Blockchain: A Tool for Insurance

A blockchain is a structured sequence of data units, known as blocks, which are linked together through a series of connections referred to as chains. Each block within this system stores specific pieces of information, and the chains create a cohesive network that ensures these blocks are interconnected. This technology enables the creation and maintenance of a publicly accessible ledger that records transactions transparently and securely.

The Court of Public Opinion

Public opinion plays a crucial role in the rate of uptake of blockchain technology. Negative perceptions, often fueled by high-profile legal issues and the association with cryptocurrency scandals, can significantly hinder its diffusion into industries. For instance, the collapse of FTX and the Binance trial in 2023 highlighted cryptocurrency-related crimes, leading to increased scrutiny and regulatory actions. 

However there is a growing distinction between blockchain technology and cryptocurrencies: In 2024, the focus has shifted towards leveraging blockchain for broader institutional applications. The technology's potential for enhancing transparency, security, and efficiency across various sectors—such as supply chain management, digital identity verification and insurance—is gaining traction. 

So how is blockchain technology currently being used in the insurance industry?

According to a report by Accenture, Jim Bramblet, Senior Managing Director and FS Midwest Lead, writes: “Providing a single source of truth allows friction in business processes to be drastically reduced, using solutions such as smart contracts to facilitate and automate Distributed Ledger Technology (DLT) networks.”

“Data reconciliation is made easier, accuracy is improved, and time spent uncovering information is eliminated, allowing for transparency, efficiency gains and cost reductions throughout a value chain.”

“What’s more, shared industry tasks and automation generate more seamless processes and lower total cycle times. The aggregate improvements in speed and accuracy can also create more positive customer experiences.”

Shaun Richards, Head of Enterprise Architecture at Towergate Insurance says: “Blockchain technology is being used across the insurance industry to automate claims processing and payouts, reducing manual intervention and speeding up settlements.”

“This ensures that payouts are automatically triggered based on verified claim events, eliminating the need for human oversight. By providing an immutable record of transactions, blockchain reduces fraud by maintaining a transparent and unalterable history of each claim, preventing multiple claims for the same incident and ensuring data integrity,” says Shaun.

Additionally, blockchain can simplify data sharing between insurers and reinsurers, ensuring accurate and verifiable data exchange:

• Claims processing can be streamlined through the automation and validation of claims via smart contracts, reducing fraud and ensuring quick and fair settlements. 
• Policy management can benefit from the use of blockchain, allowing for real-time updates, increased accuracy, and reduced administrative costs. 
• Blockchain can enhance risk management by providing immutable records of transactions and data, which improves the accuracy of risk assessments and underwriting processes.

“This can enhance transparency and efficiency in the reinsurance sector. The technology also enables secure and immediate cross-border transactions, reducing transaction times and costs while increasing security.”

Real World Applications in 2024

One of the most explored applications of blockchain in the insurance industry is smart contracting. In this approach, contract terms are managed on the blockchain, and payments are automatically triggered without manual intervention when specific conditions are met. The payment records are securely stored on the blockchain, ensuring that the execution of the contract is tamper-proof and transparent.

The primary advantage of smart contracts is the elimination of manual intervention, with all actions executed as per the contract recorded immutably on the blockchain ledger. This makes it impossible to forge any records. 

The most common smart contract a typical person might use is related to decentralised finance (DeFi) platforms. These platforms allow users to engage in financial activities such as lending, borrowing, and earning interest on their assets without the need for traditional banks or financial institutions. For instance, platforms like Compound and Aave use smart contracts to automate these financial services, making them accessible to anyone with an internet connection.

Many insurers are applying a smart contract alongside blockchain, which is triggered when well-defined terms and conditions are met. According to Jim Bramblet, by setting up an insurance contract that pays out under these circumstances, an insurer can process transactions with no human intervention and greatly enhance customer service.

In other words, blockchain technology can enable insurers to capitalise on digital opportunities. By implementing blockchain, insurers can streamline the subrogation process, which involves settling claims between insurance companies.. Additionally, blockchain facilitates a more transparent claims process by providing an immutable and verifiable ledger, ensuring all parties have access to the same information, thereby reducing disputes and accelerating resolutions. Insurers can also leverage shared loss histories stored on the blockchain to gain data-driven insights into prospective customers. 

This access to comprehensive and accurate data allows for more sophisticated and precise pricing models, benefiting both insurers and their clients. Furthermore, blockchain supports more efficient payments between insurers and third parties, especially during the claims process. By automating and securing transactions, blockchain reduces delays and errors, ensuring timely and accurate payments. Overall, blockchain technology can transform the insurance industry by enhancing efficiency, transparency, and data-driven decision-making.

Several insurers have experimented with and implemented smart contracts: A notable success story is the smart contract-based policy developed by AIG and Standard Chartered in partnership with IBM, piloted in 2021. The implementation was particularly complex, involving a multinational, multi-risk transfer policy with multiple jurisdictions adding to the intricacy.

Commercial Applications

The ConsenSys’ blockchain suite aims to address flaws in the insurance industry. With Ethereum’s smart contracts and decentralised applications, insurance can be conducted over blockchain accounts, introducing more automation and tamper-proof audit trails. Notably, the low cost of smart contracts and their transactions means that many products can be rendered more competitive for penetration of underinsured markets in the developing world.

