A group of bond producers and surety companies and other stakeholders, through The Institutes RiskStream Collaborative—an industry-led consortium, is working to unlock the potential of blockchain technology across the surety industry.
The surety professionals among these companies know that one of the biggest challenges is to digitize the execution of a bond, which is often still a manual undertaking that involves typewriters and fax machines, multiple printed copies, wet signatures, and raised seals.
“NASBP and other surety organizations are supporting RiskStream Collaborative’s exploration of blockchain technology to streamline and digitize surety workflow processes, including those relating to powers of attorney (POA) and surety bond execution,” said Michael Lischer, VP, Director of Surety at IMA and Chair of the NASBP Automation & Technology Committee.
Going digital in this day and age simply makes sense. “Today we can buy a house, buy a car, or borrow money through the internet. So why can’t we issue a bond digitally?” Lischer said.
“In terms of surety, obligees must have faith that their bond is authentic and is appropriately issued,” he continued. “Today, obligees have this feeling with paper bonds. How do we replicate this feeling for obligees when moving to a digital format?” Blockchain provides for technology interface that is open, respected, and auditable. In fact, a blockchain bond solution actually offers more security than traditional processes because it authenticates the bond validity automatically.
Lischer credits Greg Davenport, Senior Vice President, Global Risks at Liberty Mutual Surety, for getting the surety industry to begin exploring blockchain solutions. In 2018 Davenport chaired a blockchain working group for the International Credit Insurance & Surety Association (ICISA). The group produced a proof of concept and recommended developing a Power Of Attorney (POA) use case before addressing digital bonding. A year later, with Davenport present, representatives from NASBP and SFAA met with The Institutes RiskStream initiative to discuss its blockchain platform. In 2020 those associations, plus the Surety Association of Canada (SAC) and the Panamerican Surety Association (PACA), joined ICISA in forming RiskStream’s blockchain surety industry consortium.
Creating a Surety Enterprise Blockchain with Canopy Platform
A blockchain is a digital ledger of transactions that can be recorded and shared by a network of computers. Once a transaction is recorded, it cannot be altered. Blockchain/distributed ledger technology provides a secure way for businesses to deal directly with each other without an intermediary. It’s a proven technology; blockchain platforms are already used by a variety of businesses today.
“Private permissioned blockchain, often called enterprise blockchain, is increasingly being applied in industries with a great amount of multiparty business processes for intercompany data exchange and verification,” said Patrick Schmid, Vice President, The Institutes RiskStream Collaborative. “Surety falls into this category due to the variety of parties involved, including the surety, principal, and obligee.”
The RiskStream Collaborative (RSC) is the insurance industry’s largest enterprise blockchain consortium. It has collaborated with technical solution providers like Kaleido to create a multiplatform enterprise blockchain framework called Canopy. Apps built up on this platform streamline the sharing and verification of data. The Canopy platform is secure; it is SOC 2 certified and ISO compliant.
There were challenges that had to be overcome to enable data sharing in the surety industry. Over the years, the surety industry has introduced various automation systems to transact their business. While these systems may work well for an organization internally, there can be problems, such as the creation of disparate data and the duplication of processes and data, when they try to communicate with other surety organizations systems.
The Canopy blockchain platform will enable all stakeholders and systems to transact through a streamlined network that provides a single source of truth. “The important part is that this single source of truth directly connects to existing core [automated] systems. Therefore, the way that companies (sureties, obligees, agents, etc.) do business is largely unchanged from a system of record standpoint,” said Sandy Hampel, Director of Life/Annuities and Commercial Lines Products.
The Canopy platform creates a decentralized system of nodes in the blockchain network. Each organization stores data about a transaction (POA authorization, for example) within its own core automation system; that system connects to the organization’s network node. Organization A’s node can communicate with the nodes of organization B, C, etc.
Organizations can gain access to information in another organization’s node only if they have permission to do so. So organization A can decide that it wants to share certain data in its node with all other organizations (B, C, D, and E) or only with specific organizations (B and C only).
There is no centralized storing of data; the data is being sent directly from one organization to another via the nodes. Plus, when organizations share data, there’s no reconciliation of that data required because all of the parties involved transact through the platform in real time.
Proving the Concept with RiskStream Partnership—Exhibit A: POA
The RiskStream Collaborative is developing the process for a surety industry blockchain through RiskStream Labs, its blockchain innovation hub. Every project under development goes through several lab phases. “RiskStream staff work with RiskStream member companies in each phase of labs, from product exploration to proof-of-concept, to pilot, to production and adoption,” explained Hampel.
