Many insurance analysts are predicting the innovation that will radically change the industry will come from new entrants that seek to disrupt how existing products are sold and serviced, and to create new products by leveraging emerging technologies.
Blockchain sits atop this new technology list. Most agree that its disruptive potential is significant, as evidenced by how much attention the big banks are giving it. Although unlikely to have a material impact across the insurance sector for several years still, it is something all insurance professionals probably want to familiarize themselves with. Here is a brief overview.
Blockchain is a distributed digital ledger technology. Said another way, it is a technology that records transactions between parties on a decentralized, extremely secure network and provides an immutable record and audit trail of an agreement. Each “block” represents a legally valid record of a transaction or contract. A “chain” of information blocks is constructed with each new transaction added, one that is virtually impossible to modify. You may have heard of the digital currency Bitcoin. Blockchain is the underlying technology on which Bitcoin operates.
Although the insurance industry lags behind banking in technology adoption, it is nevertheless well positioned to benefit from blockchain. There is wide-ranging potential for efficiency gains and accuracy improvements, including automating policyholder validation and coverage verification, straight-through claim processing (FNOL is a likely starting point), and automatically triggering payout to an insured when a smart contract is in use. Generally, if transactions involve multiple parties and require not only the assurance of an intermediary but also a precise and unalterable date and time record, blockchain can be a powerful solution.
Blockchain also introduces something that insurance agencies aren’t very fond of — disintermediation (at least for some products). For example, a decentralized consortium of insurance carriers that manages all of its transactions online could eliminate the need for intermediaries on less complex coverages such as auto insurance or other mass-marketed products. In these environments, insurance entities could directly access and use things such as blockchain-registered property titles and blockchain e-identification cards to make decisions and execute transactions without the need for notaries, lawyers or brokers. And yes, all this does depend on regulators having to develop new ways to oversee self-governed networks where no central entity has responsibility for its functioning. Not a trivial task.
Blockchain can be useful as well in situations where the parties involved in transactions have conflicting interests, retroactive manipulation of transaction data is a risk, multiple uses of the same asset occurs, and no central trusted authority is available or wanted. Think music distribution and the opportunity blockchain now offers artists to own and control their content and be paid directly for their music.
The implications for decentralized ledger technology in a transaction-intensive industry like insurance are substantial. Simplifying the claims process, reducing high premiums, helping insurers create niche coverages, benefitting insureds who live in catastrophe or ultra-poor regions, the list goes on. It translates into very real possibilities to transition new and existing models of insurance into the digital age. Something at least to keep an eye on.