Blockchain Insurance Industry

We’ve already explored in previous articles how technology can cut down insurance premium costs in the way of usage-based insurance and how big data can be used for predictive modeling within the insurance industry. But what do we know about the implications of blockchain technology being used for financial business, realistically? It’s the latest buzzword in the fintech world; but what does it actually mean?

What is Blockchain?

Many understand blockchain as being the technology behind cryptocurrency such Bitcoin and the increasingly popular Ethereum. This was the intended use initially when Bitcoin was invented in 2008.

The 2009 white paper on Bitcoin states as its abstract:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence as events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

Sounds complicated? We’ll break it down for you.

Ignore Bitcoin, and instead of think of how Bitcoin works. This is the takeaway; it’s nothing to do with cryptocurrency. Blocks of data are chained together in a non-centralised network of nodes, where each node self-audits to verify the integrity of the blocked data. As this data is non-centralised (no central data storage or central administrator), it is transparent in the way that the authentication of all the data is publicly shared between the entire network and cannot be edited retroactively. Data can only be appended to the chain. This is referred to as “distributed ledger technology” .

How can blockchain be used in insurance?

After the success of Bitcoin, people realised that the foundational technology behind it could be used for more than just financial transactions but the transactions of all kinds of data. Organisations across numerous industries are racing against each other to achieve proofs-of-concept.

The Blockchain Insurance Industry Initiative B3i comprises 15 international insurance and reinsurance companies dedicated to doing just that, in a joint effort to explore the opportunities of the new blockchain technology within the insurance industry. The vision, they proclaim, is to be less about admin and more about insurance. This includes the streamlining of communication and transactions by reducing administration and processing times, as well as improving risk data management, via a shared, transparent record of data. Improving the flow of information between all parties involved, using blockchain technology and distributed ledger technologies, will benefit both the insurance service provider and the end customer.

During 2017, B3i has produced their first prototype partnering with IBM using Hyperledger as the platform’s underlying technology. The blockchain application shares risk data on a distributed ledger that allows for smart contracts, privacy, multi-party transactions, approvals, settlement, asset transfers, and more. They hope to deploy this product, a Property Cat XOL smart contract management system, in 2018.

Blockchain Insurance Industry Initiative B3i

Source: Architectural Overview of the Hyperledger

Kristof Terryn, the Group Chief Operating Officer at Zurich (one of the founding members of B3i) has said:

The many new additions to the B3i Initiative highlight the appetite insurers and reinsurers from all over the world have for blockchain technology. I am confident that blockchain can help bring a digital mindset to the core of our business, simplify the way we work and support us in focusing even better on our customers.

Essentially, the use of blockchain technology can drive efficiency and reduce costs at both ends. Based on blockchain principles of transparency and shared authentication, things like claims history, records and chains of custody can be shared and verified cross-industry. This transparency facilitates the level of trust between consumers and businesses, but also places more responsibility onto the consumer to control how their personal data is used and its relationship with the insurer – as well as other service providers.

In addition to the cost benefits, by decentralising customer data and removing any central point of vulnerability, companies and customers alike will not have to fear any loss of confidential data as the transactions are cryptographically recorded across the entire chain of computers and cannot be retroactively altered. This makes it incorruptible, and virtually impossible to be hacked, reducing error rates and disputes.

Blockchain Applications in Insurance

  • Automatic verification of the authenticity of identity, medical records or police records, ownership and location history, the supply chain of a product, etc. The administrative costs associated with verifying policyholders’ identities, claims and third-party data can be reduced by automating the operation.
  • Automated claims handling using blockchain-based smart contracts that can automatically pay out based on the conditions set in the smart contract (such as if a car is repaired in one of a pre-approved list of garages pre-defined by the insurer). Claims don’t require assessment, as they are already publicly verified.
  • Smart contracts that automatically update tariffs based on the policyholder’s verified data.
  • Improve insurance fraud detection by automatically checking the data required by the insurer to ensure that the customer is properly covered. This can also prevent customers from accidentally filling in quote forms incorrectly, and paying for inadequate cover or more cover than they actually need. According to the Association of British Insurers, fraud costs honest customers approximately £50 extra a year to compensate. By minimising the potential for fraudulent activity, customers can benefit from lower premiums.
  • Prevent multiple claims with different insurers from being made for a single event, as data is shared cross-industry.
  • Bridge together Internet of Things with blockchain-based smart contracts, that will automatically trigger a payout should a connected device detect the occurrence of an insured event.

Realistically, we are years if not decades from this kind of technology becoming completely implemented into our daily infrastructures. For a start, it would first need to become standardised for it to become an efficient reality. But it’s likely that we’ll start seeing blockchain technology becoming increasingly adopted across numerous sectors over the next couple of decades. The global efforts and resources being invested into the technology now are necessary in order to profit from the benefits of blockchain in the future. Like with any other industry, blockchain technology can massively transform how insurance works.

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