November 21, 2017
How Will Blockchain Disrupt Insurance?
by Pavel Bains
Insurers need to stop thinking about dipping their toes in the blockchain water. They need to jump in before they’re crowded out.
One of Bitcoin’s greatest successes has been to show how a network of individuals can exchange value without the need for a central authority. When you consider the implications of projecting the same underlying technology, blockchain, onto the complex web of underwriters, insurers, MGAs, affiliates and brokers that make up the insurance industry, you start to see how disruptive it might be.
As anyone who works in insurance knows, the industry is still awash with old technology and administrative tasks that weigh heavily on operational costs and ultimately lead to higher prices for consumers. This is what occurs across established, profitable markets, while the uptake of insurance in potentially massive emerging markets remains stubbornly low.
My own experience of the insurance industry tells me that blockchain could be truly transformational in reducing the costs associated with issuing policies and managing claims. However, to truly take advantage of this innovation, insurance companies need to stop standing around the sides, thinking about dipping their toes in the blockchain water. They need to jump in before they’re crowded out.
The fundamentals of blockchain
To really understand how blockchain might transform insurance, it’s worth briefly summarizing some of the key characteristics of the technology. Blockchain technology is more correctly referred to as distributed ledger technology and can include a number of blockchain protocols, with some of the best-known being Bitcoin, Ethereum and Ripple.
At its heart, blockchain removes the need for a centralized authority that controls information and validates exchanges of value between different parties. In the decentralized model of the blockchain, the entire ledger of records and transactions is stored on each of the nodes in the network for every participant to see.
See also: Blockchain: What’s the Real Story?
Crucially for the world of insurance, blockchain technology could allow any type of asset to be tracked and traded digitally, with information about the provenance, identification, credentials and rights all stored securely and transparently. Some well known examples of the blockchain being used to track assets in complex supply chains are logistics giant Maersk’s tracking of global shipping cargo and EverLedger’s tracking of diamonds. While these aren’t insurance products, these blockchain powered solutions will clearly have a significant effect on the industry.
The claims opportunity
When you consider the characteristics of the blockchain in the area of claims, the far reaching effect of this innovation start to become clear. An important element of blockchain technology that is worth mentioning here is smart contracts. These are lines of code that contain rules and regulations for actions that need to be taken in the event of certain things occurring, as well as the mechanism for executing these actions. In essence, they are digital contracts that are unambiguous in their design and don’t need any human administrator to action.
Therefore, instead of waiting days or weeks to settle a claim, the introduction of smart contracts could mean that claims are settled instantaneously and without the need for transmitting paper documents.
Our own work with a major global insurer showed what improvements can be made. The personal injury insurance app we collaborated on allowed someone to buy an insurance policy and have it issued on the blockchain. If the person was injured, they could go to a validated doctor, be treated and have the claim managed in real time, rather than sending photocopied documents and waiting 12 weeks for an answer.
We’re seeing smart contracts pop up in other areas of insurance too, including the decentralized applications built by Etherisc. These smart contracts execute payouts when certain parameters are hit, such as when a flight is delayed. The idea of tracking systems and sensors brings us onto a parallel technology that is linked to blockchain disruption in insurance, the Internet of Things (IoT).
IoT plus Blockchain will change insurance
IoT will play an important role in the future of insurance because of the important role that ‘things’ play in insurance. When you think how many insurance products can be categorised under the headings of protection for ‘things’ and protection for ‘people’, the significance of IoT becomes clear. As more and more consumer products become connected products, the potential repercussions for insurance are huge and probably go some way towards explaining why Amazon is starting to push into the European insurance markets.
Looking forward just a few years, a world where the vast majority of consumer devices are connected to the internet and capable of sending data to providers that offer a sufficiently tempting service is a recipe for disruption in the insurance market. However, as well as providing a sufficiently desirable service to convince users to hand over their data, providers will need to consider the implications of how this data is used to make better decisions.
This is where blockchain becomes such a fundamental foundation technology. The blockchain protocol is already proving how, through a range of cryptocurrency and early smart contract applications, it is capable of handling the complex interplay of multiple data sources to automate decision making.
If you compare this imagined future of real time data from a range of devices feeding into complex smart contracts that action instantaneous decisions based on this information and compare it to the slow, paper-based process of human interactions that exist in most insurance businesses now, the opportunity for disruption is brought into sharp relief.
This is why it’s so important for insurance businesses to start experimenting with the blockchain as soon as possible, so they can see how it could impact their business. If they don’t, they risk extinction. If they do, they will quickly see operational efficiencies as well as long term opportunities to develop new innovative products.
It is worth remembering that, in itself, the blockchain is not a particularly tempting consumer proposition. The lack of a shiney consumer blockchain brand is often one of the reasons sceptics point to in dismissing the suggestion that it will transform all industries.
However, much like cloud computing before it, this foundation technology will open up huge cost efficiencies in existing business models as well as entirely new business models. It is the organisations that can understand and utilise it properly in order to overlay customer-centric services on top that will win. After all, consumers aren’t generally interested in the tech stack behind the product they buy. They are interested if that tech stacks makes a product cheaper or more personalised to their needs.
Microinsurance that is highly personalised to the needs of individuals but still cheap to administer is entirely possible in a world of IoT devices and smart contracts. Personalisation within insurance is sometimes seen as a bad thing, with the secure, healthy or young getting the best deals and the vulnerable, unhealthy and old missing out. Certainly the question of societal good will not go away in insurance but blockchain provides a potential solution here too because of its transparent features.
The shared ledger means that individuals can securely store their data on the blockchain and control who can access it and for what purpose. Our own experience in this area came in the related field of finance, with a Know Your Customer (KYC) process we developed for a consortium of major financial institutions including HSBC, MUFG and OCBC.
See also: Blockchain: Basis for Tomorrow
The shared ledger application that was developed leveraged the Ethereum blockchain to help banks reduce the time and cost of onboarding customers, share customer data in a secure manner and facilitate ease of customer data management.
Once onboarded, an individual’s customer profile was encrypted and stored on the blockchain. Then, because of the proprietary multi-party key encryption protocol that was used, the data could also be shared with other banks if the customer chose to do so. As a result, the solution not only eliminated the duplication of work that came from each bank having its own KYC process but also reduced the human error that was inherent in all these processes.
Test your hypothesis now
In my opinion, there’s little doubt that the blockchain will disrupt the insurance industry. The fact that data, contracts and ‘things’ (which will become ever more connected) play such an important part in insurance products means there’s almost no chance that it won’t. The reliance on legacy technology and administrative tasks completed by humans only increase this likelihood.
With this in mind, my advice to businesses is to stop prevaricating when it comes to blockchain. The exact future of a blockchain powered insurance industry may not be crystal clear yet but the wide brushstrokes that define this future state are being made. Businesses that do not make their own mark soon could find themselves squeezed into a corner or excluded from the picture entirely.
Insurance companies should be getting their hands dirty with blockchain as soon as possible. Test a hypothesis that connects your business objectives to the benefits of blockchain. In the first place, this doesn’t have to be (and probably shouldn’t be) a grand scheme based on an imagined future of personalised microinsurance built on smart contracts making automated decisions using multiple feeds from a series of connected devices.
Think of a quick win related to a key business goal that blockchain could potentially solve and which could provide measurable benefits that your colleagues understand. I imagine smart contracts might be a good place to start. By testing and learning you’ll start to build a familiarity with the technology that will bring about a clearer understanding of how it might be used to solve more operational issues, create innovative new products and protect your business from industry disruption.