By 2027, experts expect the surety industry to reach a valuation of more than $25 billion.
However, for the surety market to continue growing, it needs to digitize and embrace the latest technology — including blockchain technology.
This article explores the future of blockchain in the surety industry, discusses the pros and cons of digital bonds and explains how to get bonded and insured digitally.
Why Does the Surety Industry Need to Digitize?
In response to the COVID-19 pandemic, businesses in all industries were faced with a sudden demand: Go digital or get left behind.
The surety industry has lagged on digitalization. In fact, bond execution still involves antiquated technology like typewriters and fax machines.
The slowness to adapt has to do, in part, with the exclusivity of the surety field. Surety bonding has always been a niche area within the specialty insurance and property and casualty sectors.
Many people don’t know how to get bonded and insured, nor do they understand the difference between bonding and traditional insurance. This uncertainty has led to a slow transition to digitalization.
What Do the Experts Say?
With more and more businesses going digital these days, it only makes sense for the surety industry to follow suit.
In an article published by Surety Bond Quarterly, Michael Lischer, the VP and director of surety at IMA and chair of the NASBP Automation & Technology Committee, asked why bonds can’t be issued digitally. He said it’s especially surprising that this isn’t an option because so many other processes, from buying cars to borrowing money, can be done online.
Lischer acknowledged that, in the surety industry, obligees must have faith that their bonds are authentically and appropriately issued. Paper bonds provide this feeling. However, he believes digital bonds can, as well — particularly with the help of blockchain technology.
See also: Is Blockchain Still on Track?
What Is the Role of Blockchain in the Digitalization of Bonds?
For those who are hesitant about incorporating blockchain technology into the surety industry, a lack of understanding about how blockchain works may be part of the problem.
Blockchain technology gets its name from the fact that it stores data in blocks, which are linked in a chain.
Blockchain allows for exceptional data consistency because no one can delete or modify the chain without a consensus from the entire network. The system features built-in tools and mechanisms to stop unauthorized transactions for maximum consistency and security.
Blockchain is already used in many fields, including retail, to create unalterable ledgers for order tracking, account management and payment processing.
When speaking about blockchain technology in the surety industry, Lischer noted that blockchain bond solutions have the potential to be more secure than traditional processes because of the automatic authentication process.
How to Get Bonded and Insured With Blockchain Technology
If blockchain technology were applied to the surety industry, the process would start with an electronic record.
A bond specialist would create the bond and share it with all parties. Any changes made to the bond would automatically be added, and then everyone involved would have access to and could see a history of the changes throughout the entire process.
Blockchain technology eliminates the need for typical and inconvenient elements of the bonding process. Examples include wet signatures, raised seals and acknowledgments from notary publics.
Incorporating blockchain technology can also increase the speed at which bonds are issued and reduce the costs of issuing hard-copy bonds.
In the same article from Surety Bond Quarterly, Patrick Schmid, the VP of The Institutes’ RiskStream Collaborative, explained that the digitalization of the surety industry could also transform insurance regulations and compliance.
Schmid noted that blockchain creates the possibility for regulators to monitor permissioned insurance information in real time. This real-time monitoring would also help when it comes to verifying information, including bonds and powers of attorney.
How Do Digital Bonds Reduce Financial Risk?
Increased security is one of the most significant benefits of incorporating blockchain technology — and digitalization in general — into the surety industry.
Every year, fraud in the insurance industry costs U.S. consumers approximately $80 billion, according to the Coalition Against Insurance Fraud (CAIF).
The insurance industry leaves much room for error, which increases the risk of fraud. If insurance and surety companies could store claims and bond information on a blockchain, they would have an easier time identifying and stopping suspicious behavior before fraudulent activity can occur.
Blockchain technology would introduce several elements that reduce fraud and increase financial security, including efficient documentation authentication and the creation of a permanent record of all transactions.
Because blockchain technology is encrypted, participants in the surety issuing process can trust that transactions are secure and authentic. Encryption protects everyone’s privacy and helps to minimize confusion.
In an interview with Risk and Insurance, Brian Scarbrough, a partner at Jenner & Block, explained that encryption also eliminates the risks of multiple networks being hacked at once.
Users trust an entire network of participants instead of putting their faith in one centralized party. This approach also encourages honesty because all parties must vote on a transaction before it’s added to the blockchain.
See also: Blockchain: A Hammer Looking for a Nail?
What Are the Downsides of Going Paperless?
The decentralized nature of blockchain technology naturally increases security. However, it can also be challenging to maintain.
This issue is even more likely to occur if a single organization creates its own blockchain. The computers running the network could end up centralized, which defeats the purpose.
Many people also have negative ideas about blockchain. They don’t understand it and, therefore, don’t trust it, meaning they might be hesitant about moving forward with digital bonding and working with a bond specialist who offers this option.
When Will Blockchain Become the Norm?
Blockchain certainly has the potential to revolutionize the insurance industry and the surety industry, specifically.
Several businesses are currently trying out blockchain technology to serve their clients better. However, it will take time before blockchain becomes the norm.
As more professionals successfully issue digital bonds, others will likely follow suit and develop more trust in the technology.