February 1, 2017 by Angela Stelmakowich, Editor
When it comes to blockchain, is the property and casualty insurance industry ready to burst from the blocks or is a more deliberate start in order?
Whatever the approach taken, blockchain looks to be here to stay. Implementation in some form or another appears inevitable (and advisable), with time frames likely to be set as stakeholders enhance their understanding of the needs of their organizations, customers, partners and fellow blockchain participants.
For the uninitiated, or the still-trying-to-figure-it-outers, what exactly is blockchain?
Some define it as a distributed ledger, some call it an open-source distributed database and others, still, define it as a distributed data identification technology. At its simplest, blockchain is a database that can be used to record transactions and is copied to the computers of those taking part in the network. It contains the complete history of all instructions associated with that particular blockchain.
“As the number of participants grows, it becomes harder for malicious actors to overcome the verification activities of the majority. Therefore, the network becomes increasingly robust and secure,” notes a post from Deloitte in the United Kingdom.
Blockchain touts transparency and offers fraud-combating characteristics. However, what needs to be done before everyone included in the insurance value chain – and their customers – see promise transform to reality?
In a report released last December, market intelligence firm Tractica noted the expectation is that blockchain for the enterprise applications market will reach US$19.9 billion by 2025.
Fundamentally, blockchain “provides the ability to exchange information or money directly between any two parties without the need for a trusted party as an intermediary,” states Blockchain in Insurance: Insurer Progress and Plans, a report issued this past November by Strategy Meets Action (SMA). “It provides a universal source of truth with full transparency and security, and no need for clearinghouses or institutions to conduct transactions,” it states, adding that information currently exchanged via unsecured or semi-secured methods – such as fax, email or overnight delivery – can be exchanged in a highly secure manner.
“Blockchain uses cryptography, an advance form of encryption that ensures that information cannot be accessed or understood by anyone for whom it was unintended,” says Manav Gupta, North American cloud technical leader for IBM Cloud Canada. It “is a peer-to-peer distributed ledger and can provide increased transparency throughout many – if not all – functions within insurance.”
Blockchain automates the process where “two bodies are getting involved in a contractual financial agreement. That’s a real opportunity for insurers to take advantage of and try to build better customer relationships with their policyholders,” says Jeff Goldberg, senior vice president of research and consulting for Novarica.
So what does all of this ultimately mean for p&c insurance?
Joel So, a partner and financial services technology strategy practice leader and Canadian blockchain lead for PwC, suggests that “at the heart of blockchain, it is an enabling technology.”
Blockchain presents an enormous opportunity, says Veronica Scotti, president and chief executive officer of Swiss Re Canada. “It has the potential to bring significant efficiency improvements to some of our back-end processes, and more importantly, it facilitates the creation of new products with very low operational costs,” Scotti notes.
“All parties that are involved in providing, reviewing and accepting/declining an insurance claim can benefit from the transparency and trust that blockchain provides,” Gupta says.
Fei Zhang, lead of blockchain projects at Allianz Group, suggests that “blockchain is, first, an opportunity to rethink about lots of our business processes along the lines of how automatic can the processes be, how much can we embed trust into the smart contract systems, etc.”
The first opportunities of blockchain in insurance, Zhang expects, “will probably be in improving the business process and customer experience.”
Mary Trussell, global insurance change lead partner for KPMG in Canada, says blockchain “will allow the industry to build a peer-to-peer network to establish smart contracts without the need for an intermediary or administrator.”
Capgemini Consulting defines smart contracts as programmable contracts capable of automatically enforcing themselves when pre-defined conditions are met. Potential annual savings in the personal motor insurance industry alone could amount to US$21 billion globally from automation and reduced processing overheads in claims handling, the firm argues.
Benefits will accrue from technology, process redesign and “fundamental changes in operating models, as they require a group of firms to share a common view of the contract between trading parties,” the company adds.
“Considering the scale of this digital upheaval, it will be at least three years before smart contracts enter the mainstream,” it predicts. “Smart contracts that do not require distributed ledgers could be viable by the end of 2017.”
