Blockchain, opportunity or threat for the insurance industry?

Some of these experts believe that it is the most important innovation since the advent of the Internet.

Initially adopted by the banking sector, blockchain has quickly fascinated insurers who can now offer more innovative products, counter against fraud and reduce administrative costs.

Blockchain and insurance industry

According to consultancy firm, McKinsey, 200 blockchain technology-based solutions have been developed worldwide, 10% of which are used in the insurance business. These figures, posted in July 2016, are poised to have increased considerably. For the research firm, Markets and Markets , the turnover of blockchain business, estimated at 241.9 million USD in 2016, is likely to climb to 7 683.7 million USD by 2022, an annual growth rate of 79.6%.

Blockchain : les expériences des compagnies d’assurance

Scor

Several traditional insurance and reinsurance companies have already embarked in blockchain business.

SCOR, managed in September 2016, to carry out the first in-house application of this technology: a secured and shared database, hosting the record of the exchanges made with the customers.
This prototype makes it possible to evaluate the possibility of resorting to blockchain within the framework of a broader project.

Axa

Axa, in its turn, has launched a blockchain-based insurance plan designed for plane delays. The implemented solution makes it possible to establish direct connection with global air traffic databases. It calculates, in real time, flight delays.

The information collected is immediately correlated to the lists of insured passengers who receive compensation before even claiming their prejudice.

Allianz

Allianz has also embarked on this course. In November 2017, the German insurer successfully tested out a blockchain prototype for the insurance captive market. This application allows fund transfer from one country to another.

This experience is living proof that thanks to this technology, it is now possible to simplify and speed up international transactions⁽¹⁾.

Establishment of a consortium dedicated to blockchain

Well beyond those individual initiatives, the establishment of a consortium devoted to blockchain confirms the interest shown by the insurance business in this technology. Set up in October 2016, the Blockchain Insurance Industry Initiative pool (B3i) enables its members to experiment with the potential of this solution designed for the storage and transmission of information.

As at October 2017, B3i attracted 24 new members namely : AIA, AIG, Aon, Chubb, Covéa, Everest Re, Gen Re, Guy Carpenter, Marsh, JLT Re, Leadway Assurance, LocalTapiola, Mapfre Re, QBE Re, PartnerRe, Navigators, SAHAM Assurance, Sava Re, Takaful Emarat, TigerRisk, Trust Re, UnipolSai, USAA and Willis Re, with many more on the list.

B3i’s fifteen founding members are: Achmea, Aegon, Ageas, Allianz, Generali, Hannover Re, Liberty Mutual Insurance, Munich Re, RGA, Scor, Sompo Japan Nipponkoa Insurance, Swiss Re, Tokio Marine Holdings, XL Catlin and Zurich Insurance Group⁽²⁾.

Blockchain contribution to the insurance industry

Even though the banking sector was pioneer in the deployment of the blockchain solution, the insurance business seems to be better positioned in order to take advantage of this innovation. Its decentralized structure, combined to its transparency and security enable insurers to overcome several challenges including:

• The creation of more innovative products

Blockchain broadens the scope of innovation in the area of insurance, facilitating the design and the establishment of smart contracts. This system is also capable of automatically applying the terms and conditions of a contract without human intervention. Moreover, it makes it possible to analyze data and gather payment conditions. Everything is automated, claims, file verification, calculation and payment of compensations. This solution has been available for several years now. It is, however, only starting to be fully tapped into with the advent of blockchain.

Smart contracts apply perfectly well to index-based or parametric insurance, making it possible to automatically trigger the compensation process, even before a claim report has been filed. A smart contract is connected to the weather forecast database. It verifies whether all the conditions for the enforcement of the cover have been fulfilled (after a month of drought, for instance), then proceeds to the compensation of the insured without involving an expert or even a claim report. The same principle applies to air traffic delays.

The smart contract model also applies to everything in connection with sharing economy, this collaborative practice, generally associated to virtual platforms such as Uber and Airbnb, may take advantage of blockchain. The aforementioned solution allows analysis of data pertaining to the habits and the mobility of the insured. The information gathered is then used to adjust pricing.

These solutions may technically be adopted outside the realm of blockchain, but the real contribution of this innovation stems from the additional trust and security it conveys to transactions. The last two criteria are indispensable to the automation process without having to make recourse to a third party.

• Better involvement of the insured in the insurance process

The new technologies, nowadays, allow policyholders to control their personal data and to be further involved in the insurance process. That is the case of peer-to-peer (P2P) coverage, a solution that provides for user-to-user coverage without intermediaries. A community of individuals may pool up to pay a premium designed to reimburse the claimant. A reinsurer, may, nonetheless, take over the case if regarded necessary to claim a more substantial compensation.

P2P insurance is no novelty, as several initiatives have emerged worldwide without much of a success. Blockchain may, in this case, come into play, thanks to its transparency and safety, to provide ground for development for this business.

• Better understanding of the insured

Customer awareness is no longer exclusive to insurers as several start-ups such as Tradle are now working on know-your-customer (KYC) blockchain solutions. These initiatives make it possible to gather and process a certain amount of information spontaneously provided by customers themselves. The data gathered allow better understanding of customer behavior, habits and needs. Insurers may, therefore, design more adapted products, propose risk-adjusted premiums and calculate appropriate compensations in absolute transparency.

• Better integration of new customers

Blockchain also allows to speed up and simplify the integration of new customers, making it possible to establish a joint benchmark combining customers’ identity and record of previous transactions. These customers may easily change the insurer or underwrite new contracts without having to go through the same administrative procedures all over again.

• Fraud detection

Insurance fraud accounts for approximately 10% of the claim costs in Europe, a rate that is understandably much more substantial in countries endowed with less effective control systems.

Blockchain seems to be the appropriate solution to counter the scourge of insurance fraud. Indeed, this technology facilitates the exchange of inter-sectoral data, a solution that provides free access to all the information gathered from health establishments, security departments, commercial centers, repair shops and mechanics. Consequently, verification of claim report authenticity becomes easier and more effective.

• Cutting down administrative costs

Blockchain enables insurers not only to reduce administrative costs but also to convey more speed and further accuracy to certain tasks such as contract management and claim settlements.

The dissemination of smart contracts is likely to significantly reduce the number of employees in the insurance sector.

• Better accessibility to insurance services

The decentralized and open character of blockchain enables communities deprived of traditional distribution networks to underwrite an insurance policy anywhere around the world without any cross-border or foreign currency issues since transactions are carried out in bitcoins. Insurance internationalization remains, nonetheless, theoretical in the absence of a legal framework.