For surety, the RiskStream staff held an initial roundtable with consortium members and with representatives of industry associations who suggested possible use cases for the blockchain platform. With this input from industry, RiskStream then ranked the potential use cases based on usability, desirability and feasibility. The chosen use cases—POA verification and bond verification—were then put into the RSC lab process.
The POA verification use case rose to the top because it was foundational for other transactions. It’s also something that both the U.S. and international surety markets were interested in, said Hampel. “Our goal with this effort was to advance the surety Power of Attorney away from ink and paper to an automated, streamlined, and digitized multi-party workflow process between the principal, obligee, and surety.”
Lischer explained how a digital POA process will work. “Currently, if I need to change a power of attorney—if a new individual joins our firm, for example—I have to send out 30-plus applications to each surety company to have them add that single individual to the POA,” he said. With the blockchain platform in place, however, “I would make a change on the POA blockchain platform and the change would be reported to each surety to sign off on, but it would only take one notification from me.”
The POA digital solution generated an “exorbitant” amount of interest from all parts of the surety industry during the RSC lab exploratory phase. So the consortium was able to move quickly into the proof of concept (POC) phase, where RiskStream built out a lightweight version of its proposed solution.
This solution uses an enterprise blockchain variant of a non-fungible token (NFT) to track the POA document as it changes hands and is digitally verified, Hampel said. The NFTs are unique, individualized block-chain based tokens—like a unique code or hash tag—that are associated with each document. With the NFT, the parties involved in a transaction can track a document as it goes through the network and is digitally verified; but no one can change that document.
The proof-of-concept solution developed by RiskStream Labs went through user acceptance testing to ensure members felt comfortable with the product, Hampel said. The response has been very favorable, so the RiskStream Collaborative will be working towards making the blockchain product available to consortium members.
The POA process system will go through “world-class testing” to ensure that it is completely secure, that it will be able to handle the expected volumes of POAs, and that it will be able to meet users’ needs and expectations.
Next Step: Digital Bonding
The digital bonding process will build upon the groundwork that RisksStream’s surety collaborative has laid in its work with POA. The question is whether the platform that works with the POA will be suitable for digital bonding as well. Lischer said the exploratory phase of the bond execution lab is expected to continue through November 2022. If things go as expected, RiskStream’s blockchain partner will then begin building out the digital bonding proof of concept.
When it comes to rolling out a blockchain solution for the industry, RiskStream will be able to move more quickly with the POA solution than with digital bonding. The process that POA encompasses relates only to organizations within the surety industry. The digital bonding process, on the other hand, will take longer to implement because bond obligees will be involved and they encompass a wide range of federal, state, and local government agencies.
“The digital bond process is not in a vacuum with only brokers and sureties. We need to have buy-in from obligees on the proof of concept and work with our core system providers to integrate with the blockchain platform and build execution systems around the blockchain platform,” said Lischer.
Before obligees buy into the digital bond concept, they will have to understand the advantages that it will provide them. To help get the message out, RiskStream created the Surety Advisory Committee. The committee’s members, who represent all aspects of the surety bond industry, will drive advocacy efforts for digital bonding solutions.
“This group is working to provide strategic advice to ensure that core systems providers for sureties, agents, and obligees are all brought to the table. We want to ensure that obligees will be able to seamlessly leverage the solutions,” said Hampel.
It’s important to make sure that the surety industry delivers a consistent message about digital bonding. The assistance of associations like NASBP, SFAA, ICISA, and their members will be essential in getting this information out to their customers, the potential obligees, at the grassroots level.
Blockchain Opens Door to Amazing New Possibilities
Schmid envisions several other opportunities that blockchain technology could provide to the surety industry. For example, underwriters and risk managers could benefit from the data-sharing capabilities and risk registries of blockchain. “Today, underwriting involves significant wait time depending upon the coverage selected,” he said. The increased transparency that comes with permissioned data sharing could accelerate the underwriting process and could be leveraged for risk management purposes.
“Insurance regulations and compliance could also be transformed,” he added. “With blockchain, it is possible that regulators could monitor certain permissioned insurance information in real time, which would help with the verification of information such as bonds and powers of attorneys,” he added.
While it’s not possible today to know with certainty the breadth and depth of the influence that blockchain will have on surety long term, it will undoubtedly be an important part of the industry in the future.
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