Blockchain isn’t coming to insurance. It’s already here. Leading insurance organizations are participating in alliances to adapt blockchain capabilities to insurance transactions, according to panelists discussing the topic at the 2018 Global Insurance Symposium, April 24-26 in Des Moines, Iowa.
“Blockchain” is the shorthand term commonly used to label “distributed ledger technology,” which consists of synchronized, shared databases spread among individuals and organizations throughout the world. Blockchain was an early form of distributed ledger used to trade digital (or “crypto”) currencies, including the well-known “bitcoin.”
Among other things, distributed ledger technology enables self-executing “smart contracts,” which have been used in insurance and reinsurance to automate payouts after specified events.
Blockchain applications offer great potential cost savings for insurers, said panelist Peter Miller, president of The Institutes, the insurance educational organization sponsoring the RiskBlock Alliance, a consortium of major insurers and reinsurers devoted to developing applications for distributed ledger technology.
In his comments, Miller cited consultant studies indicating that the use of blockchain could eliminate $20 billion in costs from private passenger auto insurance alone. Regarding carrier revenue, Miller said blockchain applications would greatly enhance efficiency in the estimated 10 million subrogation transactions executed each year by U.S. property/casualty insurers.
And those benefits are only the tip of the iceberg, he suggested.
“I’m very excited about this technology because it’s going to help our industry do its job better,” Miller said. “It’s going to allow us to provide more services at less cost.”
“The best loss is the loss that never happened,” he continued. Miller predicted that blockchain applications, combined with the use of distributed risk sensors (the “Internet of Things”) and data analytics, will enable “real-time” monitoring of risk that, in turn, triggers loss control actions.
To date, Miller said, his alliance has deployed blockchain technology for establishing proof of insurance and is developing methods to automate processes for making first notice of a loss, subrogating against responsible parties and executing parametric contracts. (Parametric risk contracts pay out on the occurrence of an event of a certain magnitude, without necessarily identifying specific insured losses.)
Need for Collaboration
The cost and revenue benefits of blockchain suggest there are strong competitive incentives for insurers to embrace distributed ledger technology, but that’s not the whole story. Perhaps more than for other technological innovations, successful implementation of distributed ledgers inherently requires collaboration among numerous parties, including competitors.
There are several major initiatives to develop blockchain applications for insurance, noted David Edwards, formerly with Lloyd’s of London, now the CEO of ChainThat. He added that “where there are multiple consortia, they’re going to need to develop interoperability at some point in the future.”
So, while individual insurers can’t afford to “sit back and wait,” there are risks to developing single-use blockchain applications that cannot be easily integrated with other applications developed to span insurance operations and connect with other financial sectors, Edwards said.
While much has been written about how distributed ledgers allow for “trust-free” transactions among parties who do not know each other, the RiskBlock Alliance is built on common understandings among its members, Miller said.
In contrast to the well-known public blockchains that trade in digital currencies, Miller emphasized that the RiskBlock Alliance is a private blockchain reserved for use by members who adhere to its rules and guidelines.
“We believe businesses want to know who they’re dealing with,” Miller said, “In a private permission blockchain, you know who all the participants are, you know the rules of the road, and you share data among all the participants.”
“We’d like to avoid having a lot of blockchains because, in the end, they have to talk to each other,” he said. “At the end of the day, it’s a distributed ledger. It’s about sharing data.”
Later, Miller added that “deploying blockchain is not a technical problem. The trick is to get organizations to work together.”