Three ways blockchain is improving insurance

Blockchain adop­tion might have been slow to infil­trate the insur­ance indus­try, but now insur­ers are start­ing to realise some of the ben­e­fits from the dis­trib­uted ledger tech­nol­o­gy. Blockchain has the poten­tial to trans­form mul­ti­ple process­es involved in insur­ance, from stream­lin­ing claims and improv­ing tim­ing to enabling bet­ter trans­paren­cy in con­tracts and secur­ing data.

1 Streamlining third-party transactions

Across the indus­try, insur­ers, rein­sur­ers and bro­kers are work­ing to stream­line inter­nal process­es and trans­ac­tions. How­ev­er, this doesn’t gen­er­ate returns at scale because chal­leng­ing and diverse exter­nal con­di­tions pre­vent cur­rent process­es from being auto­mat­ed more wide­ly.

Blockchain has the poten­tial to enable the insur­ance indus­try to achieve full syn­chro­ni­sa­tion of data and con­tracts, while pro­tect­ing pri­va­cy and sov­er­eign­ty, with­out need­ing to cen­tralise the infor­ma­tion among mul­ti­ple par­ties.

The tech­nol­o­gy can auto­mate the pre-admin­is­tra­tion of trans­ac­tions to enable third par­ties to focus on the trans­ac­tion itself, with­out the need to rec­on­cile large amounts of data shared between the mul­ti­ple par­ties in rela­tion to an insur­ance trans­ac­tion. 

“All the par­ties in a con­tract can ben­e­fit from full syn­chro­nism and rec­on­cil­i­a­tion at the source, remov­ing the need for man­u­al trans­ac­tions,” says Anto­nio Di Mar­zo, head of prod­ucts at B3i, a glob­al insur­ance indus­try con­sor­tium. “In rein­sur­ance there is a huge oppor­tu­ni­ty to auto­mate all the post-place­ment process­es where large vol­umes of tech­ni­cal and finan­cial account­ing are exchanged and, cur­rent­ly, man­u­al­ly rec­on­ciled to set­tle a trans­ac­tion.”

Ulti­mate­ly, mar­ket-wide inef­fi­cien­cies can be reduced while still main­tain­ing pro­cess­ing stan­dards. “Tra­di­tion­al busi­ness process­es require each par­ty to autonomous­ly ingest the data into their sys­tems, car­ry out the pro­cess­ing, data analy­sis and then take a deci­sion to trans­act. All these activ­i­ties hap­pen in iso­la­tion, requir­ing a sig­nif­i­cant amount of effort, poten­tial­ly lead­ing to errors,” he says.

The advan­tage of using blockchain in insur­ance is that it builds trust between par­tic­i­pants and links them in the same ledger. “This is espe­cial­ly rel­e­vant where infor­ma­tion has to be put in man­u­al­ly. Blockchain elim­i­nates this and avoids mis­takes from oper­at­ing man­u­al­ly. The main dri­vers for con­sid­er­ing a blockchain solu­tion are secu­ri­ty, stream­lin­ing process­es and elim­i­nat­ing repet­i­tive man­u­al actions,” says Robert Nijhout exec­u­tive direc­tor of the Inter­na­tion­al Cred­it Insur­ance & Sure­ty Asso­ci­a­tion (ICISA).

2 Smart contracts and reinsurance

“Rein­sur­ance con­tracts are the obvi­ous use-case for blockchain; com­plex mul­ti-par­ty con­tracts that are quite for­mu­la­ic in nature,” says Robert Crozi­er, chief archi­tect of cus­tomer plat­forms and head of glob­al blockchain at Allianz. 

Cur­rent­ly, each insur­er, bro­ker and rein­sur­er bears the cost relat­ed to pro­cess­ing, trans­form­ing and adjust­ing the con­tract infor­ma­tion, and then dig­i­tal­is­ing it to facil­i­tate the exe­cu­tion of their duties and oblig­a­tions. Blockchain can elim­i­nate the fric­tion which, in insur­ance, is the risk relat­ed to the prepa­ra­tion and admin­is­tra­tive process­es required to exe­cute con­tracts. 

