonizes industry data and secures the sharing of it both efficiently and transparently. The project was initiated in 2020 by the American Association of Insurance Services (AAIS), a member-governed insurance advisory organization in the United States that has been providing a common set of services for the insurance industry, such as regulatory reporting on a regional and national basis for the past 80 years. The network’s foundational use case, developed by AAIS, is regulatory and statistically reporting data exchange between insurers and state regulators/DOIs.

In 2021, the project was moved to the Linux Foundation to ensure a true member-premissioned open platform under the LF structured standards and governance model, free from proprietary solutions – as well as extensive member-exclusive benefits and support to drive project visibility, scalability, and success. The project’s use cases have since expanded, as well as its member community.

To date, openIDL’s member community includes carrier premiere members: Travelers, The Hartford, The Hanover, and Selective Insurance; state regulator and DOI members; infrastructure partners; associate members such as MOBI (Mobility Open Blockchain Initiative); and other non-profit organizations, government agencies, and research/academic institutions. 

openIDL’s network is built on Hyperledger Fabric, an LF distributed ledger software project. Hyperledger Fabric is intended as a foundation for developing applications or solutions with a modular architecture. The technology allows components, such as consensus and membership services, to be plug-and-play. Its modular and versatile design satisfies a broad range of industry use cases and offers a unique approach to consensus that enables performance at scale while preserving privacy.

For the last few years, a running technology joke has been “describe your problem, and someone will tell you blockchain is the solution.”

As funny as this is, what’s not funny is the truth behind the joke, and the insurance industry is certainly one that fell head over heels for the blockchain hype. Like any revolutionary technological advancement throughout history, blockchain and DLT are no different. Failing always smarts in the beginning, but the learnings, iterations, and refinements eventually lead to strong problem-solution alignment. Timing is key. The other key is in the (sometimes long) process of dissecting the problem and coming to the best solution – not in having a solution and searching for a problem. 

In recent years, there has been a dramatic and continuous increase in the amount of relevant – and timely – data needed and collected within the industry due to the proliferation of:

• IoT devices, cloud adoption, and 5g network expansion
• Increased insured connectivity adoption
• Evolving climate-related risks and new related external data channels
• Data needed for parametric and embedded product development
• The growing strategic need for cross-industry data exchange and standards development 
• New data requirements and requests from regulatory and government entities
• The remaining long list of increased-data-collection catalysts

With this increased need and in volume, the possibilities of utilizing these data has also skyrocketed in areas such as underwriting, risk assessment, marketing, segmentation, pricing accuracy, fraud detection, closer to real-time exchange, and many other areas within both carrier business and operations strategies. Inevitably, new challenges affecting all carriers are increasing proportionally, highlighting the need for a secure, private, and transparent platform for exchanging data. 

AAIS predicted this need and recognized permissioned-DLT as an aligned solution to these shared industry challenges. The advisory organization saw this need for the “neutral ground” of a decentralized network- a consortium with a leveled playing field maintained by an organization dedicated to the health and growth of the network; not controlled by one company or organization.

With great process, planning, and framing through extensive industry expertise, openIDL was launched and hit the ground running to prove the concept of an industry permissioned network securely managing and exchanging information, held accountable by the LF Open Governance Network model, and able to keep up with the rapidly evolving risk landscape. 

The openIDL Open Governance Network

• Working to solve shared industry challenges, such as data privacy and standardization, that could not be solved by one entity alone and will open up doors for other innovation priorities and product development. 
• Enables insurance carriers to provide data to regulators in a standard and efficient manner while maintaining control over the data. 
• Community generation of a standard data format to promote interoperability and future adoption.
• The data is stored in a cloud; each carrier has its own node, an analytics node, and an application for managing data calls.
• Network architecture uses Hyperledger Fabric and other technologies such as Kubernetes and JavaScript/Angular UI to create transactions and manage the data.

Why the insurance industry needs an Open Governance Network

There have been many attempts to produce a functional, efficient, and secure industry data-exchange network. However, without trust, the risks are too high, and we all know what the business of insurance is rooted in. 

