State Farm and USAA are building a blockchain-based subrogation solution, and have seen positive test results so far.
The current trend of large companies looking to incorporate blockchain is still in its infancy. Mainstream mammoths across the board are finding ways to incorporate the technology to fit their specific use cases. Insurance giant State Farm has dialed into the technology to improve the processes around subrogation.
Utilizing the technology made famous for underpinning the top cryptocurrency bitcoin, State Farm, in collaboration with financial powerhouse USAA, has found early success in the testing of its net subrogation solution, State Farm product manager Dustin Helland said. Helland heads up the company’s work in blockchain. The subrogation solution utilizes the permissioned, Ethereum-based Quorum blockchain.
USAA confirmed these positive testing results in an email to me. “Our goal is, and early tests indicate, that we may be able to cut down over 80% of transactions by using blockchain for subrogation,” USAA vice president of innovation Ramon Lopez stated.
Subrogation is the process of regaining funds from liable parties as part of an insurance claim. The process is often tedious and cumbersome in comparison to other aspects of today’s digital age of lightning-fast correspondence and interaction. Blockchain technology houses the potential to make the process more efficient. In May 2019, State Farm and USAA announced the testing of their conjunctive project, a blockchain-based subrogation solution, according to a statement from State Farm.
Phase Two Of Four
State Farm’s endeavor with USAA initiated approximately 18 months ago, Helland said. “We’re taking a four-phased approach,” he explained. Phase one included constructing a prototype and evaluating what benefits might come from applying blockchain to subrogation, as well as the details behind putting that solution into play. This initial phase saw completion in 2018, Helland said.
The solution is currently in the second phase, or the “MVP shadow phase” (minimum viable product), according to Helland. At this stage, State Farm and USAA are testing the solution. “We’re running it in production, in parallel to the existing business processes and legacy system, and doing a validation of the product that we built,” he noted. Helland mentioned targeting a launch of the system between late 2019 and the first quarter of 2020, “if everything goes well with that testing and the businesses agree to move forward.”
The pair of companies are also building this solution with the industry in mind so that other insurers will be able to use the same technology, according to Helland. “The goal is that we’re going to scale this to the industry,” he said. “We’re building this for the industry to leverage, not just for State Farm and USAA.”
Testing Results A Success
Utilizing its present methods, “State Farm exchanges subrogation payments to the tune of 290,000 transactions and over $1,000,000,000 with the rest of the industry” Helland said.
“Rather than exchanging all of these individual, very manually intensive process transactions, we can leverage the blockchain to create a ledger of the transactions between the organizations,” he explained. “At a certain prescribed point in time,” the system can then “settle up the ledger and execute one transaction, based off of who owes who what,” Helland noted. This essentially decreases the labor-intensive processes that go along with interacting and transacting with numerous parties.
Early experimentation findings have been positive for the new blockchain-based system, revealing a stark decrease in the number of necessary transactions and dollars exchanged throughout the subrogation process, according to Helland.
Former processes could see “upwards of 100 or more transactions” carried out on a daily basis, the State Farm product manager noted. In addition to notably trimming down the number of transactions, a single end of day settlement also “reduces the amount of dollars that are needed to be exchanged by the organizations by more than 80%,” Helland said, according to State Farm and USAA’s test results.
Lopez also explained, via email,
The USAA and State Farm Blockchain Net Settlement team created a shadow validation and test environment to assess the Blockchain Net Settlement capability against historical data. Our testing has been successful to date—100% of historical transactions were successfully netted on the blockchain.”
The subrogation process often requires the sending of many different dollar amounts to multiple parties at various points throughout the day. Sending $100 here, $50 there, another $100 elsewhere – this process requires a lot of time and a large number of transactions throughout the day. Applying blockchain to the mix allows for a single end of day bulk transaction, instead of dozens of intraday transactions. These initial testing results from State Farm and USAA essentially found that this end of day settlement reduced the total number of transactions by 80%, according to my follow-up call with a State Farm representative.