Can blockchain technology reinvent insurance?
Most of us buy insurance grudgingly, paying for a service that we hope we won’t need; and stories of people let down at claims time have left many consumers with little trust for insurance companies. Consequently, price has become the key differentiator for the category, enabling challenger brands to dramatically steal share in markets such as the UK and Australia.
This has created a significant opportunity to disrupt insurance markets by reducing costs and increasing transparency and trust. Can Blockchain technologies rise to this challenge?
Blockchain is an enabler
Blockchain is the technology behind Bitcoin; at its core, it is a security technology. The “unpermissioned blockchain” is an open, decentralised ledger which, in the case of Bitcoin, records the transfer of value. Each transaction is cryptographically chained to the previous transaction. The result is an unchangeable and verifiable public record of truth. Because there is not a centralised administrative body, it is impossible to edit, so if you want to record facts, such as property rights or financial contracts, unpermisioned blockchains are a great way to do it.
The potential applications of blockchain technology stretch from wealth to health. Financial institutions, including Barclays and Allianz, are now considering how this technology could revolutionise financial services by tracking assets, automating processes and recording the transfer of value.
In the healthcare sector, Factom, a provider of Blockchain technology, announced a partnership with HealthNautica, a medical records and services solutions provider. Their aim is to secure medical records and audit trails using the Blockchain.
And within the Lloyd’s of London insurance market, Blockchain technology could bring “increased risk-recording abilities, transparency, accuracy and speed to the insurance market”, Lloyd’s director of operations, Shirine Khoury-Haq told CoinDesk in a statement.
How might Blockchain technologies reinvent insurance?
Blockchain technology in insurance is likely to start with the use of asset repositories and smart contracts to help deliver lower cost insurance products. Down the line, open Blockchain applications could support the collection and management of data, specifically enabling customers to share their health, property and risk data to receive even more personalised pricing.
Living Asset Repositories
Understanding assets is a core capability for personal insurance businesses and this is likely to be a starting point for insurers looking to leverage Blockchain technologies. Assets generally have a lifecycle from production, to warehousing and onto multiple end-users as they are bought, sold, enhanced and repaired over time. Global insurance group Allianz has been one of the first insures to explore this use case with Everledger.
Everledger is a permanent ledger for the certification and transaction history of diamonds. Different stages of a diamond’s value chain are disparate and based on paper records. Mining, shipping and insurance are all recorded using pieces of paper which can, and do, go missing. Everledger has brought these different records together using Blockchain technology. They are able to provide an irrefutable record of the ownership of diamonds which allows individual jewels to be identified and tracked using a common database. The diamond’s serial number is registered against the database and users, such as insurance companies or law enforcement agencies, can access the entire history of a specific diamond, including changes of ownership and insurance details. If a diamond is stolen and recovered on the other side of the world, this database can allow the police to determine quickly the history of the item and its insurance details.
By creating a deeper understanding of assets, insurers can reduce their exposure to fraud, make better risk-pricing decisions and make improvements to their digital customer experience — all of which can help to reduce price.
Smart Insurance
Imagine an insurance policy where claims are paid automatically as soon as a loss occurs and without the need for a claims assessor. This is the potential for “Smart Contracts” within insurance. Smart Contracts are like a layer of logic that can sit on top of a Blockchain, with rules that prescribe outcomes to specific conditions. This means that the Smart Contract can automatically fulfil the obligations of a party, such as an insurer, when certain conditions are met. Let’s take the example of phone insurance: the asset would be registered and tracked on a public Blockchain ledger; if we were to insure the phone, this policy could also be noted against the asset, and when the phone is reported stolen, a claim is automatically triggered and verified using a Smart Contract sitting alongside the Blockchain.
Smart Contracts have been lauded for a long time because the potential of self-enforcing contracts is perceived as superior to relying on contract law. Blockchains may enable greater use of Smart Contracts because they provide the data and the mechanisms required for automatic enforcement.
Is this the end for insurance companies?
We believe that the world is shifting from closed to open — closed technologies to open technologies, closed talent networks to open talent networks and closed information systems to open information systems. In this new paradigm, Blockchain and Smart Contract solutions have the potential to fully automate insurance markets, locking and unlocking funds as prescribed conditions are met, dynamically pricing risk and enabling new markets to evolve, such as betting-like insurance products and hedging mechanisms for holiday weather. Over time, disintermediation could take place as new peer-to-peer insurance markets form, powered by Blockchains. Consumers would no longer need insurance intermediaries for financial security; instead they could rely on the technology.
However, legal complications aside, there is one major hurdle that the Blockchain can’t help us with: recovery. Insurance companies have become experts in disaster recovery — in helping people piece their lives back together following major events. Insurance is more than just financial security; the value of expertise when you need it most means that insurance companies will remain relevant for some time, albeit in a more open and efficient paradigm.
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