October 25, 2017
Intelligent Insurer – Baden-Baden Daily
Response by Marek Kaszczyc, Vice President, Head of Poland Operations
Where is the insurance industry in the development of blockchain technology?
Marek: Blockchain, or distributed ledger technology (DLT), is the latest “next big thing” across all industries. Yet, as it infiltrates the insurance industry, it faces an uphill battle. Predictably, insurers are holding blockchain at more than arm’s length, and even investigation into or evaluation of the technology is limited right now. A likely cause of this skepticism is the relationship between blockchain and Bitcoin and its definition as the foundation of cryptocurrency. As a result, many insurers view the usage of blockchain as exclusively financial or “FinTech” in nature and therefore not necessarily related to the productivity gains of InsurTech. For there to be wider adoption of blockchain throughout the industry, insurers must embrace a broader view of the technology beyond its financial characteristics. The use of the term “DLT” begins to move the needle away from associations with FinTech.
Beyond the association with FinTech, there is also of lack of understanding among insurers about how blockchain works. This has fueled concerns about how much information recorded on the blockchain is public, who owns the data or can access it, and whether the data is secure. Insurers are rarely early adopters, but the fast follower position is comfortable for much of the industry. Thus, as use cases begin to emerge, insurers are paying more attention. As a lesson for how DLT can be internalized and implemented, the insurance industry can also look at the measured way in which cloud technology was evaluated, initially rejected, and then slowly adopted before it became mainstream and strategically adopted across the industry. The ongoing lessons of technology adoption, including cloud, suggest that the combination of apprehension on one hand, and motivation for growth and cost efficiency on the other, often drive competitive advantage. Blockchain is likely on the same trajectory. According to a report by McKinsey & Company, it is widely assumed that blockchain will have a visible effect on the insurance industry within the next 5 years.
What can blockchain do for the re/insurance industry?
Marek: At a foundational level, blockchain/DLT works largely because the network across which information is shared or distributed provides safety and security of the data recorded on the blockchain. This is a technology for which insurance, in particular, should feel a strong kinship, considering the industry’s mission to mitigate and homogenize risk by distributing it across large groups instead of letting individuals shoulder significant risk burdens. In that regard, blockchain could be a robust solution for distributed data needs among multiple parties, perhaps in syndication- or consortium-driven business models.
The insurance industry is also starting to use DLT to enable smart contracts which speak to the speed needed by policyholders and the audit trail compliance required by legislators. As a viable use case, consider a CAT bond which uses a blockchain smart contract as an impartial trigger. Today, new solutions utilizing DLT are expanding and accelerating, from on-demand insurance apps to robust policy administration systems. The applications are potentially limitless.
Where is blockchain likely to be adopted first?
Marek: Across the industry, insurance companies are brainstorming ways to implement blockchain into their processes. According to a survey by McKinsey & Company, 22 percent of the total use-cases across all sectors came from the insurance industry, which can also be interpreted as contradictory to the industry’s reputation for aversion to early adoption of technology. For individual insurance companies, back office operations can be particularly impacted by improved efficiency and greater automation. Using smart contracts, much of the menial and time-consuming work required for processing paperwork, validating claims, sharing data, and sending payments can be automated.
Beyond individual companies, the Blockchain Insurance Industry Initiative or B3i is an attempt to make blockchain useful to the industry. The group seeks to develop ways to improve transactional efficiency, automate processes, heighten security and raise the overall standards for policyholder services. In September 2016, the group unveiled a prototype to better understand the power of blockchain capabilities through market testing. Recently, it was announced that the original 15-member group added 23 new members as of October 2017. By the next year, new members will test and share their results on the prototype. Those insights can have significant impact on how insurers throughout the world view and ultimately implement blockchain. Thus, rather than a specific functionality or line of business taking the lead in blockchain adoption, it could involve a collaborative, industry-wide effort.
How could blockchain change the characteristics of re/insurance products?
Marek: Overall, the insurance industry is under significant pressure to evolve, including updating legacy systems, increasing transparency for policyholders, and reducing costs while improving efficiency. Such pressures are especially felt within the P&C sector. Adoption of blockchain can help P&C insurers revamp their delivery and servicing to meet market demands. Specifically, blockchain can help to improve transactional efficiency and transparency, increase data security, reduce fraud, and automate processes. Blockchain facilitates efficient transactions between multiple stakeholders by centralizing all important information on a shared ledger, or smart contract, which can be accessed via secure computers. This is particularly useful for reinsurers who will no longer need to seek or chase information from insureds. All premiums and other information will already be available via the shared platform. This digital process means that transactions will be processed faster; it also reduces human error because much of the paperwork and other tedious operational work is eliminated. Data stored on the blockchain is accessible to all parties involved, helping to improve transparency while also ensuring the data can be more conveniently checked for accuracy.
Beyond efficiency, P&C insurers can also benefit from cost-savings. According to a recent report from Deloitte, fraudulent claims result in more than $80 billion in annual losses in the industry. In the UK alone, there 350 fraudulent cases are detected per day, according to ABI. Often scams occur when a single claim is filed multiple times with various insurance companies. Using traditional methods in which individual insurance companies store data separately (and often on paper), it is virtually impossible to cross-check the information for accuracy or to determine if the same claim has been filed elsewhere. With smart contracts, a single claim is shared and then becomes available to all parties involved in the transaction. If additional attempts to upload the same claim are made, the system will not process them.