Blockchain – the underlying technology first used in Bitcoin – is a new type of distributed consensus system that enables transactions to be quickly validated and securely maintained through cryptography, computational power, and network users, removing the need for a trusted centralized authority. The blockchain provides an immutable record and audit trail of transactions and agreements that are replicated on computers around the world, thereby eliminating a single point of failure. Because virtually any type of information can be digitized, codified and placed onto a blockchain (a database that is tamper-proof and permanent), the technology’s potential to impact various industries is significant.
Insurance industry observers, for their part, believe that the innovative distributed ledger could introduce a variety of improvements and efficiencies to the insurance landscape, and have the following four applications:
- Fraud detection
- Identity management
- Peer-to-peer insurance
- Multiple risk participation
1. Fraud Detection
Fraud accounts for as much as $80 billion every year across all lines of insurance, according to the Coalition Against Insurance Fraud. However, because all transactions on a blockchain are time-stamped and immutable, identities are secure, and data is trustworthy, insurance fraud would be more easily detected and minimized. This would be of incredible value to the industry as it is estimated that 65% of all fraudulent claims go unnoticed.
Beyond just security, blockchain also opens the door to underserved markets. As customers in the developing world turn toward their mobile devices to conduct all transactions, it makes it easier for insurers to engage this market even without traditional financial institutions. This global expansion opens a new realm of opportunity for the insurance industry.
2. Identity Management
Blockchain’s ability to authenticate assets would also be beneficial to the insurance industry. For example, a diamond’s entire commercial history could be tracked on a blockchain, therefore making it easier to insure and premiums more accurate. Everledger, a London-based startup seeking to enhance transparency for diamond certification, has added records for over 1,000,000 of the precious gemstones to its blockchain database. Other assets that carry a unique identifier, which is difficult to destroy or replicate, could also be combined with the technology. According to the company’s website, Everledger’s permanent and immutable ledger benefits insurance firms, owners, claimants, and law enforcement.
3. Peer-to-Peer Insurance
Smart contracts could impact the industry enabling peer-to-peer (P2P) solutions. A smart contract is a contract captured in code, which self-executes the obligations the parties have committed to in an agreement. Dynamis, a P2P insurance company, is developing a framework that uses smart contracts that run on Ethereum (an open software platform based on blockchain technology that enables developers to build and deploy decentralized applications) to disintermediate traditional insurance firms by allowing policyholders to pool their funds and in the event of any claim, support one another financially. The company is focusing initially on unemployment insurance. According to the company’s website, Dynamis “provides supplementary unemployment insurance by using the LinkedIn social network as a reputation system. Applicants for a new policy can use LinkedIn to verify their identity and employment status. Claimants can use their LinkedIn connections to validate that they are looking for work. The exercise of one’s social capital within one’s social network enables participants to obtain a new policy or open a new claim.” The system, which is still in the development phase, could one day help reduce the costs of insurance.
4. Multiple Risk Participation
Blockchain Insurance Industry Initiative (B3i) made up of European insurance and reinsurance providers, is the first consortium of its kind designed to facilitate an exchange of ideas, explore the potential of using distributed ledger technologies within the insurance industry for the benefit of all stakeholders in the value chain, and pursue proof of concepts in this space. The consortium, now 38 members strong, celebrated the successful launch of the first reinsurance blockchain prototype in mid-2017. The prototype demonstrated that transactions could become quicker, more efficient, and more secure than with current methods. By the end of 2018, the first live trades on the platform are anticipated with several other products being developed concurrently.
Figure 1 – Founding shareholders of B3i (Source: B3i)
Problems of Blockchain
While the future of blockchain in insurance looks promising for delivering new and innovative ways to reach the global market, Bitcoin’s success highlights an economic problem with large blockchains. According to Digiconomist, power consumption per year from Bitcoin mining (30.14TWh) exceeds the annual power consumption of 19 other European countries.
Additionally, challenges in scaling the number of transactions processed per second via blockchain is a significant hurdle. Public blockchain implementations, such as Ethereum, can only handle around 15 transactions per second. When high transactional throughput is required, the current blockchain implementations will struggle to keep up.
Conclusion
Blockchain is a hot technology with constant on-going development. If used right we expect it will allow financial transactions to settle faster, cheaper, more transparently and with less operational risk. The benefits of using blockchain could come through enabling more efficient business processes across multiple stakeholders without “full trust” in each other. Through lowering the cost per transaction of insurances, we also expect the technology to increase competition and open new revenue streams and market segments.
Jason Oh is a management consulting professional at Novantas, specialized in financial services strategy consulting. He holds experience helping Fortune 500 financial institutions with product management, commercial due diligence, go-to-market strategy, and distribution channel strategy. He’s also an avid traveller with passion for FinTech, marathon, and blogging.
Image: Pixabay
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