Blockchain has been much considered by the media in recent months as a relatively new concept. As part of this discussion there are many explanations out there for what it is, and its likely advantages for financial services generally.
It is important to find some independent definitions for what blockchain actually is. One great source is the book ‘Blockchain Revolution’ by Don and Alex Tapscott. This sums up the financial function of blockchain very clearly as “allowing you to send money directly and safely from me to you, without the need for a third party at all; no bank, credit card or PayPal.” Blockchain is a type of distributed ledger or decentralised database that keeps records of digital transactions. Rather than having a central administrator, like a traditional database (banks etc..) a distributed ledger has a network of replicated databases, synchronised via the internet and visible to anyone within the network. In addition, blockchain technologies have the potential to support the significant digital transformation underway across financial services because much of this transformation relies on data.
Some big banks have already started to use blockchain to deliver speed, with lower costs, and security with fewer errors. Barclays is using it for trade finance transactions, and the Royal Bank of Scotland is planning on piloting its blockchain in the months ahead.
This may be all well and good for the big banks and broader financial services, but what does it mean for the insurance sector? This industry is renowned for often being slow to adopt change and yet, blockchain could affect the insurance industry in significant ways.
Blockchain has already interested some big, global insurance names. Recently, Aegon, Allianz, Munich Re, Swiss Re and Zurich joined the Blockchain Insurance Industry Initiative B3i to look at the impact and possibility of blockchain for the industry. These, and other insurers, believe blockchain’s distributed ledger has the potential to serve clients better through faster, transparent, more convenient and secure services.
Arguably, the most exciting promise for blockchain in insurance is telematics. Insurers are using data from sensors to price motor risk more accurately, reducing the premiums of young, careful drivers, and this technology is spreading to other types of cover, such as home insurance. Smart contracts powered by a blockchain could provide customers and insurers with the means to manage claims in a visible, responsive and irrefutable manner. Contracts and claims can be recorded onto a blockchain and validated by the network, ensuring only valid claims are paid. However, to date there are only a few early uses of blockchain in insurance. Allianz has piloted the technology by way of a smart contract solution to automate catastrophe swap transactions, with a significant reduction in placement time.
The rise of blockchain coincides with the growth of the Insurtech movement, with start-ups seizing on the technology to develop competitive applications and insurance offerings. This blockchain development will undoubtedly help the insurance industry in its work to digitalise, and ensure the industry keeps up with the ever-changing tech landscape of modern businesses.
Certainly, there are challenges in adopting blockchain. The reliance on bitcoin organisations to verify transactions requires extremely scalable, very distributed and high performance databases, which can be a constraint. At this stage blockchain still operates outside of regulatory and governance frameworks; the legality of blockchain contracts is unlikely to escape legal challenge in the future.
Before employing blockchain for insurance, companies do need to become familiar with the limitations of this technology in terms of scalability, security, and standardisation. Blockchain is a technology ready for exploration by insurers, but its exploitation is still some way off. By its very nature, as a distributed system, its value depends heavily on collaboration with competitors, suppliers, or others. That requires time, and trust.
Blockchain is an IT investment with a timeline of maybe five years or more until full realisation of its benefits. There is also a possibility that alternative solutions may provide similar benefits much sooner. Assuming that reinsurers and insurers do identify how best to employ Blockchain, and develop solid user cases through their current experimentation, it is likely they will see enormous returns. Watch and wait.