InsurTech In-Focus: Blockchain (part 1) — The Future of Insurance?
As we discuss the myriad elements of the InsurTech landscape, we would be remiss if we didn’t provide insight into Blockchain, likely the single most talked about technology within the InsurTech conversation.
A dominant point of discussion at InsurTech events, the conversation around Blockchain usually comes down to two core questions: “What is Blockchain?” quickly followed by “How will it change the insurance industry as we know it?”.
Before we can begin to tackle the second question, it is valuable to provide a brief overview as to what Blockchain is and what it isn’t.
Blockchain is not a type of crypto-currency. Blockchain is a type of distributed ledger technology (DLT), essentially a network of connected ledgers each reflecting the same information. When a change is made in the ledger it needs to be verified by other parties and once verified, updates throughout the network.
Whilst blockchain was originally developed alongside the crypto-currency BitCoin, the value in having distributed ledgers secure from tampering and unwanted revision was quickly recognized by numerous industries as a way to improve accuracy and efficiency.
There are three primary sub-categories of blockchain: Public, Federated, and Private. Each with slightly different ‘network’ sizes. Public blockchains are open to anyone with an internet connection to participate in the verification and transaction process. Federated and Private blockchains, by comparison have restricted membership with Federated blockchains operating under a leadership group and Private being centralized to a single organisation. (Many technologists may dispute whether Federated and Private blockchains are even blockchains at all given that their data is restricted to only a few parties; however, for the sake of simplicity, we will include them in our definition.)
Due to the nature of data privacy and the self-interest of participating parties, both the banking and insurance sector have decided to use Federated blockchains for their purposes. By taking this approach they are able to leverage the efficiency gains achieved through DLT whilst simultaneously maintaining the requisite privacy required by regulators.
With a basic understanding of blockchain established, we can move on to the second question: “How will blockchain change the insurance industry as we know it?”.
When evaluating various InsurTech technologies, they generally fall into two categories: supportive technologies and disruptive technologies. Blockchain and DLT would fall squarely into the supportive technologies category — a technology that could have broad sweeping implications as to how the industry operates in the future, but is unlikely to disrupt incumbents on its own.
Despite being a supportive technology to the insurance sector, early blockchain adoption may well be an indicator of the winners and losers over the next several years. The rapid progression of technology has resulted in a (re)insurance value chain in a state of flux. With fungible capital supporting ever softening market conditions and the value of intermediaries being increasingly challenged, the companies seeking to adopt technologies to improve their operational efficiency will likely be those that are best capable to rapidly adapt to the changing landscape. It is with this forward-looking approach to the market that TigerRisk decided to join the R3 consortium in 2017, becoming the first reinsurance broker to join the platform which is already accepted as the gold standard in the financial industry.
One of the most appealing aspects of blockchain technology for TigerRisk and the industry as a whole, is the ability for companies to build and maintain Smart Contracts — enabling instantaneous amendments recognized by all parties and potentially automatically enforcing rules around premium and claims payments. The ability for all parties sharing a contractual agreement to always maintain identical records is incredibly appealing to the insurance industry; however, it should be noted that not all smart contracts are automatically legal contracts and certain expected efficiencies around legally binding contract wording may not be recognized for a few more years.
Like many emerging technologies, blockchain and DLT are not perfect and well-established institutions are not used to adopting technology until it is able to meet every business need.
The business landscape has changed; companies who wait for technologies to solve every problem before they are adopted will be over taken by smaller, more agile competitors. No, blockchain will not disrupt and change insurance as we know it, but it may well determine the winners and losers over the next five years.