Although still in the early stages of adoption in some sectors, blockchain technology is beginning to emerge as a strategic force across multiple industries. The insurance industry is seeing plenty of action of its own. Some of the world’s largest insurers have taken notice of the potential of this technology. They have started industry initiatives like B3i, which is a collaborative effort to explore increased efficiencies in the exchange of data between reinsurance and insurance carriers. There is an increased realisation that the use of globally distributed ledgers is quite disruptive for some of the most foundational insurance processes, such as underwriting, claims and reinsurance. As a result, there is a need to evolve strategies to address those disruptions.
Simultaneously, traditional players are also being prompted to think more innovatively due to the emergence of smaller ‘insurtech’ start-ups, threatening to encroach on the territory of leading insurance companies. These firms often have technology at their core and are likely to rise in popularity as we see innovations such as driverless cars enter the mainstream, challenging insurers to create new models that cater to these developments. As the insurance industry is traditionally slower to adopt change, insurance firms that get to grips with, and start using blockchain technology, will have a significant and positive impact on the industry.
However, in order to successfully implement blockchain, insurance companies will have to balance the range of benefits and challenges before it can become a regular feature.
Claiming the future
Although blockchain could still be defined as ‘emerging,’ the technology has a number of potential applications and exciting implications for insurers. As a distributed ledger increases in security as more parties access it, providing an extra layer of verification, blockchain could help reduce the burden of reporting, balancing and payment reconciliation while claims paid timelines could see a reduction in physical damage claims from two-three weeks to a week. Combined with this, blockchain’s automated nature could result in numerous efficiency benefits for insurers, through the use of smart contracts. A smart insurance contract would pay out against the insurable event without the policyholder having to a make a claim or the insurer having to administer the claim. This will essentially remove the cost of claims processing and minimise fraud.
For example, imagine your travel insurance policy being ‘activated’ at the exact moment a cruise ticket is purchased, ‘de-activating’ when the ship docks at its final destination. In the event that the ship could not depart on time, blockchain-enhanced insurance would automatically trigger the claims process. Thereafter, a smart contract would reimburse a policy holder without the need for any administrative input from them or the insurer. In the future, , assume that you want to insure the contents of your cabin, the policy is automatically quoted based on cabin size and location alerting you on the mobile phone, the quote and binding agreement are done automatically through digital policy processing core systems and the premium and commission to the cruise company are automatically credited using blockchain.
Blockchain also has the potential to enable the growth in popularity of peer-to-peer (P2P) insurance models – a prominent facet of the ‘insurtech’ revolution. Certain companies already enable small groups of policy holders to pay into a collective claims pool, rather than enter a contract with an insurer. In this instance, blockchain ensures that payments comply with terms agreed to by all parties. Transparent and almost fully automated, claims management could be sourced to a third party that connects related ledgers to verify and settle a personal claim. That blockchain has use cases across traditional claims processes and innovative ‘insurtech’ models demonstrates how versatile the technology is in enhancing the offerings of all types of insurers.
Breaks in the chain
Despite the plethora of applications of blockchain for insurers, firms of all sizes have several challenges to overcome before it can be fully integrated into their business models. While the reliance of blockchain ledgers on public key encryption or cryptography means they are safe from many traditional cyber-threats, it has the potential to cause significant upheaval resulting from the disintermediation and the transformation of how business is conducted in insurance firms. More broadly, there is the ever-present issue of how best to integrate new technologies with legacy systems; concerns surrounding the transition phase between systems is an obstacle for businesses. Organisations will need to test and deploy blockchain technology that fits with existing systems, to overcome formidable integration challenges.
It will also mean that organisations give up some of the control they have over certain transaction and data exchanges. For example, a policyholder does not have to rely on the decision of the insurer to cover damages, as the insurer will pay before claims managers are even aware of the claim. However, as insurance decisions have the potential to seriously impact people’s lives, there will still be a need for human intervention and analysis to regulate this automated claims processing.
Building (on the) blocks
Insurers are getting wise to the benefits of blockchain. Executing proofs of concept is an important first step. This will allow them to understand blockchain’s potential and limitations, rather than measuring early deployments on their return on investment. Adopters should consider running hackathons, building developer communities and even crowdsourcing innovation rather than managing the whole process in-house as opportunities to innovate exist on many dimensions.
In the current climate, it would seem that regulatory and security concerns – in addition to upfront costs – are still tipping the balance versus the potential efficiency and cost savings associated with the distributed ledger in the long term. After all, despite the benefits, blockchain is not a guarantor of authenticity. However, as it matures, blockchain could prove to be the key to delivering the tailored products and services that insurance customers now expect, in a manner that address some very longstanding issues around creation and exchange of value.
Michael Clifton, Senior Vice President, global insurance strategy and Ventures, Cognizant