The blockchain, a distributed database and ledger that maintains a growing list of digital records, has the potential to redefine business operations and help the insurance industry overcome many of its current challenges. The decentralized consensus process associated with blockchain (what some call ) removes the need for intermediary verification and could dramatically lower industry costs. The ability to use smart contracts — programmable code that can be written into a blockchain and self-execute — extends potential applications and makes automating large chunks of business processes more practical.
In a lot of ways, blockchain was the next logical step in technological innovation. It fused databases/ledgers and networks through encryption and incentives (i.e. economics) to provide advancements in e-commerce (i.e. transactions) and computing (i.e. smart contracts). Although it was born within the bitcoin protocol, that was only its beginning. Today, there are over 1,500 cryptocurrencies, most of which have their own blockchain.
Despite the rise in media attention regarding these public blockchains, most businesses are focusing on private, permissioned or consortia blockchains, not public blockchains. A consortia blockchain, for example, creates the potential for a shared database that, if adopted, could transform and automate countless traditional processes. For this reason, many within the insurance industry are turning their attention toward blockchain consortia, like , because of blockchain can lower operating costs, increase automation, streamline usage and verification of data, improve processes, and eliminate the need for intermediaries. A realization is afoot that the blockchain works best within a robust netwrok, so consortia are a logical starting point for adoption.
Blockchain and DLT Break Through
I provided a historical view of blockchain and highlighted several applications across the insurance value chain.
The paper also showcases how the blockchain can benefit both insureds and insurers. From an insured’s perspective, industry use of blockchain may enhance the customer experience, improve affordability (), provide a means for greater product innovation and allow for faster entry into emerging markets. From an insurer’s perspective, use of blockchain may lower costs, ease data retrieval, simplify processes, combat fraud and lower regulatory burdens. On net, a B2B blockchain can help the industry work collaboratively on universal problems like and fraud.
With the major benefits identified, the challenge now becomes actually realizing them by building blockchain-related applications. This could be a tall order for insurance organizations, given the number of evident use cases for blockchain technology in insurance. One way to get started is to divide the potential use cases by sector — for example, carrier, broker and reinsurer.
Impact on Carriers
The economic climate today presents many challenges for insurers. In an extended period of weak income growth, rising prices, greater access to information, ever-evolving technology, and increasing globalization, consumers demand more from suppliers — including insurers. Yet, in this increasingly competitive environment, profits have been constrained by factors such as low interest rates, weak investment returns, and regulatory scrutiny. Blockchain technology can help by creating new efficiencies — with cost containment realized through automation and disintermediation, particularly in the claims process.
The current insurance experience is complex, often relying on paper processing. Great room for improvement exists, according to feedback from customers, who want seamless, personalized solutions with minimal delay. However, today’s processes involve ingrained system complexities that hinder the ability for smooth transitions and deviation from the norm. For example, insurers interact with many intermediaries and third-party data providers, which can lead to delays and increased costs. In addition, the current claims process is largely manual: adjusters manually inspect claims submissions, verify policies, review coverage, evaluate damages and liability, and negotiate loss amounts and settlements.
Blockchains can help reduce costs through automation, as blockchain-enabled smart contracts can be embedded throughout the claims experience. Broader use of smart contracts could establish rules to enforce policy terms, notify participants of a first notice of loss, and even pay claims without requiring loss adjusters to manually administer or review every claim — instead, allowing them to focus on complex claims.
The claims submission process could be dramatically simplified and become more customer focused if smart-contract-generated submissions were incorporated into it. Engagement with intermediaries through the claims process could also improve because the flow of information would be automated and streamlined where appropriate.
Although these auto insurance examples help to tell the story, blockchain applications are needed in a variety of other areas. In fact, some of the RiskBlock Alliance’s 2018 focus will likely shift away from the aforementioned to commercial lines applications, many of which mimic pieces of the personal auto use cases above.
One notable example is certificates of insurance.
An insurance certificate is a piece of paper that provides “secondary evidence” of insurance coverage. Certificates are required in many kinds of commercial contracts: fleet, construction, marine, etc. But, what if blockchain were used as a real-time repository for policy information, allowing permissioned access and verification for those deemed appropriate (i.e., certificate holders). This could have significant impact, allowing all coverage and changes to update automatically, including additional insureds, exclusions, endorsements and cancellation notices.
Impact on Brokers
Blockchain applications will also affect agents and brokers, lifting administrative burdens and allowing for greater efficiencies. In commercial insurance, for example, exchanges of information and transactions often occur in a centralized manner. Much of the activity is documented on paper in great detail — a labor-intensive process, as insurers maintain electronic, and often physical, files, that describe all the risks.
To develop a quote, brokers may call multiple underwriters or search various insurer websites. En route to being registered, finalized contracts often undergo digital transformation, processing, and record keeping. Then, copies of the contract are sent to the brokers and insurers — and the processing and record keeping begin again.
Brokers and insurers may need to use these records in later stages of the insurance policy life cycle. In fact, the records are generally adjusted and updated throughout the life of the contract, potentially leading to reconciliation issues.
Documentation difficulties, such as data updates that might not be duplicated in other versions of the same contract, may lead to processing delays, which in turn increase the overall cost of insurance. Moreover, such difficulties can contrain growth opportunities by requiring that increasingly more labor resources are dedicated to administrative tasks.
A consortium blockchain, like the one proposed by The Institutes RiskBlock Alliance, can help by providing access to contract documentation via keys. These keys can be shared with the related insurers and brokers, allowing permissioned and secure access to the documentation and updates that are reflected across the board. In this way, a blockchain can help ensure consistency among various parties and dramatically cut administrative costs.
Reinsurer Examples
Today’s reinsurance market faces several important challenges. Profitability is constrained by low premiums, interest rates and investment returns. And legacy systems and process inefficiencies plague the sector. But blockchain technology offers new hope, potentially improving information exchange, reducing operating costs, providing true auditability, and streamlining processes.
To realize this promise, blockchain must be accompanied by an industry-wide network or consortium to improve trust and transparency and reduce administrative burdens. The Institutes RiskBlock Alliance aims to fulfill this need, bringing together all industry sectors to facilitate blockchain adoption.
Estimates around blockchain show that the technology could provide reinsurers with cost savings in excess of $5 billion. Efficiencies in claims placement, processing and settlement times and from minimized manual collaboration will likely provide much of this savings. Through a blockchain, the entire process of placement, premium cession, loss cession and payment is represented on a single ledger that can be shared among all parties simultaneously.
The RiskBlock Alliance is already building production-ready blockchain applications related to parametric insurance, proof of insurance, first notice of loss and subrogation. Appropriate pieces of these applications can easily be leveraged and bundled into a platform that helps minimize the extent of manual collaboration among the primary insurer, reinsurer, and retrocessionaires.
For example, parametric triggers using smart contract functionality could commence a claim and potentially even settle it based on predefined, codified business logic. Alternatively, a first notice of loss could kick-start the claims process, igniting automated information sharing. Either way, the blockchain would allow data and information to be shared among all permissioned parties, reducing claims leakage and providing efficiency.
The processing and settlement of claims would occur in real time, through a single source of truth, thereby limiting manual interaction among parties. And because all information is accessible on the chain, the reinsurer would not need to ask the cedent for detailed premium or loss data through a bordereau. These changes could be highly beneficial to reinsurers and their customers.
Nonetheless, building blockchain applications for only one sector of insurance will not truly capitalize on the blockchain’s network effects. Instead, the industry must join together, working collaboratively and collectively to design holistic blockchain solutions. is a not-for-profit consortium aiming to do just that.
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