These days it seems everyone is talking about blockchain. Major insurance companies are investing into it, consortiums are forming around it and investors are pouring in capital. It’s early days, yet evidence suggests blockchain will create significant commercial and economic value for the industry.
Largely unknown just four years ago, blockchain is now one of the most discussed and analyzed technologies today. Investment funds are pouring capital into blockchain-based enterprises, while its potential application across a variety of industries is currently growing at a staggering rate. As far as the insurance industry is concerned, blockchain could soon prove to be revolutionary. Yet, given the comparatively small number of insurers that have fully capitalized on the technology’s existing capability, it’s still early days.
The promise of blockchain
As a reminder of its basic definition, blockchain is a distributed digital ledger that provides a permanent, immutable record of transactional information within a specific network of users. Each transaction is normally recorded sequentially onto the ledger to provide a series of ‘blocks’ which, when tied together, provide the unique blockchain. Because each block is cryptographically verified among the system’s network of authorized participants, the transactional information becomes impossible to compromise.
Blockchain’s ability to provide an unfalsifiable, single version of the truth provides a solid foundation for a variety of industrial processes to become faster, safer, more accurate and more efficient. However, perhaps even more exciting is its potential to eliminate the need for central intermediaries to verify the transaction. This shift away from the necessity of third-party verification could comprehensively transform the traditional models upon which entire industries currently function, with insurance being no exception.
Collaboration drives adoption and exploits blockchain’s potential
Financial services took the early lead in exploring application of the technology. Since early-2014, over 40 financial services entities have invested in blockchain-related ventures and interest is now spreading inside the insurance industry. Although many industries, such as government services, pharma, supply chain management and the music industry, have been energized by blockchain’s transformational possibilities, it is financial services that has taken the early lead in exploring application of the technology. The best example to date is B3i, the collaborative consortium announced by Allianz, Aegon, Munich Re, Swiss Re and Zurich in October 2016. Notable indications of the industry’s growing interest in blockchain also include last year’s joint investment of approximately US$55 million into Canadian blockchain-based startup Blockstream by AXA Strategic Ventures and others, and the $75 million invested into a digital currency platform by diversified insurance and financial services firm USAA.
Several of insurance’s biggest names are now testing potential uses of blockchain. Generally, the tests thus far have fallen into two broad categories:
- Internal use cases conducted by individual companies and focused on internal efficiency improvements – primarily reducing costs, but also improving top-line revenue growth by simplifying internal processes.
- Industry use cases tend to focus on the network implications and thus require collaborative efforts across the sector. The B3i consortium is a good example of an industry use case with its biggest players sharing ideas, testing use cases and pursuing concepts related to the wider insurance sector.
Smarter solutions for smarter insurance
Many believe that sectors right across the industry’s value chain could benefit significantly by adopting blockchain solutions. One of the most pronounced examples currently lies in “smart contracts”. Such contracts operate on a blockchain which isn’t controlled by a single entity. Rather, all parties can trust and rely on the self-executing protocols embedded in the contract to automatically, securely and efficiently enforce the contract’s performance across all counter-parties involved.
Claims data may well be the biggest beneficiaries of smart contracts. Currently, claims data is inefficiently shared within insurance organizations, agents and third parties (i.e. repair shops) while manual data entry processing methods are subject to considerable human error. The smart contract would ostensibly streamline the process by automating claims payments, and by filing and adjudicating claims based on secure information recorded on the smart contract. As such, the smart contract would lower costs, increase payment speeds and provide a new innovative business model.
Data lies at the heart of the insurance sector’s most anticipated blockchain applications
This makes sense, especially when one considers the increasingly crucial role data is playing in the risk-assessment and pricing models now being developed by underwriters and actuaries. Telematics, in particular, is arguably the most exciting in this regard. It essentially involves the use of a “black box” sensor that receives wireless information in order to record a person’s driving habits. It measures several elements that would be of interest to underwriters, such as distance driven; time of day when most driving takes place; the GPS location; how rapidly the driver accelerates, and how often the airbag is deployed. Insurers can then use this recorded sensor data to price motor risk more accurately. Young – but safe – drivers, for instance, may see a reduction in their premiums as a result, while someone who drives long distances at high speeds could see an increase.
With telematics data expected to be increasingly used by insurers, a blockchain could improve the claims system for insurers and customers through smart contract adoption. Indeed, telematics devices could connect to a smart contract after an accident to initiate the claim in real-time and reduce repair costs by connecting the insured with preferred vendors. Thus, the use of the blockchain in insurance assures veracity – as telematics provide confidence – decisions are made faster and become more reliable.
While it’s tempting at this stage to consider blockchain as the technology of tomorrow, there are concrete steps that insurance executives can take today to capitalize on the ledger technology’s nascent development. These include:
- ensuring your entire team, including decision makers, understands blockchain’s disruptive potential;
- devising strategies to best implement blockchain within your business
- investing in and nurturing the appropriate skills and capabilities of digital ledger technologies
- setting up a consortium or partnership to collaborate with relevant industry bodies.
Indeed, the power of collaboration to exploit blockchain’s full capability shouldn’t be underestimated. Cooperation among insurers, via the sharing of technology platforms and standards will help to drive adoption, while coordination among technology providers, start-ups, investors and regulators must also be established. Ultimately, collaboration – as opposed to competition – will enhance the insurance industry’s adoption of blockchain, and those that embrace such collaborative initiatives as soon as possible will be ideally positioned to prosper.
 Telematics is heavily employed in Usage-Based Insurance (UBI) systems – ones that seek to closely align auto insurance premiums with specific driver behaviour. UBI is also referred to as pay as you drive (PAYD), pay how you drive (PHYD), time based insurance (TBI) and mileage-based auto insurance. Drivers that participate in UBI programs, moreover, often receive several percentages off their insurance premiums if they are found to be safer drivers than their demographic cohort.