Scotti’s take is blockchain will “enable new models for sharing, distributing and funding risk – which may be disruptive to our industry, but can also be opportunities for insurers who understand the implications and start experimenting with new business models early.”
Gupta maintains that “blockchain for insurance is a transformative technology with the potential to change technology the same way the Internet changed communication in the 1990s.”
The value chain in the insurance market is transforming rapidly, Juniper Research reports. This will force traditional providers to improve their offerings and customer service to fend off the threat posed by fintech suppliers.
Given that insurers are not “always quick to adopt new technologies,” says Goldberg, blockchain is “a way for outsiders or smaller companies to provide a value proposition that incumbents are not, and bring customers their way.”
Blockchain’s ability to send, receive and store data, as well as to enable transaction flow across multiple layers of counterparties “can potentially redefine the new standard for digital transaction processing,” Scotti expects.
This all sounds great, but are organizations ready to move forward? Is their understanding of blockchain sufficient?
In November, SMA reported that just 33% of surveyed p&c insurers “are now starting to understand” blockchain, 27% are “slightly familiar with the concepts of blockchain, but don’t understand its implications and/or potential for insurance,” 20% are “aware of specific insurance use cases or are experimenting with the technology,” and 20% are “not at all aware of blockchain.”
Pointing out it is “early days for blockchain,” Trussell says “while a number of financial institutions are investigating it, including insurance companies, insurers have not yet developed a full-scale blockchain capability, nor yet explored the end-to-end opportunities.”
Scotti would likely agree. “Most insurers are still in the exploration phase – attempting to understand the implications of the technology, while experimenting with limited proofs of concepts (PoCs),” she reports.
“In our view, the lack of understanding of blockchain technology and its potential for disruption poses significant risks to existing business models and the firms that do not take the time to understand the impact will underestimate the opportunities and threats that blockchain can provide,” Haskell Garfinkell, PwC’s U.S. fintech co-leader, suggested in a statement last March.
BENEFITS NEAR AND FAR
Despite the need to beef up blockchain understanding, Gupta sees things moving forward in the coming year. “Around the world and even here in Canada, we’re seeing insurance companies explore how they can integrate blockchain technology and best determine which products or use cases will provide tangible value and better business results,” he reports.
“Imagine you are parking a car and it goes from manual to the self-parking mode. At some point, it bumps the next car. How do we determine who is responsible: the driver, the insurance company, the manufacturer?” he asks.
Blockchain will record each transaction, Gupta explains. “This becomes a permanent record of what happened that can’t be changed. You don’t need a witness, you don’t need a third-party report to validate the accident,” he says.
“What we believe – and what IBM predicts – is that blockchain will be a huge trend for 2017, so we should expect to see more companies realize the potential for blockchain and how it can improve business,” Gupta says.
Scotti expects larger-scale implementations of blockchain will begin “in two to three years from now.”
Trussell says “insurers could use digital ledgers to digitize and validate customer data and improve compliance. Also, real-time data flows and claims determination could speed up inputs into reserve calculation impacting support processes.”
Looking forward, says Scotti, “as a start, we’ll begin to see blockchain-enabled parametric and metric products, where the entire value chain is completely automated by blockchain-resident smart contracts and premium, and claims payments are conducted across the blockchain.”
Citing blockchain’s impact on the insurance value chain, Zhang says “there we might see changes to the roles different stakeholders play in the value chain. But again, that’s the role of innovation: to shift and transform value chains.”
His expectation is “the change will be gradual and long term. Migration of data from legacy systems could be a potential issue, but that’s a valid concern for any kind of ‘technology upgrade.'”
IN WHOLE OR PART?
“Even though there are different fabrics of blockchain, no business can operate in isolation,” Gupta emphasizes. “What we’re seeing in the industry is a need and a desire for one blockchain fabric to integrate with another.”
Zhang, whose company is one of the founding members of the Blockchain Insurance Industry Initiative, B3i, also sees openness to working together. The initiative was launched last October jointly by Aegon, Allianz, Munich Re, Swiss Re and Zurich.
