Blockchain and Insurance: Partners in Crime?

By Madhvi Mavadiya | 12 August 2016

According to PwC, 56% of financial firms recognise the importance of blockchain, but 57% do not know how to respond to the blockchain boom. A new report by Long Finance and Z/Yen Group highlights how mutual distributed ledger technology could transform the global insurance industry, but companies need to understand how it works.

The PwC study presents the idea that insurance is a little behind when it comes to new technology. “That’s in line with the more general perception that insurance often lags behind other sectors of financial services in modernising its business processes and technology. This reflects the need to work with large clients, provide bespoke cover, and manage specialist risks; these require data-heavy interactions between multiple participants including brokers, insurers, and reinsurers,” the report read.

Blockchain Defined

The report defines blockchain as a mutual distributed ledger and provides a breakdown of what that means.

  • Mutual – blockchains are shared across organisations, owned equally by all and dominated by no-one;
  • Distributed – blockchains are inherently multi-locational data structures and any user can keep his or her own copy, thus providing resilience and robustness;
  • Ledger – blockchains are immutable, once a transaction is written it cannot be erased and, along with multiple copies, this means that the ledger’s integrity can easily be proven.

“Another way to think of blockchains is as permanent timestamping engines for computer records. Timestamps can be used to prove that data elements were entered at or before a certain time and have not been altered,” the report said.  

The report says that many insurers are trialling blockchain technology and are aware that the ledger can provide tamper-proof record keeping, replace central authority with decentralised processes and has the ability to provide smart contracts. In addition to this, PwC highlighted that wholesale insurance can benefit from blockchain technology in these sectors: placement of insurance (client to broker to underwriter/insurer), reinsurance (underwriter/insurer to reinsurer), claims management, accounting & settlement and KYC/AML checking processes.

Respondents stated that in these areas, inefficiency, cost, delays and the need to rekey data in unstructured and poorly standardised documentation were major problems. In the KYC/AML area, “the insurance industry is frustrated by the way in which different market participants have to routinely duplicate processes, leading to cost and delay.

Another issue that was brought to attention was the unpermissioned nature of blockchain and how anyone can access and alter information. “New transactions are added to the ledger and inconsistencies resolved by methods akin to majority voting (albeit implemented by a statistical process), with users having votes pro rata to the resources they commit to the process. In contrast, in ‘permissioned’ blockchains, a governance structure defines which users can view or update the blockchain and how inconsistencies will be resolved,” the report said.

The governance structure is better suited to the insurance industry as it would ensure that blockchain can evolve easily if business requirements change and could be implemented in such a way that would work well with data protection legislation. “Because wholesale insurance is built on a network of risk transfer, many bilateral transactions are effectively part of a global process involving potentially all participants in the market. This means that any proposed process change has to be analysed in the context of its impact on the market as a whole.

At the start of Deloitte’s “Blockchain applications in insurance” paper, CEO of Everledger, Leanne Kemp, is quoted. “When I saw what the fundamental principles of the blockchain provided, it was just patently obvious to me that it would make sense around reducing fraud related instances of valuables.” The report also commented on the benefits blockchain can provide to the insurance industry, but in order to streamline payments of premiums and claims, as well as a general digitalisation of the sector.

For example, actuaries and underwriters are using the ever-expanding universe of data to build models that more accurately estimate risk and price it accordingly. Arguably the most exciting example of this trend is in telematics: insurers are using data from sensors to price motor risk more accurately, reducing the premiums of young safe drivers, and this technology is spreading to other types of cover, such as home insurance,” the report said.

However, the Deloitte report explains that the general attitude in the banking industry is to “wait and see”. “From the insurer’s perspective, the industry is facing ever-tighter regulation and a growing threat from fraud – whether from small-claims fraud by individuals or more serious and organised fraud spanning multiple insurers in the industry. The Insurance Fraud Bureau (IFB) is a non-for-profit body set up to tackle organised crime affecting the UK general insurance industry.”

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