This is precisely where the LF Open Governance Network model establishes the needed trust that has been lacking – and from the get-go. The power of both the Linux Foundation and its proven secure framework, as well as the trust, transparency, and security is intentionally woven into Hyperledger Fabric, providing a platform for carriers and all industry stakeholders to solve challenges while trusting in the governance of the community.

Challenges Solved by openIDL

Data Privacy

The primary challenge openIDL solves is the growing data privacy issue faced by insurance carriers. Carriers want to keep their data private and in their control, but if they constantly send data to regulators and other entities, control is inevitably compromised. openIDL allows carriers to provide data to regulators in a standard way while keeping the raw data in their cloud and only accessible through their node.

Standardization

openIDL implements data formatting, tokenization, and interoperability standards to ensure that multiple carriers can participate in the network. This will allow for future adoption and efficient data sharing, aggregation, and analytics applications.

Auditability

openIDL provides an auditable process for carriers to share their data with regulators and other entities. This visibility and transparency ensures that the data is managed properly and that carriers understand what will be done with their data.

Data Calls  

openIDL provides a secure and efficient solution for regulators to conduct data calls efficiently and securely. The carriers respond to the data calls, helping regulators better monitor the market activity, plan for future emergencies, and protect consumers by providing data, and the results of the data calls are visible to the regulator through an analytics node. The first step in a data call is for the carriers to load their data into the harmonized data store inside their cloud. The data is then put into a standard format and is only accessible through their node. The regulator can access the data call results through an application that is part of a Kubernetes cluster. The Hyperledger Fabric API is used to create transactions and manage the data on the ledger.

Conclusion

openIDL is an important initiative for the insurance industry as it provides a secure and transparent platform for exchanging information, data, technology, and leadership Open Governance Network strategy.

The use of DLT ensures information is secure and exchange of data is efficient, standardized, actionable, and accurate. The Linux Foundation’s involvement is paramount as it provides the foundational and successful open governance model – free from proprietary uses — allowing carriers to solve industry-wide challenges collaboratively and securely.

openIDL represents a huge milestone for the industry at large. The network’s use of enterprise-scale permissioned-DLT and its commitment to data privacy and standardization makes it a viable solution for the industry moving forward. openIDL is perfectly positioned to bring everything we, the insurance community, have been discussing and planning for years. 

It’s time to bring the plans to fruition and beyond, together.

For more information or to inquire about membership options & benefits, please reach out! info@openidl.org

The American Association of Insurance Services, AAIS, identified an opportunity to significantly improve data processing between insurance carriers, advisory organizations, stat agents and regulators. This led to development of the first blockchain network connecting data across the insurance industry: openIDL.

OpenIDL (open Insurance Data Link) is an open blockchain network that streamlines regulatory reporting and provides new insights for insurers while enhancing timeliness, accuracy, and value for regulators. It is the first open blockchain platform to enable the efficient, secure, and permission-based collection and sharing of statistical data.

To get the project off the ground, AAIS partnered with IBM to implement the system.  Through many design thinking sessions involving AAIS, IBM, carriers, and regulators, an architecture emerged based on the Linux Foundation’s Hyperledger Fabric, hosted in the IBM Cloud.  Since one of openIDL’s goals is to distribute data ownership and build trust, the distributed and permissioned nature of Hyperledger Fabric and the trust mechanism of blockchain made this a good fit.

After initial implementation, AAIS was able to successfully execute proof of concept projects with prospective carriers.  Subsequently, IBM transitioned openIDL’s development ownership to AAIS.  Since AAIS is primarily an AWS user, they wanted to move the system to the AWS cloud.  While attempting to do this themselves, they quickly realized they needed more expertise in the following areas:

• AWS’s complex infrastructure
• Kubernetes in AWS
• IBM Blockchain Platform
• Hyperledger Fabric
• Node.js and Angular

AAIS identified a project to migrate openIDL from the IBM Cloud to AWS, with the following deliverables:

• openIDL nodes hosted in AWS
  • AAIS Node
  • Carrier Reference Node
  • Analytics Node
• Infrastructure as Code (IaC) for all aspects
  • AWS infrastructure
  • Hyperledger Fabric network
  • Applications in Kubernetes
  • Secret Management
• Reference Implementation that can run on local machine
• Documentation

AAIS worked with the Linux Foundation to find the appropriate partner.  Chainyard emerged as the company with the extensive experience and solid credentials needed to execute the project.

