Blockchain technology is one of the most exciting new frontiers for insurance, having the potential to fundamentally transform the way consumers protect their prized assets.
To understand the benefits it can bring to insurers and insureds alike, we must first understand the technology that underpins it.
The blockchain, in its simplest sense, is a network of computers used to store data securely. Because it is a network and not a central authority – like a bank or insurer – any changes to the data must be agreed right across the network for it to be accepted, hence why the blockchain is often described as a ‘truth platform’.
Nish Kotecha, Chairman of blockchain firm Finboot, says: “By storing data on the blockchain, insurance companies can reduce the risk of human error when completing tasks like processing claims or updating records. For example, someone could forget to switch out a name on an insurance policy. When trying to find the original policy, they might accidentally process it with someone else’s information, creating a dispute down the line. Human error makes paying out for claims very difficult – and claims are often processed manually rather than by machine, increasing room for error.”
The consensus of information that exists across the blockchain is frequently referred to as ‘distributed ledger’ technology (DLT), and it’s this that has the power to reshape the insurance landscape. DLT has existed for more than a decade and has been widely adopted within the mainstream of financial services, but insurance is slow to catch up.
“Adoption within insurance firms has certainly been slower than in similar industries, but the tide is turning and we are now seeing more insurance firms examining ways that DLT can support their business growth,” explains Richard Dhuny, UK DLT and Crypto Lead at digital transformation specialists GFT. “One of the main drivers for this is that insurers are beginning to look beyond DLT as an isolated enterprise technology. Instead, they are starting to understand where DLT’s value truly lies – as a catalyst for business ecosystem transformation.”
Dhuny believes that DLT could be used for know-your-customer (KYC) protocols to share data within a private blockchain, meaning that customers only need to submit information once, as well as for fraud detection, pricing, claims handling and underwriting.
Business leaders not fully embracing blockchain
One of the reasons that insurance has not fully embraced blockchain is an apparent hesitancy caused by a lack of understanding around the benefits it can bring. According to market research company GlobalData, a fifth of business leaders think blockchain is “all hype and no substance” with better-understood technologies – like artificial intelligence (AI), cybersecurity and cloud computing – more likely to solicit positive reactions.
“Blockchain has often been a poorly defined and misunderstood topic,” says Benjamin Hatton, Insurance Analyst at GlobalData. “Its association with the world of cryptocurrencies and digital assets has left it with a poor reputation among many. Although this may set back the development and implementation of blockchain in insurance, use cases will remain and continue to emerge in the future. As regulation is gradually introduced and strengthened within the space, some firms may get the confidence in the technology they need to reconsider the power of blockchain.”
Despite the seemingly tentative approach to blockchain, the hesitancy revealed by the research is not necessarily borne out by the numbers. According to forecasts from several industry observers, the value of the blockchain in the insurance market is set to skyrocket – from a present valuation of a few hundred million dollars to US$20-30bn by the end of the decade.
Unleashing the potential of blockchain in insurance
Once we overcome the knowledge gap that seems to persist, there are opportunities to be realised: blockchain will make life more convenient for consumers; it will drive efficiencies and unlock new revenue streams for insurers; and it will make the entire process more transparent for all parties.
Richard Dhuny of GFT continues: “Within the insurance sector, there are some really interesting blockchain applications coming from innovative providers that support more robust data infrastructures, less vulnerable to fraud or human error, as well as delivering greener IT practices.
“US insurance provider Lemonade, for instance, recently founded the Crypto Climate Coalition alongside other providers. The coalition functions as a decentralised autonomous organisation aimed at building and distributing at-cost parametric weather insurance for farmers and livestock keepers in emerging markets.
“One key innovation is that Lemonade receives granular weather insights from its partner network, generating models that can be programmed into smart contracts that automatically estimate the accurate premium for insuring crops based on the field’s location, size and topography. By parametrically measuring rainfall amounts in an insured field, smart contracts can also automatically trigger flood or drought claims, paying farmers without them even needing to file a claim.”
And Finboot’s Nish Kotecha is brimming with enthusiasm about a blockchain future: “Consider a world where each physical asset has its digital twin stored on a blockchain: the ownership can be easily transferred, and each activity is immutably recorded. This digital passport is then used for the provision of insurance, which is based on facts rather than perception of the asset and its historical uses and claims. If insurance provision can be made more accurate, surely it can be made cheaper and more accessible while saving time, money and resources for insurance companies?
“If insurers can track the asset, not the consumer, we have the ability to embed insurance along with the asset, rather than relying on each new owner to update the insurer on the condition or use of the asset. This has the ability to change the insurance industry forever.”