“Blockchain technology shows most of its potential only if it’s applied in a network of peers,” Harald Rosenberger, head of innovation at Munich Re, said in a statement announcing B3i.
As with all financial institutions, So says, “ultimately they are in competition.”
But there are “certain aspects about their business where there are synergies for them to share data and some processes where it’s actually not part of a competitive advantage,” he explains. “When it comes to, for example, adjudicating risk of certain policyholders, I think it behooves all of the insurers to have a shared understanding that enriches their actuarial model of a particular policyholder or business’ risk.”
Trussell notes there are already those setting up incubators and joint ventures aimed at developing new concepts, those investing in emerging technologies to buy in skills outside of their core competencies and capabilities, and those investing resources and capital into pilot projects and PoCs.
With blockchain, “benefits are directly proportional to the level of collaboration and the industry’s ability to come together to drive standards for wider blockchain adoption,” Elizabeth Wesson, director of digital strategy for Swiss Re, says. “Ultimately, deep collaboration between incumbents, innovators and regulators is the key to success.”
Though the insurance industry is at the very early stages of blockchain development, Zhang says that PoCs are very appropriate ways of exploring this technology. “The expectation is that some of the PoCs will graduate into cases with tangible business value with real support from the operating business,” he says.
“As we think about larger-scale blockchain implementations, there are numerous technical, regulatory and business-related challenges ahead,” says Wesson.
“Technical challenges include the ongoing instability of blockchain platforms as they continue to be developed, issues around transaction confidentiality and privacy, and questions about the scalability of blockchain solutions,” she says.
“Due to blockchain technology’s immutability, proper data governance and data quality is a necessary prerequisite,” Wesson comments. “Combined innovations of blockchain, artificial intelligence, Internet of Things (IoT) and other technologies will form the foundation of next-generation financial services infrastructure,” she adds.
“The impact of blockchain has the potential to span the insurance cycle end-to-end,” Trussell says, including potential applications for claims management, underwriting, reinsurance, fraud detection and prevention, and risk determination and reserve calculation. “It will also have impacts for policy sales and incident management,” she adds.
Wesson would likely agree. “When we think about coupling blockchain with smart contracts, and then even taking it a step further to incorporate IoT, we really have the power to transform the entire insurance value chain,” she says.
“We can create low-cost, automated, trigger-based parametric or metric products where blockchain and smart contract infrastructure take care of everything from identifying the user, validating information in the underwriting process, triggering a claim, and making a payment,” Wesson reports.
It is also important to remember that blockchain can be used effectively within organizations. “The real promise of blockchain is to enable trust in a trustless environment,” So says, explaining that trust in this context is not necessarily adversarial in nature.
“Sometimes, trust means that certain parties have different views of data, have different timeliness of data,” he says. “So if you redefine the notion of trust that way, you can start to imagine there are certain business problems inside of an organization, which may span… less than a half-dozen participants,” each an individual user or whole groups.
This is all well and good, but insurance is a highly regulated industry. Are regulators showing signs of being open or closed to how blockchain might potentially be used?
“IBM views blockchain as an opportunity for business to work more closely with regulators, and, in fact, regulation will be one of the key drivers that will make blockchain successful,” Gupta predicts. “Regulators are interested in finding out the truth, and the easiest way to share truth is to ensure everyone is looking at the same information.”
Zhang says regulators appear “open to new experiments,” expecting that industry players will come up with something tangible about the pros and cons of a new solution that can then be presented to the regulators.
“Regulators are, by nature, cautious and tend to focus on potential risks and protecting consumers. That’s natural,” says Trussell. Still, they recognize that the world is changing, she notes.
“Some of the inherent qualities of blockchain, particularly transparency and auditability, as well as blockchain’s ability to lower operating costs of insurance to, ultimately, provide better value to the consumer, will be looked on favourably by regulators,” says Wesson.
“I think blockchain definitely will take advantage of the savvy customer bases’s desire for faster, more touchless interactions and communication,” Goldberg says. “But blockchain itself, really, is bigger than that and is more about building this kind of distributed ledger of communication across people without a central governing body.”