Business professionals across many industries are currently grappling with the implications of blockchain technology. One industry where having a distributed, encrypted, and immutable ledger of transactions could have a major impact is insurance.
Because of the way that blockchain can help to democratize trust in financial transactions, there’s reason to believe blockchain could prove hugely disruptive to the insurance industry, which in 2016 collected $1.1 trillion in premiums in the United States alone.
“It’s not hard to see how distributed, secure, peer-to-peer ledgers — the mysterious and exotic-sounding technology behind blockchain — may one day be as common in the insurance industry as Structured Query Language (SQL) databases,” Ernst & Young wrote in a 2016 paper. “Blockchain has the potential to evolve into a core, underlying element in the technology ‘stacks’ of most P&C carriers, supporting a diverse range of processes and part of your company’s future technology ‘plumbing.’”
CB Insights sees blockchain helping insurers in several manners, including enabling insurance companies and their customers to transition from a paper-based workflow into “smart contracts” utilizing a digital workflow. The group also says blockchain could help to combat “common sources of fraud” that add up to $40 billion per year, and also help secure sensitive medical records.
“Today, the sheer complexity of the insurance industry creates gaps in visibility that can be exploited to perpetrate fraud,” CB Insights writes. “Claims are shuffled from insurees to insurers and reinsurers in a slow, paperwork-driven process that has many moving parts. This creates opportunities for criminals to make multiple claims across different insurers for a single loss, or enables brokers to sell insurance policies and pocket the premiums.”
Thiru Sivasubramanian, the vice president of architecture and technology strategy at SE2, which provides technology and business services to insurance companies, sees blockchain helping with other aspects of the insurance business, including agent onboarding, faster processing of death claims, and better carrier-to-carrier communication.
“In certain instances, 1035 exchange transactions can take anywhere from several days to a few weeks,” Sivasubramanian tells Datanami via email. “If the exchange is enabled with concurring carriers using blockchain, the experience will be faster and seamless for the consumer and carriers can avoid all paperwork.”
While blockchain is still fairly new, it’s already being utilized by some forward-looking firms in Europe and Asia.
“For instance, AXA France is using blockchain to offer its fizzy platform for travel insurance that offers direct and automatic compensation to policyholders whose flights are delayed,” Sivasubramanian says. “Other carriers are using blockchain technology to enable specialty health coverage, like MetLife Asia Pacific, which now offers its Vitana coverage for gestational diabetes.”
E&Y sees the convergence of blockchain and Internet of Things (IoT) technologies to create new opportunities for insurers. “As more devices and objects are connected to the IoT, the amount of data that will be created and collected will increase significantly,” the company writes. “This data will be hugely valuable to insurers as they look to develop more accurate actuarial models, or new products such as usage-based insurance [UBI] models.”
The auto insurance market could utilize data about driving times, distances, acceleration, and braking patterns to identify high-risk drivers, to validate information included on applications, and possibly even “give consumers more control over their premiums,” E&Y says.
“The challenge in this future state, however, is how to manage the sheer volume of data and logic as thousands or millions of devices are communicating with each other. With blockchain, you can manage large, complex networks by having the devices communicate and manage each other on a peer-to-peer basis, securely, instead of building an expensive data center to handle the processing and storage load.”
However, there are hurdles to overcome before blockchain can revolutionize the insurance business. For starters, blockchain requires an enormous amount of energy to run and execute.
“The global power demand from cryptocurrency mining is approximately the annual electric consumption of Argentina, according to Morgan Stanley research,” Sivasubramanian says. “One of the new changes to ‘permissioned’ public blockchain is to run using a proof-of stake [PoS] algorithm instead of a proof-of-work [PoW] system that uses Ethereum. There is a lot of research and engineering work being done to overcome this across the board.”
Sivasubramanian says three major groups have emerged to investigate the potential benefits and challenges of using blockchain technology in the insurance business. He says P&C Carriers and The Institutes have joined to form The Institutes RiskBlock Alliance.
“The Blockchain Insurance Industry Initiative (B3i), which was initially set up by reinsurance firms primarily based out of Europe, is now expanding globally,” he says. “And finally, led by LIMRA, life and annuities insurers are coming together as an industry to explore ways to leverage blockchain. LIMRA’s recently-established Blockchain Advisory Council is working as one entity to develop collaborative industry solutions.”
Just as big data analytics, machine learning, and IoT threaten to change the status quo in insurance, the blockchain also has a shot at disrupting the insurance industry.