How blockchain will revolutionise insurance
- Charles Stewart, head of strategy and planning at Willis Towers Watson GB (CS)
- Steve Green, director at Anthony Jones Insurance Brokers (SG)
- Marijo Volarević, chief digital officer and director of digital strategy and development at Croatia Insurance Company (MV)
- Marcus Breese, cyber class underwriter at Arch UK Regional (MB)
- Pépin Aslett, head of commercial at St John’s Buildings barristers’ chambers (PA)
- Shaun Williams, chief executive and founder of Lime
Which areas and sub-sectors of insurance will see the biggest benefits from blockchain adoption?
CS: “Blockchain is likely to benefit all areas of insurance. Transactional and administration efficiency, and better data capture is essential for the evolution of the London market. Premium and claims payments will also be faster, resulting in improved cashflow management. Blockchain enables all members of the transaction – client, broker, insurer or risk manager – to view the same piece of information at the same point in time allowing for effective, simple and transparent ways of doing business.”
SG: “Blockchain should help the largest and most established insurers and brokers to overcome legacy IT systems and infrastructure, allowing them a foot up the digital insight ladder. The insurance sector is not exactly well known for rapidly evolving operating models and blockchain could (I emphasise could) be a catalyst for change. So here we have threat and opportunity - expect to see insurtech companies utilising blockchain to challenge incumbent insurers unable to adapt with online end-to-end solutions utilising data analytics. Logic and intuition would suggest that high-volume homogenous insurance contracts such as SME business or many aspects of personal lines covers will lend themselves to “smart contracts” where interpretation of intent is less open to challenge. Add to this shared, transparent information and quicker slicker communications and transactions and you should achieve better processes and the ever-illusive customer experience.”
MV: “The biggest impact perceived by traditional industry players is in fraud prevention (claims) and smart contracts triggering (automated sales). The most promising use-case at the moment is travel insurance (overseas travel assistance and health coverage) and smart contracts with third-party triggers. For example, weather-based risks like freezing or extreme heat or international cargo risk transfer, based on locked timestamp and GPS data. We also expect startups with new business models to disrupt the market in specific areas like risk sharing.”
MB: “Insureds should also see the benefit of clearer contracts and much quicker, more certain claims payment. There are product development opportunities too. I can see how marrying parametric triggers with blockchain claims settlement could transform certain areas of risk transfer. Imagine a scenario where the occurrence of an event triggers immediate claims payment. For example, wind speeds above a specified level in a specified location trigger automatic payment of a pre-agreed amount by one or many insurers. The whole concept of loss adjustment and the associated uncertainty disappears. These benefits apply to both insurance and reinsurance and have the potential to transform the insured’s experience of insurance right at the point of use.”
What are the practical obstacles holding back adoption?
SG: “Sometimes the simplest of answers are the most obvious – the costs of starting are holding back adoption. The insurance sector is notorious in grinding to a start when asked to look at investment rather than cost reduction. Take a look at most global insurers for a start and the cost focus messaging from CEOs all over the world. All insurers have their own processes and IT applications on which they run their business. Most have multiple systems after merger and acquisitions. This is the predominant model in the insurance industry. As an industry the concept of sharing and focus on trust and accuracy more than suspicion and inconsistency is a challenge. Breaking tribal behaviour is tricky so excuses for delay would be ‘establishing standards’. My experience of collaboration across multiple parties around common proposal forms, question sets and exactly what is meant by what supports my view of very practical obstacles.”
SW: “Ultimately, the biggest obstacle is culture. As with many industries, the insurance world knows it should talk innovation and technology, but frankly, it likes the way things are. There are so many moving parts in insurance, and without robust processes, systems and policies in place, there’s little chance a new technology like blockchain will be welcomed with open arms by industry leadership. Practically speaking, it really comes down to how you’re going to get this new technology signed-off and approved across the C-suite – I think that’s the real challenge for many.”
Is the legal framework set up for blockchain to be adopted?
CS: “We continue to use existing and well-established offer-and-acceptance legal mechanisms for contract formation, and this needs to be codified in the technology. The same is true for any use of smart contracts.”
MV: “This is an ongoing, regularly debated topic. In my view, it’s just another technology that currently has no consistent framework or guidance for treatment of business topics like information security audit, GDPR, and court expert witness and ruling practice – all that will be overcome in time.”
PA: “The Financial Conduct Authority’s regulatory sandbox is an environment that allows firms to test out innovative market propositions with real consumers. It is helping foster new startups using blockchain technology in the insurance world, where innovator and regulator work together from the start in a limited market without undue restriction, allowing mutual understanding of new technology and regulation. However, there are other legal issues which present real barriers to the immediate adoption of the blockchain in the market and beyond. For example, there are big questions surrounding data protection and the holding and processing of personal data, including in relation to GDPR. With blockchain using a multinational distributed ledger, where is data held or processed? There are further legal challenges, including: the protection of intellectual property rights; the use of smart contracts; which will need to be carefully programmed; electronic signatures and document authentication, as well as dispute resolution procedures. Whilst we can easily identify these problems, they do need to be worked through over time. For now, at least, that means a degree of uncertainty and startup risk.”
MB: “The legal environment is a key consideration. Theoretically, because insurance contracts become less ambiguous, legal disputes shouldn’t be an issue but in practice things have a tendency to be less than perfect. What would happen in the event of a dispute caused by a coding error? Which jurisdiction would apply? Such disputes are typically resolved by arbitration but that concept runs counter to the fundamentals of blockchain contracts.”
If blockchain promises cost reductions and efficiency, how will pricing dynamics likely change?
CS: “While better information delivers improved decision-making, this does not necessarily translate to cheaper prices in all cases. Better information allows all parties to better decide how to respond either by purchasing more risk transfer or indeed less or focus on risk litigation or avoidance.”
SG: “The future is unwritten in insurance costs – this is unchanged. Pricing dynamics are likely to be far more flexible giving the ability to alter pricing minute by minute if needed. If capacity providers are able to make more accurate risk selection decisions and have reduced operating costs the difference in pricing of risk could be substantial. Consideration should also then be given to a move away from annual pricing and the opportunities that open up for rolling /tacit renewal contracts or even short term exposures that the sharing economy opens up.
SW: “I think any future changes in pricing will be minimal. With blockchain, you’re ensured encryption – and that’s a huge benefit – one that’s increasingly important to insurers and consumers. But as far as widespread use of blockchain across the industry, I don’t think there’s a significant amount of scope throughout various business models – it’s just one part of the broader technology kit. I think the core problem can only be overcome by refreshing the entire value chain, and then enabling it with technology. Blockchain is just one tech option at this stage. As far as pricing goes, I wouldn’t consider it to be the silver bullet.”
MV: “The market will define the price tag on these benefits. We do believe it will significantly impact the risk and cost of the overall processing and therefore lower insurance premiums as well. We are working with the startup community and established leaders like æternity to support blockchain projects and technology adoption in insurance.”
MB: “In theory the benefits of stripping cost from processing should be passed on to insureds in the form of reduced premiums and enhanced insurance contract terms. The challenge will be valuing the cost savings accurately.”