Four years ago, blockchain was only associated with cryptocurrencies such as Bitcoin. However, awareness of the technology and its potential in the financial services space has grown significantly. Central to this is the way that blockchain enables a trusted and single version of the truth to be shared in a network without the need for any central authority. The inclusion of smart contracts which self-execute introduces further efficiencies.
This is attractive for insurance, particularly in the transaction of reinsurance. A shared version of the truth provides contract certainty and through the incorporation of smart contracts, terms and conditions can be coded so that execution can be automated. This self-execution removes the need for manual intervention in the form of reconciliation, premium collection or claims settlement.
In short, blockchain powered insurance contracts provide efficiency, trust and privacy.
Insurance Market Interest
Many companies in the insurance market have been experimenting with blockchain technology for some time. The focus to date has been on developing prototypes and internal initiatives to identify tangible benefits of employing blockchain.
For many, the interest in using blockchain lies in the hypothesis that using the technology in re/insurance contracts could reduce friction in the transaction process. The objective is to seek improved efficiency.
Inherent inefficiencies in the transaction process result in excessive paperwork, lack of standardisation and cumbersome signoffs. This leads to further issues in delays and manual reconciliations and creates credit risk and additional cash flow costs.
Placing a treaty contract on a blockchain and using a smart contract would create an undisputable single version of the truth shared across the participants in the contract – insurer, broker and reinsurer/s.
Negotiation of the terms, conditions, rates and lines can be done entirely digitally, with real time messaging through the platform. The smart contract is able to automatically calculate premiums, providing stronger cash and credit management. Claims can be automated when triggered by a valid event and automated payments can be made, resulting in zero reconciliation efforts.
According to some companies, reducing this friction could provide up to 30 per cent efficiency savings across the value chain. Reduced risk, more transparency and improved cash flow add to the benefit.
At least one company claims that it will launch a blockchain product for the global re/insurance market ready for January 2019 renewals. This would be the first tangible evidence of a commercial proposition. Based on the assumption that many others are developing use cases, we could expect several more products in the reinsurance and primary insurance space coming to the market over the next couple of years.
The Opportunity for Cross-border Regulation
Across the globe, regulators are actively interested in blockchain and its impact on the market. This interest is evidenced by active promotion of innovation, research and development, including installing sandboxes to facilitate well-controlled testing. However, the level of supervision is usually driven by usage rather than technology.
The transparency afforded by smart contracts and access to regulatory nodes (access points to the blockchain) make this interesting for regulators. Privacy is also addressed through its distributed nature with strong user control, rather than a single point of failure.
As regulation and the technology remain at an early stage of development, it is important to maintain an open dialogue with developers such as B3i as applications move from a conceptual to the operational stage.
Consequently, it is critical for jurisdictions across the globe to take a pro-active and co-ordinated approach which will accelerate industry-wide learning. This will ultimately lead to the most effective regulation and supervision, benefiting both the entire industry and the customer.
Is Blockchain a Revolution or an Evolution for Insurance?
The ‘Fosbury Flop’ a technique used in the high jump, was a revolution for athletics. Fosbury did nothing new per se, but how he did it was ground-breaking. Striving to improve the way that insurance is transacted is nothing new either, but employing blockchain technology is — in the same way as Fosbury — challenging the status quo in a revolutionary manner.
But such a transition will take time. Blockchain must gain traction and more advocates. The business, regulators and users need to be educated further before a material demand for blockchain solutions is created. This needs to be driven by the market, for the market, and not by the technology providers. In this sense, adoption will be evolutionary, but the pace of adoption is likely to be more rapid than usual.
Insurance tends to lag other industries when it comes to technology adoption despite what seem to be very clear benefits. The drive to adopt and change will probably come more from competitive pressures than other factors, not least because of the uncertainty which normally surrounds innovation.
But regulators help to accelerate this process keeping in mind the increasing need to build trust and quality for consumers.
It is probably true to say that blockchain is here to stay. The key though, is that it needs to come out of the lab and into the business for it to start to make a real difference.
Chief Marketing Officer. Ken Marke has also given numerous keynote addresses on the topic of Blockchain