Are businesses getting smarter? For the insurance industry, it seems like we can turn to smart contracts for tech-savvy progress.
We will take a closer look at how businesses (henceforth known as the insured in the context of this article), insurers and insurance brokers are using and are affected by blockchain technologies
What is Blockchain?
A blockchain is a decentralised database of transactions that everyone on the network can see. Computers in this network must all approve an exchange before it is verified and recorded into a growing chain of data.
As a publicly distributed ledger system, it allows tracking and recording of assets and transactions without a central trust authority such as a bank.
It is particularly attractive to businesses because of these key characteristics:
- Efficient: Transactions can be made quickly and automatically, thus streamlining processes and removing substantial transaction costs and time.
- Transparent: Since transactions are verified by every node in the system before it is recorded, the resulting public ledger is tamper-proof and accurate with a highly traceable audit trail.
- Decentralised: Transactions do not rely on a central point of control which removes the need for users in the blockchain system to trust a central authority. The technology uses strict protocols across a network of nodes to validate transaction and record data in a manner that is incorruptible.
Blockchain and Cryptocurrency Investments in Asia, USD Mn
Source: FinTech Global
As of September 2017, global investment in blockchain and cryptocurrency amounted to USD 1.41 Bn, of which Asia accounted for USD 161 Mn (11.4%). This represents a 4.6 times increase in total investments in Asia since 2014.
Technology can be a powerful tool to be harnessed, and Asian businesses have been the most eager to embrace blockchain technology due to its aforementioned key characteristics.
Example of blockchain in action: Blockchain Food Safety Alliance, China
In 2017, Walmart, IBM, JD.com (a Chinese retailer) and Tsinghua University announced a Blockchain Food Safety Alliance to improve food tracking and safety in China. The alliance involved IBM’s Blockchain Platform, Tsinghua University’s technical advice and Walmart and JD.com’s expertise in food safety measures.
The alliance is expected to create a solution that enables accountability and gives stakeholders (suppliers, regulators, and consumers) greater transparency over how food is handled from farm to consumers.
Key Obstacles Affecting Blockchain Application for Businesses
- Cyber Security: Blockchain technologies have been touted to be secure, but increasing attacks on cryptocurrency exchanges prove otherwise. Cyber security concerns would play a key role in deferring adoption rates of blockchain applications.
- Regulatory Environment: Within Asia, only a few countries (such as China) have released national standards for the use and adoption of blockchain technologies. The lack of standards results in uncertainty amongst organisations as to what type of blockchain technology should be implemented.
- Resources: Implementing blockchain technology is not a small investment. It can sometimes involve changing the entire IT infrastructure. The high costs of setting up new blockchain systems will be a key obstacle for believers of this technology.
Blockchain technology is particularly relevant to insurers in the form of smart contracts, which act as automated intermediaries that execute peer-to-peer exchanges of data, assets and currencies.
Automation and Efficiency
During claims, for example, smart contracts can automatically perform claims due diligence, calculation of claim amounts (on the basis of the triggered event) and process the final payments to the insured.
According to experts, blockchain technology in insurance could save the industry USD 5 to 10 Bn in expenses accrued during routine processes. The B3i consortium also stated that the technology has the potential to improve efficiency across the value chain by up to 30%.
Insurers are eager to reap the benefits of using smart contracts. On June 2017, AIG sold its first blockchain-based multinational (UK, US, Kenya, and Singapore) insurance policy to Standard Chartered; with the underlying objective to reduce both costs and regulatory complexity. Through the smart-contract technology, AIG would be able to track policy and payment data in real-time. (Link)
Blockchain’s public, temper-proof ledger technology also tackles the insurance industry’s age-old nemesis: fraud. According to the non-profit organisation, Coalition Against Insurance Fraud, around USD 80 Bn a year is lost globally due to fraudulent claims.
Smart contracts prevent multiple bookings/claims from the same accident or event and establish ownership through digital certificates. If smart contracts are implemented industry-wide, the industry has a strong chance of eliminating the problem of fraud for good
New technologies often face resistance. In a 2017 study, Cognizant identified both internal and external barriers encountered by insurers for implementing blockchain technologies.
Barriers to Implementing Blockchain in the Insurance industry (Cognizant, 2017) (Link)
The graph above is from a Cognizant Survey of 526 global insurance professionals conducted from January to March 2017 to determine the level of understanding of the blockchain technology within the insurance industry.
Majority respondents were from Europe (54%), Asia-Pacific (31%) and the US (15%).
The survey highlighted that the key internal barrier for insurers was communicating the business value of blockchain to key decision makers, while privacy and security remain as the key external barrier among the majority of the respondents.
Within the insurance industry, blockchain technology is being or could be applied in areas such as:
- Catastrophe swap and bonds
- P&C claims settlement
- Market Investments
- Financial audit and reporting
- Index-based livestock Insurance program
- Flight Insurance
- Automating underwriting and claims settlement with the help of smart contracts
- Internet of things (IoT)
- Parametric Insurance
- High-value assets Insurance
- Medical claims processing
THE INSURANCE BROKERS
Before long, insurance brokers may see smart contracts starting to perform some activities that have traditionally been performed by brokers — and doing it far more efficiently. Brokers will have to adapt accordingly by changing the nature of how they add value.
This creates an opportunity for brokers to evolve simultaneously with the insurers and develop new solutions with blockchain functionalities.
Key Channels for Brokers to Adopt Blockchain
- Partnerships: Team up with large technology companies (such as IBM) to create customised blockchain solutions.
- Acquisitions: Acquire small InsureTech start-ups that have successfully launched and utilised blockchain technologies.
- Incubator/Accelerator Programs: Host various accelerator programs for InsureTech-based start-ups using blockchain, and invest in a company which provides a viable business case.
Effect on Broker Commissions
Smart contracts will reduce the amount of friction a broker faces during the process of matching capital with insurable risks. This would result in a reduction of the complexity of a broker’s work, thereby creating downward pressures to reduce commission rates.
To avoid such reductions, brokers have begun to offer more solutions to its clients (insurers) such as data analytics and risk analysis to differentiate themselves.
JLT Analytics and Risk Consulting
JLT has dedicated analytics and consulting practice which enables clients to deal with exposures through assessments, data and modelling. It enables clients to develop a holistic risk management program. The analytics solutions encompass the following:
- Analytics, including property and business interruption and casualty
- Property and casualty claims
- Forensic accounting
- Risk and loss control services
- Business continuity management
- Supply chain risk management
- Enterprise risk management
As with most technologies at this stage of infancy, a lot more has to be done for blockchain applications to develop into industry-wide solutions.
The insurance industry needs to be willing to work with each other to align standards and processes, while regulatory bodies have an important role to create suitable frameworks that protect consumers and guide the use of blockchain.
How exactly will blockchain impact the industry remains to be seen, but given that the technology itself will continue to evolve, perhaps the insurance industry will eventually need to get used to having a new middleman on the block.
For further information, please contact Graham Edwards, Regional Director of Sales and Marketing at Graham_Edwards@jltasia.com