Trust Link - Maximizing Benefits of Blockchain through a Consortia Approach

Pat Schmid, Vice President, The Institutes RiskBlock Alliance

Pat Schmid, Vice President, The Institutes RiskBlock Alliance

The blockchain, a distributed database and ledger that maintains a growing list of digital records, has the potential to redefine insurance operations and help the insurance industry overcome many of its current challenges. Using a decentralized consensus process, the blockchain “Trust Machine”, removes the need for intermediate verification and could dramatically lower costs. Industry competitors can securely share data on a permissioned blockchain, which can reduce duplicative efforts, minimize reconciliation issues and lower costs. Smart contracts – programmable code that can be written into a blockchain and self-execute – can extend potential applications and make automating large chunks of insurance-related processes much more practical.

The World Economic Forum predicted that blockchain will soon become “the beating heart of the global financial system” and within 10 years, “10 percent of all gross domestic product will be stored on blockchains”. Other groups have made similar predictions for insurance benefits. McKinsey & Company found that the insurance industry accounts for the most blockchain uses (22 percent of the total), distantly followed by the payments industry (13 percent). A Deloitte report stated that “adopting a common blockchain across the sector could create a step-change in value in the insurance industry: claims handling could become more efficient and streamlined, resulting in an improved customer experience. Such an approach could also help to reduce further, if not entirely prevent, fraud if identity management was also enforced on the blockchain—meaning that criminals could no longer crash for cash.” Capgemini research indicates that personal auto insurers could save $21 billion a year through the application of blockchain-enabled smart contracts.

Strength in Numbers

In many ways, blockchain was the next logical step in technological innovation. It fused databases/ledgers with networks through encryption and economic incentives to provide advancements in e-commerce (i.e. transactions) and computing (i.e. smart contracts). Although blockchain was born within cryptocurrency (i.e. bitcoin, ether, etc.) on public blockchains, most businesses are now focusing on private, permissioned or consortia blockchains. A consortia blockchain creates the potential for a shared database that, if adopted, could transform and automate countless traditional processes.

"Blockchain could have widespread ramifications across the insurance value chain, increasing market reach and customer personalization while cutting costs"

A consortia blockchain can also help with trust. All parties in a given industry, including government and regulators, already trade information. Trust is desperately needed and also paid for. Businesses and governments are either storing data themselves, paying intermediaries to store it for them, or both. Each of these possibilities comes with both storage and transaction costs, the latter associated with sharing data on demand. When companies both store their own data and pay intermediaries, they also pay reconciliation costs.

But what if every untrusting competitor within an industry trusted a secure blockchain or distributed ledger system to deliver information to other parties on a permissioned basis? Costs could fall substantially for all. Universal problems that affect an industry could be collaboratively worked on through permissioned data sharing. Duplicative efforts associated with transactions and various intermediaries would be eliminated. Reconciliation issues would disappear. Permissioned regulatory reporting could be done in real-time with no resource drain.

For these reasons, many within the insurance industry are turning their attention toward blockchain consortia. The blockchain works best within a robust network, so consortia, which can provide consistency among parties and dramatically cut administrative costs, are a logical starting point for adoption.

Benefits of Blockchain for Insurance

Blockchain could have widespread ramifications across the insurance value chain, increasing market reach and customer personalization while cutting costs. The industry could change in these ways:

• Insurance products, pricing, and distribution may be wildly altered as blockchain proliferation and its associated smart contracts spawn new products, such as parametric insurance and insurance implanted in transactional purchases, and realize efficiencies in the insurance process, thereby lowering prices and allowing for broader reach into emerging markets.

• Underwriting and risk management may see data-sharing capabilities and risk registries emerge. The immutability associated with blockchain provides provenance and auditability features. Peer-to-peer insurance models may also become more practical.

• Policyholder acquisition and servicing could become more efficient because new customer data will be increasingly confirmed at the origin. In addition, insurance lifecycle documents will be easily updated with blockchain technology, avoiding repeat entry and verification and easing concerns with know-your-customer/anti-money laundering regulations.

• Claims management itself could be simplified through smart contracts, while an industry-wide shared ledger could help with multilayer settlements and fraud inspection.

• Finance, payments, and accounting in insurance could also change. A distributed ledger like blockchain could allow for lower-cost international payments, more efficiency in subrogation via smart contracts, and new forms of raising capital.

• Insurance regulation and compliance could be transformed, as regulators would be able to monitor all insurance variables in real time and potentially create an industry-wide proof of insurance ledger.

If implemented, these blockchain use cases can benefit both insureds and insurers. For insureds, blockchain may improve customer service and affordability, enable greater product innovation, and allow for faster entry into emerging markets. For insurers, blockchain use may lower costs, ease data retrieval, simplify processes, combat fraud, and lower regulatory burdens. On net, a business-to-business blockchain can help the industry work collaboratively on universal problems like uninsured motorists and fraud.

Putting Blockchain to Use

Recent research suggests blockchain implementation could lead to a 5 to 13 percentage point reduction in combined operating ratios, creating a $200 billion opportunity.  But the challenge now becomes building blockchain-related applications. This could be a tall order for individual companies, given the number of evident use cases for blockchain technology in insurance.

When production-grade blockchain use cases proliferate across the industry, the first entrants will be best positioned to reap the competitive rewards. Therefore, industry participants are best served engaging early in blockchain efforts, including consortia, like The Institutes RiskBlock Alliance. The goal should be to determine use cases, prioritize them, engage in requirement setting, test the viability of blockchain applications and efficiently adopt use cases with a positive projected return on investment.

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