Blockchain is one of the most polarising topics in insurance with views ranging from “this will transform the sector” to “this is about overinflated bitcoins and has no practical application in insurance”. Perhaps linked to the broad divergence in views is the fact that understanding of the underlying technology also varies widely. What is the real answer and if blockchain is going to have an impact, where and when can we expect to see some traction?
A quick summary to begin. What is blockchain?
It’s a write only database, where all participants have an identical copy of the information, that is timestamped and cryptographically secured
This write only data base allows an exchange mechanism for moving value between peers and a transaction validation mechanism that does not require intervention from a single centralized intermediary.
How and why is blockchain relevant to insurance?
The underlying technology has several important characteristics that have strong potential application for insurance.
Decentralised validation, enabling disintermediation – The data is packed into blocks that can only be added to the blockchain after consensus is reached on the validity of the action. This allows participants to place their trust in transactions even in the absence of a regulated central authority.
Multiple redundancies, providing security– The blockchain is continuously replicated on all or at least a group of nodes in the network. Thus, no single point of failure exists.
Immutable storage, reducing fraud – Each stored block is linked to its previous block in the chain, making it almost impossible for hackers to change subsequent blocks, as they would have to manipulate any succeeding block plus most replications.
Encryption, facilitating proof of insurance, claims and subrogation – Digital signatures based on pairs of cryptographic private and public keys allow network participants to authenticate which participant initiated a transaction, owns an asset, signed a smart contract, or registered data in the blockchain.
Smart contracts, replacing traditional insurance policies – Blockchain enabled platforms can be used for smart contracts, which are small programs running on a blockchain and initiating certain actions when predefined conditions are met.
Where are we today?
Technology and digital trends are reshaping global demand and supply of insurance. Five core blockchain capabilities hold tremendous promise for enabling the insurance ecosystem
Most of the credible and scalable use cases in insurance so far have come from three areas:
- Overhead & support functions, procurement and finance/ reinsurance accounting
- Reinsurance contracting across Life and P&C
- Distribution, underwriting, servicing and claims management of microinsurance products (fixed benefit life & health, motor) often linked to parametric insurance
The banking sector’s experience with blockchain also offers useful lessons for insurance.
The R3 consortium has pivoted and successfully focused on more achievable, short-term problems such as KYC, AML, credit card authorisation and fraud and cross-border payment reconciliation after initially struggling with the complex global payment infrastructure and governance.
There are still several key questions to be addressed, including whether the blockchain can handle the volume of transactions that are currently being processed through the traditional insurance market and the legality of blockchain contracts from an insurance perspective which has yet to be fully tested.
How to capture value from blockchain technology?
The possibilities from blockchain technology for the life and non-life insurance value chains appear compelling but capturing the opportunity will require insurance incumbents to proactively and collaboratively work across four dimensions
Strength in Numbers
Blockchain is only viable when multiple parties are involved to share data. To that end the insurance space has seen the rise of Blockchain consortiums such as the RiskBlock Alliance. Consortiums bring together like minded individuals together with the common goal of creating a shared benefit for all parties involved.
There are several things to consider when evaluating whether to join an industry Blockchain consortium, including:
- Does the existing member make-up reflect your firm? For example, if you are a P&C carrier, your needs would not be served by joining a consortium focused on Life and Health.
- Does the consortium have a strategy for a reusable framework? Some Consortiums are focused on building individual use cases, while others are focused on building reusable frameworks on which multiple different and varied use cases can built on top.
- Does the consortium have a strategic plan of building multiple use cases that will serve your organization over time? While there is no promise that the whole pipeline of use cases will be built, it is important that the consortium has thought through a road map of future use case and how they all fit together for the greater good.
- Does the consortium have the scalability to serve your needs? If you are a multi-sector firm or a multi-national firm you need a consortium that can support those needs. Otherwise you might wind up being a very big fish in a tiny pond.
It is vitally important to select a consortium that meets your organization’s needs. Its membership should be reflective of your firm, have a reusable standardized framework, have a strategy and the scalability for building use cases now and in the future and most important meet the unique needs of your firm.
Blockchain is a team sport, it is imperative to join the right team through the appropriate consortium for your firm’s needs.
Current insurance blockchain companies and applications
There are several new blockchain focused platforms working with the insurance ecosystem to build solutions based on a partnership model rather than ‘winner takes all’. include
Several start-ups are also leveraging blockchain as part of their technology solution to improve the customer experience and drive efficiency, examples include Lemonade that settles claims when specific conditions on the blockchain have been met, Teambrella that combines a peer to peer model with blockchain to allow members to set insurance policy parameters and trigger payments and Dynamis that focuses on peer to peer unemployment insurance in the US.
Looking to the future, what impact will blockchain have on the insurance sector?
We expect to see the following applications gaining traction in the next 18 to 24 months:
Event triggered smart contracts that enable automated claims, self-executing contracts, reduced fraud and improved customer experience.
Increased back end efficiency creating decentralised, fully digital and safe markets with reduced human error, data duplication, manual intervention and fewer processing delays delivered at lower transaction costs.
Disintermediation through decentralised consortium models that connect key members of the value chain supported by automatic identity validation and seamless sharing of data.
Better pricing and risk assessment through underwriting in real time based on underwriting factors specific to the individual risk (rather than out of date and proxy) supported by automatic data sharing for pricing and analytics and combined with the ability to connect and capture huge volumes of data from the IoT, sensors and trackers.
New types of insurance including sharing economy, spot insurance, fractional insurance and hybrid policies that provide improved transparency and can be underwritten at significantly lower prices.
Reaching the underserved by solving many of the current micro insurance problems, supported by the automatic construction of distributed data bases and lowering the cost of coverage given the simplicity and improved efficiency.
Recognising the possibilities created through blockchain, it’s also important to avoid the tendency to force blockchain into a new model when actually a simpler existing technology may make more sense. Each use case should be considered on its own merits.
There are many relevant use cases and we therefore agree with the view that blockchain will have a significant impact on the insurance sector. As with many technologies, the impact in the next two to three years may have been exaggerated but the impact over the next five to ten years has almost certainly been under estimated.
Starting small, with specific use cases linked to manageable eco-systems makes sense. As does adopting a partnership approach working with both new and established companies to drive standardisation and consistency in approach.