Everybody’s talking Blockchain. What does it promise for Insurance?

There is a huge amount of buzz around blockchain and many explanations out there for what it is, and its likely benefits for financial services, especially banking and finance.

A blockchain, according to the excellent Blockchain Revolution by Don and Alex Tapscott, basically allows you to send money directly and safely from me to you. That’s without the need for a third party at all; no bank, credit card or PayPal. Digital currency like Bitcoin isn’t filed away somewhere, but rather represented in a global spreadsheet, or ledger, which is used to directly verify or approve each transaction.

Big banks have already put a lot of store into blockchain’s promise to deliver speed, and lower costs, and security with fewer errors. Barclays is using it for trade finance transactions, and the Royal Bank of Scotland is planning on piloting its blockchain in the months ahead.

All very interesting, but what does this mean for the insurance industry? This industry is often slow to adopt change, and yet blockchain has the potential to effect it more profoundly and significantly that other financial service industries.

Blockchain has already interested some big, global insurance names. Recently, Aegon, Allianz, Munich Re, Swiss Re and Zurich joined the Blockchain Insurance Industry Initiative B3i to look at the impact of blockchain on the industry. This group aims to provide a central point for companies to share ideas, develop models and test use cases that may rewrite fundamentally how they deliver insurance. These and other insurers believe blockchain’s distributed ledger has the potential to   serve clients better through faster, transparent, more convenient and secure services.

There are only a few early uses of blockchain in insurance to date. Allianz has piloted the technology by way of a smart contract solution to automate catastrophe swap transactions, with a significant reduction in placement time.

Potential applications are more than just for smart contracts linked to exotic aspects of insurance.  Blockchain’s ability to make verification strong and transparent means the technology could power fully-automated, on-demand insurance services especially for the new sharing economy services for cars, property and even domestic appliances; with potential in developing markets, too.

There are also great hopes for how blockchain could be applied internally, eliminating paper or manual processes; and the more evident benefits for blockchain are collaborative cross-industry applications, for example in the fight against fraud.

The rise of blockchain coincides with the growth of the Insurtech movement with start-ups seizing on the technology to develop competitive applications and insurance offerings.  Start-ups such as SafeShare (offering Lloyd’s underwritten insurance for the “sharing economy”), Everledger, InsureETH, Tradle are interesting early examples. This cannot be unwelcome news to established insurers who may appreciate smaller entities scoping out the benefits as well as the risks of the technology. 

Certainly, there are challenges in adopting blockchain.  The reliance on miners to verify transactions requires highly scalable, very distributed and high performance databases can be a constraint. At this stage blockchain still operates outside of regulatory and governance frameworks; the legality of blockchain contracts is unlikely to escape legal challenge in the future.

Increasingly, insurance customers expect tailored products and services and blockchain could be a significant tool in delivering them, while reducing cost and increasing efficiency and resilience for insurance companies. All good, but there is a rub: the question of timing. Blockchain requires IT investment and it could be several years before the most effective use cases can be identified and benefits realised. The B3i initiative illustrates how the industry is starting to work together, but more collaboration and communication between insurers, technology experts, regulators and start-ups is needed. Equally, individual insurance companies must determine the most likely blockchain use cases for themselves, drawing from customer need and potential.

A report last summer by London think-tank Z/Yen and PwC estimated that if reinsurers adopt blockchain, they might expect cost-savings in the region of $5-10 billion (through faster, more accurate and efficient placement, claims settlement and compliance checks). Blockchain may be a simple concept; for those reinsurers and insurers who identify how best to employ it there could be huge rewards. An interesting one to watch in 2017.