Emerging Blockchain Innovations in Insurance — I
Blockchain technology promises a secure way of authenticating, storing, managing, and protecting information, identities, transactions, and more — that can be updated in real-time. But its potential for delivering useful applications for insurance will depend on the development of the technology itself.
The hype around blockchain has been around for some time, never quite seeming to deliver, nor refusing to dissipate either. We do not yet know the true scale of transformation that blockchain may bring, but the real scope of blockchain-led innovations and real applications is on the horizon.
While its use in facilitating transactions is now well established, it can also be used to formalize commercial relationships through smart contracts. This is where the promise of blockchain for insurance industry lies, as it can help automate processes, facilitate smooth claims, and prevent fraud.
The global market for blockchain in insurance is expected to grow from $64.5 million in 2018 to $1.39 billion by 2023 — a compound annual growth rate of 84.9 percent. And as estimated by the Accenture Technology Vision 2019 survey, more than 80 percent of participating global insurance organizations have adopted blockchain across one or more business units, or are piloting or planning to pilot the technology.
A Quick Primer on Blockchain
A blockchain is a way of storing data where the data is distributed across many computers. It is a form of an open, distributed ledger, which may be decentralized with no one central administrator, and information may be authenticated via a peer-to-peer system. Pretty much anything can be stored on a blockchain, from financial transactions and contracts to supply chain information and medical data.
Blockchain Technology & Insurance
Blockchain displays strong potential at the intersection of emerging technologies — Internet of Things (IoT), artificial intelligence (AI), and quantum computing. In the medium and short term, there are four features of blockchain which can transform and enhance insurance ecosystems.
01 Decentralized Ledger Technology (DLT)
Blockchain’s Decentralized ledger technology or DLT helps in bringing all parties on one common platform which simplifies the quote and claim processes. Industry perceptions of blockchain are evolving and insurers are beginning to understand the true value of DLT. It is a potential catalyst for complete insurance ecosystem transformation.
As most organizations have integrated key technologies of the digital age, namely social, mobile, analytics and cloud, known as SMAC — the next wave will be led by DLT, artificial intelligence, extended reality, and quantum computing or DARQ. Just as SMAC enabled new levels of collaboration and connectivity between insurance companies and consumers, the DARQ-DLT combine is expected to transform entire ecosystems, markets and value chains with distributed ledgers expanding networks through secure connections at scale.
To take advantage of DLT for collaboration, insurance organizations need to partner with others to create DLT propositions and platforms that create value for all members of their ecosystem. Real value will come not from the technology alone, but from the ability of insurance organizations across complex ecosystems to align upon common economic incentives and governance structures.
02 Smart Contracts
Smart contracts are digital protocols where various parameters are set in advance and when satisfied, can execute various tasks without human intervention. Smart contracts use blockchain technology to turn paper contracts into programmable code that can automate claims processing and calculate liabilities in insurance for all players involved, while maintaining a secure and permanent audit trail.
They offer immense potential for accelerating the development of new insurance models like on-demand insurance, much sought after in shared economy markets. With blockchain along with IoT, claim and settlement can be automatically activated if the shared asset is equipped with a sensor that can detect and trigger a customer’s insurance journey for an insurance claim or payout.
03 Peer-to-Peer Insurance (P2P)
Peer-to-peer insurance has been around for some time, but is evolving around the principle of the decentralized autonomous organization or DAO. While smart contracts represent the first level of a decentralized application, they often involve human input, especially when the contract is to be signed by several stakeholders. If the smart contract interacts with other contracts, it can contribute to an ‘open network enterprise’ or ONE.
When ONEs are combined with the notion of an autonomous agent, or programs that make decisions without human input — a DAO, or an organization that generates value without a traditional management structure, is created.
DAOs enable P2P insurance, which can be rolled out on a large scale, due to their ability to manage complex rules among several stakeholders. Hence, insurers can expect to use the P2P insurance market well, which is essentially risk pooling — the very fundamental basis of insurance.
04 Data Storage and Exchange
Blockchain is hailed as the technology that provides more secure and traceable records compared with current storage means. Data storage and exchange are feasible blockchain applications for insurance at this stage. The technical advantages of blockchain are quite clear in data exchange efficiencies and larger-scale data acquisition.
Blockchain can promote the capture of timely and accurate big data resources, which allows introduction of new risk instruments and capital opportunities in the market. More sophisticated forms of self-insurance and new tailored insurance products are possible, along with new data pooling opportunities in transactions where multiple parties share data.
Blockchain brings the ability to access a single and real-time resource of data, which will change the way buyers manage, and finance risk, as well as enable insurers to price and govern claims recoveries accurately.
The Blockchain Disruption
Blockchain is well placed to disrupt existing business models in several ways. From minimizing identity theft, automation of existing time-consuming processes like identity validation to easier and faster claims processing by authenticating transactions, policies, and consumers using smart contracts, the possibilities are quite tangible.
While it is still a recent technology and needs to be fully understood, so far, the insurance industry has deployed a ‘wait and watch’ approach towards it. But decentralization strengthens information sharing and reduces information asymmetry. Insurance companies ought to pay more attention to pricing, product development, claims services, and even reputation risk. All of which will benefit from leveraging and harnessing blockchain’s true potential.
Blockchain applications on the shape and capabilities of insurance products will be explored in our next and concluding part.