Blockchain and its Implications for the Insurance Industry

^{July 2020}

Blockchain continues to be a hot topic in the business world and news. Many people have heard of blockchain but may not be familiar with what it actually is. As a basic definition, blockchain is a data structure that enables the creation of a digital ledger of transactions and the ability to share them among a distributed network of computers.¹

The core benefit of blockchain is that it builds trust between parties sharing information. The information shared is encrypted as an electronic list of records or blocks. It cannot be erased, which helps to ensure trust between users. Once information is recorded, it cannot be changed without changing all of the records, which also provides for secure transactions between users. We’ve observed how this would be valuable to the life insurance industry, as it helps to ensure information is accurate, secure and trusted.

Blockchain is a data structure that enables the creation of a digital ledger of transactions and the ability to share them among a distributed network of computers.

Smart Contracts

Smart contracts help blockchain technology work. According to PwC, a smart contract is a digitally signed, computable agreement between two or more parties. A virtual third party, a software agent, can execute and enforce at least some of the terms of such agreements.² The smart contract allows the information to be shared and executed in a secure manner. For example, consider this as an If/Then program: if an insured car is in an accident, then an insurance claim is paid. The use of a smart contract in blockchain allows this type of payment contract to be completed without human interaction, as the information is secure and automated. With the automation of the contract, we can begin to see how this powerful technology can help large organizations.

Who Uses Blockchain?

Organizations with large amounts of stored records that need information to be moved and shared can benefit from using blockchain, which can include insurance companies, banks, hospitals and even governments. It is important to understand that there is not just one blockchain in the world. There are different types of blockchains in use globally, with many types of blockchain initiatives in development.

Open or public blockchain: used for governments or nonprofit organizations, where information is open to the public.
Closed or private blockchain: allows only invited users to participate, see and use the information. This would be of interest to insurance companies to use and share information on insurance policies for administration, billing and claims payments. Only information that is needed to be shared is shared.

Blockchain and Bitcoin

Blockchain is the technology that enables the existence of cryptocurrencies. Bitcoin is the first cryptocurrency, a form of electronic cash, for which blockchain technology was invented. Cryptocurrency is digital and uses encryption techniques to control the creation of monetary units and verify the transfer of funds. Bitcoin was created to work as a form of payment from peer to peer to work in blockchain.

Bitcoin simplified online currency transactions, by eliminating third party intermediaries. This avoidance of third-party intermediaries allows for currency transactions on a blockchain without using a bank that may be charging fees per transaction.

Blockchain and Munich Re

Munich Re is a founding member of the Blockchain Insurance Industry Initiative (B3i). B3i is a group of 15 member companies to test the potential of blockchain for insurance. The initial focus of B3i was on property casualty insurance and looking to see how insurers can use blockchain for catastrophe excess of loss coverage. Blockchain is used to automate and streamline processes for paying claims. The B3i initiative has been so successful that B3i has been spun off into a separate entity known as the B3i Consortium.

Blockchain and Life Insurance Industry

Magdalena Ramada-Sarasola, PhD (InsurTech Innovation Leader EMEA, Willis Towers Watson) writes that blockchain has the potential to generate disruption in the insurance industry six ways:³

Event triggered smart contracts
Increased back-end efficiency
Disintermediation
Better pricing and risk assessment
New types of insurance
Reaching the underserved

Cost savings is a major benefit that blockchain can provide. It is logical to see that claims, administration, underwriting and product development can be impacted by the use of blockchain, and today, much of blockchain use cases have been focused on cost reduction efforts. Initial areas considered for insurance companies include using blockchain to build automation in paying claims. Blockchain has the ability to help automate claims functions by verifying coverage between companies and reinsurers. It will also automate payments between parties for claims and thus lower administrative costs for insurance companies. An analysis by Gartner estimates blockchain will generate $3.1 trillion in new business value by 2030.⁴ We can also envision a future state where new life insurance applications are submitted using blockchain.

Another potential use of blockchain would be the transmission of any type of digital evidence for underwriting, including the use of electronic health records (EHR). When digital evidence is easier to incorporate into underwriting, we can expect future changes into other areas of pricing and product development. The combination of the Internet of Things (IoT) and Artificial Intelligence (AI) will lead to automation of insurance processes that will make our industry look very different in the near future. However, these are still new technologies that require proper due diligence before being fully leveraged by the insurance industry.

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