Trust is everything in insurance. Insurers, reinsurers, brokers and policyholders all need to have faith in each other and in the processes, systems and data upon which they all rely. There are lots of opportunities for things to go wrong.

This is one reason why the insurance market is so interested in the unfolding developments of the distributed ledger technology known as blockchain, which, it is hoped, will offer a faster and easier way to improve accuracy and reliability of data, while cutting out a huge amount of the time currently needed to complete business processes. That in turn would generate significant cost savings and open up a huge range of new commercial opportunities for insurance industry participants, while making life much simpler for clients. But what is it?

At its most basic, blockchain is a distributed ledger shared between organisations, held at multiple locations simultaneously, and owned equally by all authorised users. Once data is entered in the ledger it is present within every copy of the blockchain and cannot be deleted or altered. This particular, simple feature could, in time – and in combination with other technologies such as smart contracts – lead to significant changes in the way the insurance industry operates, including changing the way insurance is written, sold and used. Blockchain is also a relatively straightforward technology to use and customise.

Some insurance industry observers been characteristically – and justifiably – cautious about the wider claims being made for the technology, but throughout 2016 some real world examples of blockchain use in insurance have started to appear; and some
of the biggest names in the industry are beginning to invest in its development.
In October 2016 Aegon, Allianz, Munich Re, Swiss Re and Zurich announced a new joint project, the Blockchain Insurance Industry Initiative (B3i), designed to evaluate possible uses of blockchain in insurance and reinsurance and to create process standards that would allow industry-wide deployments of the technology.

Earlier in the year, a report sponsored by PwC and published by Long Finance and Z/Yen Group showed global insurers actively investigating use of blockchain. Examining potential barriers to adoption, the research concluded there were three areas where blockchain was most likely to be adopted: placement and contract lifecycle processes, claims management; and both know your customer (KYC) and anti-money laundering (AML) processes.

In the placement process a blockchain could be used to store ancillary contract documents, which could be shared between a broker, underwriters, reinsurers and other service providers; and would be accessible to regulators or (for example) tax authorities. The PwC Blockchain Development Laboratory has created a Proof-of-Concept (PoC) technology representing a policy placement flow, with communications and negotiation between broker and insurer, then contract creation all taking place on the blockchain.

In claims management, a blockchain could incorporate all the documents related to the claims process, which would then be available to underwriters and to both a client’s broker and a claims broker; thus reducing costs, time taken to complete the process and errors. Steve Webb, UK financial services blockchain lead at PwC, says PwC has also created a PoC for this process, showing how it could be linked to a smart contract, to trigger claims settlement automatically if appropriate.

Smart contracts could be used in combination with blockchain in a number of different ways. Research from Capgemini Consulting suggests smart contracts could help motor insurers save 12.5 per cent on operating and claims expenses, allowing them to pass some of these savings on to their customers. A smart contract could include all policy details and terms, which could then be shared via the blockchain with third party service providers such as car repair firms. If a claim occurred actions could then be triggered automatically.

It is not hard to imagine similar use of blockchain and smart contracts in other forms of insurance – from travel or health policies to weather-related claims for businesses.
“We see [smart contracts] as the predominant way that insurers will leverage blockchain,” says vice-president of global insurance solutions and head of innovation at Capgemini, Mahendra Nambiar. In future, he suggests, these processes might also be driven by data collected via Internet of Things (IoT) technologies, such as sensors built into vehicles or buildings that could report on crashes or fires.

For KYC/AML processes, PwC and Z/Yen have built a prototype file transfer system that encrypts identity-proving documents and validation of them on a blockchain. An insurer or broker’s counterparty or customer could then present the documents and decryption keys to each firm with which they want to do business when needed.

Other possible use cases include improving management of insurance policies in different countries for multinationals; using blockchain instead of paperwork to manage situations where proof of insurance is required; management of portfolios of retail insurance risks; and management of excess of loss reinsurance.

Blockchain could also enable the development of new types of insurance, delivered via peer-to-peer relationships; and more customised policies for the shared economy, where consumers may act as service providers (for AirBnB-type services, for example). Another use case involves the deployment of mobile technologies alongside blockchain to enable insurance provision in environments where a conventional infrastructure and network for insurance provision does not exist, or is subject to unacceptably high levels of risk or fraud. PwC claims at least one large global insurer is developing a prototype of such an application in a developing country.

Sensitive data

All these use cases would entail storage of sensitive and/or personal data on a blockchain. Even if the data is encrypted and even if any attempt to interfere with it would in theory be easier to spot on a blockchain than if the data was held in separate locations by multiple organisations, insurers will still need to ensure there is no increase in security or compliance risks as a result of using the technology.

One problem is the regulatory stipulations around the length of time for which companies can hold personal data – which would, in theory remain on the blockchain in perpetuity. One possible solution might be to delete decryption keys that would enable access to that data – but would this satisfy a regulator? These are unresolved questions that will eventually need to be tested in court – and legal conditions will, of course, vary by jurisdiction.

Richard Magrann-Wells, executive vice-president at Willis Towers Watson, acknowledges that concerns around security remain, but stresses that data held on a blockchain is in practice likely to be safer than that stored by only one company or organisation. Furthermore, he points out, the digital currency Bitcoin, which is based on blockchain, has effectively proved the strength of its security since its launch in 2009, since when “every hacker in the world has tried to break into it”.

The need for standardisation could prove even more of a stumbling block. Magrann-Wells draws an analogy with the development of the derivatives market, which was only able to grow once derivatives contracts had been standardised.

Implementations of the technology that have already appeared include a prototype solution for settling catastrophe swaps and bonds created by Allianz and investment manager Nephila Capital; and an application created by Blem Information Management that helps insurers manage recoveries under excess of loss reinsurance.

Magrann-Wells expects to see more use of smart contract-enabled claims settlement in the near future, for some travel insurance claims such as cancellation of airline tickets, for example. Nambiar believes commercial forces will encourage adoption, as insurers use business process and cost improvements as service differentiators.

But any progress will require standardisation and cooperation, says Webb. “The real benefits of this technology come when multiple parties agree to adapt it together and agree rules and data standards,” he says. “That’s not easy.”

So can blockchain really live up to the hype and change insurance? Yes, says Magrann-Wells. ”When you combine it with other technologies, like big data and smart contracts – that’s huge. It will change insurance.” Blockchain is going to become a bigger part of the insurance world, but it will be insurers, brokers and their customers who determine how, where and when.

This article was published in the November 2016 issue of CIR Magazine.

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