“These smart con­tracts will unlock more dig­i­tal­i­sa­tion at the core of insur­ance and enable more automa­tion, stream­lin­ing set­tle­ment of claims. Short­en­ing the time to return to nor­mal for busi­ness­es and cus­tomers by set­tling claims quick­ly,” says Crozi­er.

With rein­sur­ance, where a sin­gle insur­er inter­acts with mul­ti­ple bro­kers and rein­sur­ers, each par­ty is respon­si­ble for main­tain­ing, updat­ing and rec­on­cil­ing the data to achieve a tem­po­rary align­ment to exe­cute a trans­ac­tion; then the process starts again until the next rec­on­cil­i­a­tion is achieved. “There is a con­sid­er­able amount of man­u­al effort being spent to arrive at a point where they can trans­act with con­fi­dence,” says B3i’s Di Mar­zo.

Smart con­tracts have the abil­i­ty to self-exe­cute, doing away with this process. “Today, insur­ance admin­is­tra­tion is dri­ven by human deci­sion-mak­ing, sup­port­ed by ana­lyt­ics and machine learn­ing, but man­u­al actions are still required to trig­ger the exe­cu­tion of oblig­a­tions. This implies that the exe­cu­tion of con­tracts is a prob­a­bilis­tic process,” says Di Mar­zo.

Smart con­tracts are defined by dig­i­tal para­me­ters and pro­grammed log­ic, and the con­tract can self-exe­cute when the agreed con­di­tions are met. This allows the exe­cu­tion to be deter­min­is­tic and there­fore pre­dictable. “At present, process­es are sup­port­ed by tech­nol­o­gy. In the near future, there will be trust in mech­a­nisms like smart con­tracts, which will enable process­es to be exe­cut­ed by tech­nol­o­gy,” he says.

3 Data management and security

Secu­ri­ty is a fun­da­men­tal ben­e­fit of blockchain because only cer­ti­fied par­ties in the net­work can trans­act. Blockchain ledgers are a com­mon ver­sion of the truth that each par­ty holds and acts upon. “In enter­prise uses, the tech­nol­o­gy allows con­tract­ing par­ties who need to see the infor­ma­tion see it and no one else,” says Crozi­er at Allianz.  

“Blockchain allows us to move away from trans­fer­ring cus­tomer data via spread­sheet CSV files to only trans­fer­ring the actu­al data need­ed to per­form a trans­ac­tion.” This means less per­son­al infor­ma­tion is shared to achieve a cer­tain out­come. “How­ev­er, blockchain-enabled prod­ucts are as secure as the peo­ple who build them and the sys­tems on which they are deployed,” Crozi­er notes.

Exchang­ing infor­ma­tion with­in this infra­struc­ture becomes eas­i­er and short­ens the process of cer­ti­fy­ing the infor­ma­tion. As the infor­ma­tion is trans­port­ed in dig­i­tal form, it is held as struc­tured infor­ma­tion and incre­men­tal­ly improved in time. Any changes to the record are not­ed as incre­men­tal changes.

This unique, shared ver­sion of dig­i­tal data pre­vents dupli­ca­tion and man­u­al entry, with­out hav­ing to cen­tralise the infor­ma­tion. It guar­an­tees own­er­ship and pri­va­cy, but more impor­tant­ly enables syn­chronic­i­ty between the autho­rised par­ties, who have access to the same data. “It removes the need for cost­ly rec­on­cil­i­a­tion and rekey­ing of data, ulti­mate­ly improv­ing con­tract cer­tain­ty as deci­sions can be made from the same infor­ma­tion across the board,” says Di Mar­zo of B3i.

Being able to ver­i­fy the authen­tic­i­ty of a cus­tomer, pro­vid­ing his­tor­i­cal records of poli­cies and trans­ac­tions leads to bet­ter secu­ri­ty, a more dif­fi­cult process to cor­rupt files and greater pre­ven­tion of fraud, although the law still has some catch­ing up to do. “A chal­lenge to the imple­men­ta­tion of blockchain in the insur­ance sec­tor is that the legal frame­works have become out­dat­ed and need to be adjust­ed to the new real­i­ty and cir­cum­stances,” says ICISA’s Nijhout.