Distributed Ledger Technology – commonly referred to as “blockchain” — has recently emerged as a buzz word in the insurance industry. The insurance industry is quickly deciding that this new technology will fundamentally reshape the insurance industry. For example, Aegon, Allianz, Munich Re, Swiss Re, and Zurich recently launched the “Blockchain Insurance Industry Initiative” to explore the potential of distributed ledger technologies to “better serve clients through faster, more convenient and secure services.” The insurers hope to use the blockchain to replace existing information systems, leading to streamlined paperwork and reconciliations for insurance contracts, improve auditability, accelerated information sharing, and faster claims payments.
While these insurers are actively testing and applying blockchain technologies, many insurers are behind the curve in the adoption of blockchain technologies. PwC recently estimated that almost one-third of insurance company executives are not at all familiar with blockchain, and widespread adoption is still likely several years away. Businesses can use this window to their advantage by building systems now to leverage the increased flow of information to better quantify risks, understand the impact of smart contracts and rapid information sharing, and demonstrate a case for reduced premiums.
Well-informed businesses can gain a potential competitive advantage by understanding the applications of blockchain technology in the insurance industry. Here are three things you need to know to understand the impact of blockchain technology on your insurance coverage:
1. Blockchain is an encrypted, easily-accessible, permanent digital ledger.
For all of its potential applications, the underlying concept for blockchain is simple. Blockchain is a digitally‑stored public ledger. What makes blockchain exciting is the combination of ease of access, privacy, and security. Unlike existing digital ledgers, which use central administrators or clearinghouses to ensure accuracy and security, blockchain relies on a public network of individual computers solving incredibly complex cryptographic puzzles in exchange for verification of the legitimacy of each entry – each block – in the ledger. Each individual block is linked to the previous blocks, forming a chain. This process ensures the security and accuracy of individual entries.
Because each transaction stored on the blockchain is encrypted and publicly verified, it is secure despite being publicly accessible. Because the transactions themselves are pseudonymous and encrypted (like email), they are private despite being publicly accessible.
2. Blockchain encourages more sophisticated underwriting.
Because the blockchain allows for more information to be parsed and appended to so‑called smart contracts, substantial amounts of information can be shared easily between parties. The applications of increased data availability are only now beginning to be parsed, but more nuanced and sophisticated underwriting is one promising application.
Consider a commercial auto policy for a large company with hundreds of potential drivers and a massive fleet of vehicles. The insurance company now underwrites these risks based on amalgamations of fleet size and location, number of drivers, and claims histories. With a blockchain‑based insurance policy and proper data capture, insurers can base underwriting on real time use of individual vehicles by individual drivers in individual areas. Today insureds pay the same insurance premium rate regardless of whether an individual vehicle is in use, the user’s identity, the geographic location, and the period of time that the vehicle is in use. If this use data is captured in real‑time, insurance premiums can instead change dynamically based on the number of vehicles in use, the identity of the users, and the vehicle’s particular use. After all, the risk of a motor vehicle accident is drastically reduced when the car is parked in a garage on your company’s property.
This type of dynamic underwriting already exists in the drone insurance market, where companies can buy insurance by the hour, but the blockchain allows this technology to scale beyond a single hobbyist flying a drone in a park to a real world commercial application.
3. Blockchain allows for faster claims payments and more efficient claims management.
Increasing the efficiency of information sharing between insurers, brokers, and policyholders through the use of blockchain technology should lead to faster claims submissions and faster claims processing. It will also allow certain types of information to be automatically gathered and reported. The potential benefits of this increased efficiency are immediately apparent to insurers in the form of decreased overhead and greater control over claims adjustment. The potential benefits to policyholders are obvious too; undisputed claims may be paid more quickly and, hopefully, with less time spent gathering claim-related information.
On the other hand, a move towards efficiency and automation in claims adjustment, especially in the information-gathering phase, necessarily comes with a loss of at least some control over the flow of information between the parties. If blockchain technology impacts the claims submission and adjustment, commercial insureds should understand what portions of the claims process have become automated, what information will automatically be shared as part of this automation, and the avenues to engage in a more nuanced dialogue about more complex claims.
The Bottomline on Blockchain
Blockchain is really about sharing very large quantities of information quickly, reliably, and efficiently. Automation of information sharing in underwriting and claims adjustment may initially benefit insurance companies. Savvy insureds, however, should be able to leverage this information sharing to their benefit by negotiating the automated information sharing in so-called “smart” contracts; gathering, controlling, and presenting shared data in a consistent and thoughtful manner to place the company in a favorable position when a claim arises; and negotiating clauses that allow for de-automation of the claims process in more complex claims.