Every emerging technology has its naysayers, who can be very accomplished in their field and still end up being wrong. For example, columnist and economist Paul Krugman once opined on the Internet’s future, stating: “Most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

Similar skepticism has developed around the blockchain, a distributed database and ledger that maintains a growing list of digital records.

The blockchain has the potential to redefine business operations and help the insurance industry overcome many of its current challenges. The decentralized consensus process associated with blockchain removes the need for intermediary verification and could dramatically lower industry costs. The ability to use smart contracts—programmable code that can be written into a blockchain and self-execute—extends potential applications and makes automating large chunks of business processes more practical. Yet many are still skeptical of this emerging area and its growing impact on the insurance industry.

It’s easy to dismiss new technologies, but articles written by naysayers tend to be reductionist. One recent article in Carrier Management’s sister publication, Insurance Journal, claimed that “blockchain is littered with smart contracts gone bad,” mentioning a few smart contract flaws that took place within one blockchain platform, Ethereum.

But blockchain and Ethereum are not synonymous. There are thousands of blockchains, some of which are not public and do not involve money. Additionally, Ethereum is a platform for decentralized applications (dapps) to be built upon using smart contract functionality. There are thousands of dapps built on Ethereum, with countless smart contracts. So, what’s the chance of a flaw? Is two or three out of thousands of smart contracts really “littered”?

While it has bold, new applications, blockchain is, in many ways, the next logical step in technological innovation. It fuses databases/ledgers and networks through encryption and incentives (i.e., economics) to provide advancements in e-commerce (i.e., transactions) and computing (i.e., smart contracts). Although it was born within the bitcoin protocol, that was only its beginning. Today, there are over 1,500 cryptocurrencies, most of which have their own blockchain.

Logic of Consortia Blockchains

Businesses have been paying close attention to this growth. While there is excitement about the benefits, there is also concession that new technologies pose some risks. There are flaws to be worked out with public blockchains like bitcoin and Ethereum. Yet despite the rise in media attention regarding public blockchains, most businesses are focusing instead on private, permissioned or consortia blockchains and distributed ledger technology.

A consortia blockchain creates the potential for a shared database that, if adopted, could transform and automate countless traditional processes in a secure manner. For this reason, many within the insurance industry are turning their attention toward blockchain consortia and their potential to lower operating costs, increase automation, streamline usage and verification of data, improve processes, and eliminate the need for intermediaries. Organizations are quickly recognizing that the blockchain works best within a robust network, so consortia are a logical starting point for adoption.

From an insured’s perspective, industry use of blockchain may enhance the customer experience, improve affordability, provide a means for greater product innovation and allow for faster entry into emerging markets. From an insurer’s perspective, use of blockchain may lower costs, ease data retrieval, simplify processes, combat fraud and lower regulatory burdens. A business-to-business blockchain can help the industry work collaboratively on universal problems like uninsured motorists and fraud.

With the major benefits identified, the challenge becomes realizing them via blockchain applications. This could be a tall order for the insurance industry, given the number of evident use cases for blockchain technology within insurance. One way to get started is to divide the potential use cases by sector—for example, carrier, broker and reinsurer.

Impact on Carriers

Today’s economic climate presents many challenges for insurers. In an extended period of weak income growth, rising prices, greater access to information, ever-evolving technology and increasing globalization, consumers demand more from suppliers—including insurers. Yet in this increasingly competitive environment, profits have been constrained by low interest rates, weak investment returns and regulatory scrutiny. Blockchain technology can help by creating new efficiencies, with cost containment realized through automation and disintermediation, particularly in the claims process.

The current insurance experience is complex, often relying on paper processing. Great room for improvement exists, according to customers who want seamless, personalized solutions with minimal delay. However, ingrained system complexities and inefficiencies hinder the ability for smooth transitions and deviation from the norm. For example, insurers interact with many intermediaries and third-party data providers, creating delays and increased costs.