The emerging blockchain ecosystem also requires insurance. Cyber insurance can be taken as a template for coverage, with extensions and endorsements for financial loss (hot wallets and exchanges), specie and crime (cold wallets and vaults), professional liability (developers), and surety bonds (technology and software projects). Insurers can cooperate with tech companies, such as Consensys Diligence, to assess risk and advise on best practices for loss control and mitigation.

Nationwide Insurance is demonstrating a strong commitment to blockchain technology. The company not only joined the RiskBlock Alliance but also became the first to adopt the alliance’s blockchain platform. This platform enhances safety and efficiency by enabling quicker proof of insurance, allowing customers to swiftly verify their information with law enforcement and expedite the claims process.

InsurTech Lemonade set up a Crypto Climate Coalition, bringing together industry-leading partners with expertise in various fields to work together on solving these challenges. Avalanche, Chainlink, and DAOstack contribute their vast knowledge of blockchain technology while Lemonade, Etherisc, Hannover Re, and Pula builds accurate, fully automated weather insurance models.

By using a DAO instead of a traditional insurance company, smart contracts instead of insurance policies, and oracles instead of claims professionals, they aim to leverage the collaborative and decentralised features of web3, along with real-time weather data, to provide affordable and immediate climate insurance to those most in need

Main benefits of implementing blockchain

“Implementing blockchain technology offers several key benefits for insurance companies. By automating claims and other processes, blockchain significantly increases efficiency, reducing both the time and labour involved, which leads to cost savings and faster service delivery. Enhanced transparency is another major advantage, as all parties have access to a single, immutable version of transaction data,” says Shaun.

This transparency builds trust and reduces disputes over claims or policy terms. As mentioned previously, blockchain also plays a crucial role in reducing fraud due to its immutable nature, making it virtually impossible to alter stored information. 

Shaun continues: “This immutability, combined with the reduction in the need for intermediaries, lowers transaction costs and decreases instances of fraud and waste. Finally, blockchain can improve the customer experience by enabling faster claim processing, secure transactions, and less paperwork, resulting in a smoother and more reliable insurance process.”

What future developments or trends

“Looking ahead, blockchain technology could bring several developments to the insurance sector. One development is greater integration with IoT devices, which will automate data collection and processing, further enhancing claims processing and risk assessment capabilities,” believes Shaun. 

“As trust in blockchain grows, the wider adoption of smart contracts is expected, enabling more insurers to use them for a broader range of applications, from property insurance to health claims. The regulatory landscape will also evolve to accommodate better and leverage blockchain technology, ensuring its effective use in the insurance sector. 

“Moreover, there is the possibility of more extensive cross-industry collaborations between insurance and other sectors, such as finance and healthcare, facilitated by blockchain. This could lead to the development of innovative insurance products and services.” 

Diffusion of blockchain in insurance

The emergence of blockchain systems, such as Bitcoin and Hyperledger, has significantly impacted traditional financial and business services models. Blockchain technology can be applied in various areas, including the clearing and settlement of financial assets. It has the potential to disrupt the banking industry by reducing costs and risks associated with financial transactions. Large software companies like Microsoft Azure and IBM are beginning to offer Blockchain-as-a-Service, which illustrates a growing interest and investment in this technology.

Blockchain technology can facilitate the creation of secure and reliable peer-to-peer (P2P) financial markets. This technology allows for computational tasks to be offloaded onto a network of anonymous peer-processors, enhancing security and efficiency in financial transactions.

The cons of blockchain

Scalability is one of the foremost issues, with current blockchain systems like Bitcoin struggling to process transactions at a high rate due to limitations in block size and the need to maintain security. Effective solutions are required to balance these factors while accommodating a higher volume of transactions.

Another significant concern is energy consumption. The Proof of Work (PoW) consensus mechanism, commonly used in many blockchain networks, demands substantial computational power, leading to high energy usage. To mitigate this, alternative consensus algorithms such as Proof of Stake (PoS) are being explored. These alternatives aim to reduce the energy footprint while maintaining the integrity and security of the blockchain.

Privacy concerns also persist despite blockchain’s promise of anonymity. There are fears of privacy leakage, which necessitate the development of advanced cryptographic techniques to bolster privacy and ensure user data remains secure. Regulatory compliance poses a challenge, particularly in heavily regulated sectors like finance and insurance. Integrating blockchain solutions in these industries requires careful alignment with existing regulations and standards to ensure legal and operational viability.

“Having adopted the fundamental technologies of the digital era—social, mobile, analytics, and cloud (SMAC)—most organisations are now witnessing the emergence of a new wave of digital innovations. This upcoming wave now encompasses Distributed Ledger Technology (DLT), Artificial Intelligence (AI), Extended Reality (XR), and Quantum Computing, collectively known as DARQ. Although these technologies are at different stages of development, they are set to become the primary drivers of what Accenture refers to as the post-digital age,” says Jim.

“Just as SMAC facilitated new levels of collaboration and connectivity between insurance companies, individuals, and organisations, DARQ—particularly DLT—promises to revolutionise entire ecosystems, markets, and value chains. Distributed ledgers will enhance business networks by securely linking industry participants effortlessly and on an unprecedented scale.”

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