Viewpoint: The benefits of blockchain for the insurance industry
Due to its transparent and auditable nature, blockchain technology offers increasingly streamlined reinsurance processes – in particular, where multiple insurers and reinsurers collaborate
Blockchain technology offers many advantages, including speeding up payments, streamlining reinsurance processes and tracking insured assets
Since blockchain’s widespread introduction to the world around 2009, its uses have exploded through the creation of cryptocurrencies, decentralised finance applications, smart contracts and non-fungible tokens.
A blockchain, simply put, is a distributed database that maintains a growing list of transactions in a “trustless” manner. Blockchains are best known for ensuring a secure and decentralised record of transactions in cryptocurrency systems.
However, the technology is not limited to these uses: from finance and the public sector to insurance, blockchain can make data in any industry secure and immutable (that is, verifiably recorded).
Operating in a highly competitive environment means insurance companies must offer both value for money and excellent client experience. Blockchain technology offers significant options for efficiency gains, cost savings, faster payouts, transparency and fraud mitigation. It also enables real-time data sharing between various parties in a traceable and trusted manner.
Smart contracts – programmes stored on a blockchain that run when predetermined conditions are met – can automate the execution of an agreement so all participants can be certain of the outcome. As defined by IBM, smart contracts work by following “if/when… then…” statements that are written into code on the blockchain, before a network of computers execute the actions when predetermined conditions have been met and verified.
In insurance, this could mean the introduction of effective automation of customer risk scoring, claim validation, policy issuance and regulatory reporting. Benefits include instantaneous processing of data from an insurer’s corporate system and relevant third-party sources to speed up underwriting and claim resolution cycles.
Additionally, smart contracts can help prevent fraud, tackle compliance breaches and improve data security via immutable records of transactions and events. Fraud is a serious problem for the industry. According to recent data from the Association of British Insurers the cost of an average scam recently increased to £15,000 ($18,630), up 20% on 2021.
Blockchain technology offers significant options for efficiency gains, cost savings, faster payouts, transparency and fraud mitigation. It also enables real-time data sharing between various parties in a traceable and trusted manner
In essence, smart contracts are self-executing programmes that can allow insurers to automate contractual liabilities in multi-party insurance agreements. Therelatively low cost of smart contracts and their transactions means insurance products can be much more competitive for penetration of underinsured markets, for example in the developing world.
In 2017, Axa launched the fizzy platform – a flight delay insurance tool leveraging the public Ethereum blockchain to store and process payouts to policyholders whose plane is more than two hours late. Because the smart contract is connected to global air traffic databases, as soon as the delay is observed, compensation is triggered automatically.
Ultimately, Axa has automated this simple claims process, built more transparency into its operations and bolstered customer confidence – customers know in advance how much they will be reimbursed.
Despite fizzy’s discontinuation in 2020, as travel disruption spiked during Covid-19, there is still demand for the technology. According to Accenture, the global blockchain market was expected to grow from $64.5m in 2018 to $1.39bn by 2023 – an annual growth rate of 84.9%.
More recently, analysis from Research and Markets forecasted a compound annual growth rate of more than 63.4% for blockchain in the insurance sector.
It is easy to see why there is such a buzz around blockchain. Blockchain enables the automation of various manual processes, including data entry, verification and reconciliation. Minimising paperwork and removing intermediaries can also lead to reduced administrative costs.
It also enables more streamlined cross-border collaboration, transactions and development of insurance programmes with partners and customers. This is thanks to blockchain’s ability to remove intermediaries, fees and operational costs associated with traditional currencies. Payments are therefore processed in minutes rather than days and funds can be transferred directly between sender and recipient.
Other industries are already embracing the potential of blockchain-based cross-border payments. In 2020, JP Morgan rebranded its blockchain-based Interbank Information Network as Liink to address delays in cross-border payments.
The technology uses a mutually accessible ledger that enables banks to exchange information about compliance checks and other exceptions preventing completed payments. Liink app users can validate account information before initiating payments, as well as check the formatting matches the country and currency-specific information required to make the payment.
Due to its transparent and auditable nature, blockchain technology offers increasingly streamlined reinsurance processes – in particular, where multiple insurers and reinsurers collaborate. According to PwC, blockchain solutions could remove 15% to 25% of reinsurance expenses, saving the industry between $5bn and $10bn.
Sharing data between these two parties is a complex business; it is time-consuming and requires duplicate manual work and a level of trust between the two. Blockchain eliminates trust required by traditional centralised authorities and their checks to ensure the integrity of transactions, which helps ensure their own and their clients’ information is safe.
Finally, blockchains can be used to track insured goods and assets (think shipping) as they move along the supply chain, collecting data via sensors including location, temperature and humidity. This data can be used by insurance companies to make payments in the event of a loss.
The technology also offers transparency as cargo moves between different parties, from the producer through the distributor to the consumer. It can also mitigate fraud by securely recording transactions between parties in a verifiable and permanent way that makes it very difficult for bad actors to hack the system.
However, it is important to understand blockchain is not a panacea for every insurance firm – other industries have tested the technology and failed. It is not easy to integrate decentralised technology; however, there are applications available for those keen to try it. Ultimately, you should at least explore the technology and conclude if it works for you and your clients.
Chris Trew is founder of Stratis