After undertaking the project, Chainyard’s objective was to successfully facilitate openIDL’s production launch.  To accomplish this, they implemented a multipronged approach, starting with understanding the application’s status quo. This included going through openIDL’s functionality, architecture, cloud services, application topology, test cases, infrastructure provisioning and deployment scripts.

Following this discovery period, the team developed a migration path focusing on design details for the cloud migration, NodeJS upgrade, Angular upgrade, Hyperledger Fabric upgrade, and Infrastructure as Code.  The cloud migration consisted of moving openIDL from the IBM Cloud environment to Amazon Web Services (AWS).  The NodeJS upgrade was from v8 to v14, the Angular upgrade was from v6 to v12, and the Hyperledger Fabric upgrade was from v1.4 to v2.2.  Developing the supporting IaC scripts was done from scratch for the target environment using industry best practices and leveraging Terraform for infrastructure, GitHub actions for CI/CD pipeline, and Helm Charts for Kubernetes containerization.  Security was considered a priority for all these changes and was designed into all activities.

For each upgrade, changes from the existing level to the target level were analyzed to determine impacts on the code.  This helped with both development and testing planning.  The upgrades had no planned feature or functionality changes to take advantage of in the target environment – these enhancements were instead put on the roadmap for a future version of the platform.

The openIDL project utilized an agile methodology during its life cycle, which involved having daily team standups, weekly architecture deep dives and management meetings, and ad hoc sessions to work through obstacles. The project team consisted of AAIS and Chainyard participants, working together to prioritize tasks and set key dates by which the project and sprint objectives had to be defined.

Once the overall project was complete, AAIS accepted these deliverables: an AWS-hosted AAIS Node, Analytics Node, and Carrier-Specific Nodes (each in their own AWS account), Hyperledger Fabric deployed on AWS using Blockchain Automation Framework (BAF), IaC scripts, and supporting documentation.  An additional product created during the project is an openIDL Reference Implementation that runs in the minikube Kubernetes utility. This is disconnected from the AWS Cloud (except for Cognito authentication services) and provides a lightweight way for developers to familiarize themselves with the openIDL solution. The combination of features provided by these openIDL elements ensures AAIS’s insurance regulatory reporting is more effective, faster, and secure than ever before.

About AAIS

Established in 1936, AAIS serves the property casualty insurance industry as the modern, Member-based advisory organization. AAIS delivers custom advisory solutions, including best-in-class forms, rating information and data management capabilities for commercial lines, inland marine, farm & agriculture, commercial auto, personal auto, and homeowners insurers. Its consultative approach, unrivaled customer service and modern technical capabilities underscore a focused commitment to the success of its Members. AAIS’s strategic work and partnerships led to the creation of openIDL, the data and information sharing platform for regulatory reporting built on distributed ledger technology, now a Linux Foundation Project. For more information about AAIS, please visit AAISonline.

About Chainyard

Chainyard is not just a team of Digital Transformation enthusiasts who focus on blockchain, but also a dynamic organization with the people, processes and technology that goes along with developing world-class business and software solutions.

We offer education, technical workshops, architecture assessments, business systems solution design, user interface design, continuous integration and delivery pipelines, operational impact assessments, network support services, consortium building, governance models and other activities critical to enabling a business to participate in a decentralized ecosystem.

To learn more about Chainyard, email Isaac Kunkel at isaac.kunkel@chainyard.com, or visit the website at www.chainyard.com.

Author: Isaac Kunkel, Chainyard

Photo: PIXABAY