Blockchains can reduce costs by automating processes like claims. Today, adjusters manually inspect claims submissions, verify policies, review coverage, evaluate damages and liability, and negotiate loss amounts and settlements. Blockchain-enabled smart contracts can be embedded throughout the claims experience. Broader use of smart contracts could establish rules to enforce policy terms, notify participants of a first notice of loss and even pay claims without requiring loss adjusters to manually administer or review every claim, instead allowing them to focus on complex claims. By integrating smart contract-generated submissions, the claims submission process could be dramatically simplified and more customer-focused.

Blockchain could also automate and streamline the flow of information between intermediaries. One notable example is certificates of insurance, where a piece of paper provides “secondary evidence” of insurance coverage. Certificates are required in many kinds of commercial contracts, including fleet, construction and marine. Blockchain could be used as a real-time repository for policy information, allowing permissioned access and verification for those deemed appropriate (i.e., certificate holders). This could allow all coverage and changes to update automatically, including additional insureds, exclusions, endorsements and cancellation notices.

Impact on Brokers

Similar opportunities for efficiencies and reduced administrative burdens exist for agents and brokers. In commercial insurance, for example, exchanges of information and transactions often occur in a centralized manner. Much of the activity is documented on paper in great detail—a labor-intensive process as insurers maintain electronic, and often physical, files that describe all the risks.

To develop a quote, brokers may call multiple underwriters or search various insurer websites. En route to being registered, finalized contracts often undergo digital transformation, processing and record keeping. Copies of the contract are sent to brokers and insurers, and the processing and record keeping begin again.

Brokers and insurers may need to use these records in later stages of the insurance policy life cycle. In fact, the records are generally adjusted and updated throughout the life of the contract, potentially leading to reconciliation issues.

Documentation difficulties, such as data updates that might not be duplicated in other versions of the same contract, may lead to processing delays, which in turn increase the overall cost of insurance. Such difficulties can also constrain growth opportunities by requiring more labor resources for administrative tasks.

A consortium blockchain, like the The Institutes’ RiskBlock Alliance, can help by providing access to contract documentation via keys. These keys can be shared with the related insurers and brokers, allowing permissioned and secure access to documentation and updates. In this way, a blockchain can help ensure consistency among various parties and dramatically cut administrative costs.

Impact on Reinsurance

Today’s reinsurance market faces several notable challenges. Profits are limited by low premiums, interest rates and investment returns. Legacy systems and process inefficiencies plague the sector. But blockchain technology offers new hope, potentially improving information exchange, cutting operating costs, providing true auditability and streamlining processes.

To realize this promise, blockchain must be accompanied by an industrywide network or consortium to improve trust and transparency and to reduce administrative burdens. Industry initiatives, like The Institutes RiskBlock Alliance, aim to fulfill this need, bringing together all industry sectors to facilitate blockchain adoption.

Estimates around blockchain show the technology could provide reinsurers with cost savings in excess of $5 billion. Efficiencies in claims placement, processing and settlement times and from minimized manual collaboration will likely provide much of this savings. Through a blockchain, the entire process of placement, premium cession, loss cession and payment is represented on a single ledger that can be shared among all parties simultaneously.

The RiskBlock Alliance is building production-ready blockchain applications related to parametric insurance, proof of insurance, first notice of loss and subrogation. Appropriate pieces of these applications can be leveraged and bundled into a platform that helps minimize the extent of manual collaboration among the primary insurer, reinsurer and retrocessionaires.

For example, parametric triggers using smart contract functionality could commence a claim and potentially even settle it, based on predefined, coded business rules. Alternatively, a first notice of loss could kick-start the claims process, igniting automated information sharing. Either way, blockchain would allow data and information to be shared among all permissioned parties, reducing claims leakage and providing efficiency.

The processing and settlement of claims could occur in real time with blockchain, thereby limiting manual interaction among parties. And because all information is immutable, the reinsurer may not need to request the cedent to provide detailed premium or loss data through a bordereau. All told, blockchain and distributed ledgers provide the potential for new business processes that could be highly beneficial to reinsurers and their customers.

Despite naysayers’ focus on hiccups in execution, it’s clear that blockchain represents something very powerful within the insurance industry. The technology can enable fundamental shifts in how business is done by carriers, agents/brokers and reinsurance. From proof of insurance to claims to reconciliation and subrogation, the industry must work together to identify and develop new tools that maximize the value of blockchain’s potential.