Insurance carriers are coming to understand the value blockchain brings to the enterprise.
Blockchain is a game changer for the insurance industry. The underlying technology used for bitcoin, blockchain is a distributed, immutable digital ledger that records transaction history in the form of blocks and has a timestamp linked to previous or subsequent blocks.
Transactions are digitally signed ensuring integrity, validity, and authenticity. The transaction/block is then distributed across a network of parties who provide consensus about these transactions. This distributed consensus model allows blockchain to run as a distributed ledger without the need for a central, unifying authority validating the transactions.
Appeal to Insurers
Blockchain is attractive for a variety of reasons:
The lack of a requirement for a central authority makes it an ideal ledger and settlement solution for joint ventures and affiliate relationships, which are made on equal footing without a provision for an arbitrator or manager. Having the computers verify transactions and settle them eliminates the need for clearinghouses and other settlement agents, providing disintermediation in a business arrangement and generally reducing costs while improving the speed at which transactions can be made, verified, settled, and recorded.
Digital signatures and verifications make it difficult to envision a scenario wherein a bad actor could commit fraud and introduce problems that are costly to remove and resolve. The cryptographic integrity of the pending transaction, as well as examination by multiple nodes of the blockchain architecture, protect against threats and malicious use of the technology.
Impact on the Insurance Industry
Blockchain brings operational efficiencies to insurance processes:
Ledgers that store and trace identities can help reduce cost of verification and reduce fraud over time.
Smart contracts associated with insurance events such as weather, can automatically trigger policy provisions, which can lead to straight-through processing.
Smart contracts for re-insurance can drive automated administration between the re-insurer and insurer resulting in improved cash flows.
Blockchain can lower infrastructure operating costs and eliminate data storage and reconciliation between the insurer and business partners.
Blockchain can enable automated insurance solutions requiring no human intervention. Insurance contracts will be event driven using sensors and/or trusted data input.
Cognitive services can be enabled operating on social data feeds.
Trusted IoT data feeds can be established.
Blockchain can enable a market-driven approach to insurance where insurers and service providers compete for customer business and where large aspects of underwriting, claims and billing administration are fully automated.
What to do to Adopt Blockchain?
An insurance company interested in moving toward adoption of blockchain technology should consider a structured approach:
The first entry point will likely be in the context of smart contracts, leveraging existing products/forms and beginning to incorporate smart contracts to trigger automation.
The second step would be to explore identity validation and structural mechanisms where parties can rely on the blockchain structure to provide the trust and verification to participate in exchanges of information
The development of products and services based on blockchain structures will need to remain viable in an industry that will be shif from a centralized to a peer-to-peer market.
Some of the many questions that the industry should explore:
Can smart contracts built on blockchain automate parts of the process in how business is done in insurance?
What kind of effect will blockchain adoption have on the public’s perception of risk?
How could that affect how insurance companies mutualize?
Can blockchain improve customer relations and confidence?
Companies can leverage blockchain to alleviate obstacles they are facing such as limited growth in mature markets and cost reduction pressures. This is the time for insurers to explore blockchain to determine how it can help grow their business with new products and services, while reducing administrative cost. Blockchain can be the foundation for the future.
Brett Baith is a partner with MVP Advisory Group. This article was originally published in ITA Pro.