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.