Could Blockchain Place Insurance Clients at the Top of the Foodchain?

Published in Insurance Insider's Data Room

The UK Government Chief Scientific Adviser recently published an 80-page document on the new hot topic of the moment – the Blockchain - called Distributed Ledger Technology: Beyond Blockchain. His findings are notable in that he says that blockchains are truly transformational.

Why might that be and for those of you that have so far lived in blissful ignorance of the blockchain, what does it actually do? Let’s start with Bitcoin. Bitcoin is a crypto currency. It transfers value between bitcoins and works as a series of blocks where everything is held in what is called an ‘immutable ledger’ which means that nothing can be changed.  There are actually multiple potential blockchains but the best known one to date is Bitcoin.

OK so what is a distributed ledger? A traditional ledger is a record of every single transaction. A ledger shows money transfers typically. A distributed ledger is when everyone has an entire copy of that database. With a distributed ledger, transactions can go peer-to-peer potentially and that is one of the potentially disruptive things around blockchain technology - that it may remove the need for a centralised body in some ways if it becomes truly distributed.

In the Chief Scientific Adviser report’s foreword the Chief Scientific Adviser comments: “In distributed ledger technology, we may be witnessing one of those potential explosions of creative potential that catalyse exceptional levels of innovation. The technology could prove to have the capacity to deliver a new kind of trust [my italics] to a wide range of services.”

The key word here is “trust.” A number of trust indices consistently put banking and insurance organisations at the foot of the trust ‘league table’. For example, the Edelman Trust Barometer from a few years ago placed these two sectors on “how much do you trust these businesses to do what is right?” at 21% and 41%.

The insurance trust deficit is an issue that the sector has wrestled with for some time so how could blockchain technology make a difference?

AXA Strategic Ventures recently announced its participation in Series A funding of $55 million for Blockstream, a leader in the sector. Why? Its rationale is that: “By streamlining transactions, redefining data protection methods and reducing their cost, this technology has the potential to significantly impact the insurance and asset management businesses and transform standards across all industries.”

Allianz France meanwhile has teamed up with Everledger a blockchain start-up to develop a proofs-of-concept as part of a research initiative. It confesses, however, that “Allianz France sees the promise of the technology, but doesn’t have a clear idea of which use cases would be most relevant to it.”

It’s a disarmingly honest admission but clearly the experienced – if slightly leaden - global insurance giant has become entranced by the allure of its lithesome new partner as they both venture out into a brave new world of technological exploration and discovery! It’s easy to see why.

I can think of a number of potential uses for insurance mutual distributed ledgers starting with the development of trust enhanced by mutual peer to peer transactions that places the customer at the top of the blockchain’s food chain.

Imagine the benefits and efficiencies of an automated process that is self-referencing, and strips away the sector’s obsession with third parties, convoluted distribution models and commercial confidentiality whilst embedding the relationships between client, broker and underwriter.

In a world of dramatically increasing insurance litigation, imagine the positive impact on claims when all information is complete and available at source. Moreover, the positive impact on the transaction cost for underwriters where the data which feeds the underwriting process can be acquired seamlessly throughout the risk lifecycle.

The downsides? They are many - not least for swathes of insurance people employed in audit, compliance and claims whose roles might be under threat from the new technology. There is another converse, which is that if you start automating all processes and contracts it could have an adverse impact on underwriters too.  

At the latest ACORD Forum it was reported that most people that have flight delay insurance - even where they have a flight delay - don’t claim on it. As was noted, that - from an insurance company profitability point of view - is pretty good. Someone is paying for something and even when there is a valid claim they don’t claim on it. So there is the risk that smart contracts – enabled by a blockchain - could lead to an environment where some flight delayed people do actually see their claim paid.

That can’t be a sustainable long-term or even short term model for success though can it? It is little wonder that so many members of the public say they can’t trust their insurance company!

Of course there is a risk that blockchain will cause significant disruption. It might put some people out of business and engender change that reduces headcount to a degree that we simply can’t imagine right now. The opportunities for underwriters are also potentially game changing in a positive way, however.

Imagine the potential for business intelligence opportunities to aggregate multiple blockchain transactions for underwriting portfolio accumulation and then immediately assessing the net position by analysing the collectible from the reinsurance blockchain.  If we’re honest, we have an ambiguous relationship with new technology.

We love our new phone but we hate taking a business call on the beach. The hope here, however, is that blockchain will make the customer the master, improve underwriting standards and by reducing the need to constantly focus on audit, compliance and litigation empower underwriters to focus on better analysis, pricing and management of risk.