Without a crystal ball it’s hard to know whether any technological innovation will live up to the early hype. Such is the case with blockchain technology. While some insurance industry analysts see great promise in this emerging technology, others have yet to be convinced. Until it becomes clear whether or not this technology will live up to its early promise, insurers are well advised to at least monitor where things are heading. Insurers that ignore this technology risk putting themselves at a competitive disadvantage.
So what is blockchain technology? Fundamentally, it is a secure way to record online transactions. Instead of having a central database overseen by a trusted administrator, blockchain technology involves a decentralised digital ledger that records transactions on countless computers around in the world. Due to the wide distribution of the ledger, there is no central point of vulnerability that can be hacked or that can fail. Within a blockchain, each individual block contains a batch of encoded transactions as well as information on the previous iteration of the block within the chain. This iterative process confirms the integrity of the entire chain going all the way back to the first block in the chain. It is the unassailable security of the data that sets blockchain apart from other technologies.
The best-known application of blockchain technology is bitcoin, but the technology is being used for other commercial applications. According to the market intelligence firm, Tractica, the annual revenue from the business use of blockchain in 2016 will be USD 2.5 billion. By 2025, revenue is expected to reach USD $20 billion.
Although the use of blockchain technology within the insurance sector is still fairly limited, this is expected to change. A few weeks ago, Novarica published an executive brief that described blockchain technology as a source of both disruption and opportunity for insurers. Novarica is a company based in Boston that provides consulting services to insurers regarding technology. When Novarica published a report a year earlier on blockchain, the concept had not yet become relevant to the insurance industry. A year later, the company described the technology as the ‘enterprise equivalent of a household name’ and one that will become an important platform for some lines of insurance in the near future. With that said, a report from Strategy Meets Action, a Boston-based insurance consulting company, indicates that nearly half of the insurance companies it surveyed were either ‘slightly familiar’ with the concepts of blockchain or were ‘not at all aware of blockchain’. So much for being a household name.
Even though the jury is still out as to what benefits the insurance industry may be able to glean from blockchain technology, this is a technology that bears watching.
In an article by Raconteur Media Ltd., the insurance industry was identified as the sector in which blockchain technology could have the most profound, transformational and disruptive effect with cost-savings in the billions of dollars. Peter Hacker, the Chief Innovation Officer of a London-market wholesale brokerage, is quoted as saying blockchain ‘is going to the heart’ of the costly and inefficient use of centralised databases and, in so doing, is promising enormous change. The article in Raconteur notes that several major insurers, as well as Lloyds of London, have invested millions in blockchain research as a means of strengthening ties with consumers, regulators and each other as they seek to eliminate errors and improve efficiency. The article cites accounting firm PwC’s example of claims that are recorded on a blockchain. The blockchain ‘would refuse multiple claims for the same incident, knowing what had already been activated, and the smart contract would pay out only on specific conditions being met’. Ashley Hirst, COO and Chief Underwriting Officer of AIG in London states, ‘because the record is fundamentally public, it eliminates huge opportunities for corrupt or criminal behaviour…. (T)he record is public and that is potentially transformative.’
The global insurance industry is in the early stages of assessing the ways in which blockchain technology may or may not transform the industry. As noted by Mr. Hirst, ‘No one has come along and shown us the Holy Grail.’ Yet.
Although blockchain technology may not qualify as a game changer, it is estimated that an insurance contract written on a blockchain would realise expense savings of fifteen to twenty per cent through efficiencies in the underwriting and claims-handling processes.
Insurers who are able to capitalise early on this emerging technology will have an advantage over their competitors.