No Chain, No Gain

Blockchain has been the subject of hype for a long time and is often discussed in relation to cryptocurrencies – a subject that seems far removed from the objective, analytical world of insurance. But in fact, blockchain technology could revolutionize the way insurance contracts are formed.

Agreeing and maintaining contractual relationships between insurers, reinsurers, brokers and clients can be complex and time-consuming; and in a manual, largely paper-based world is also subject to the risk of human errors that can create additional difficulties. Blockchain enables an alternative approach: use of smart contracts, secured by cryptography, in a single, shared blockchain distributed ledger.

Every participant can see the data, any changes that need to be made, or money transferred between participants, in very close to real time. Cryptographic private and public keys authenticate participants; and every ‘block’ is joined to the next block in the chain, making it almost impossible to alter the information held within it.

Smart contracts consist of self-executing code running on the blockchain framework. Used in combination with systems that speed up the detection of events that will lead to a claim – for instance, internet-connected sensors in a motor vehicle that report accidents, or systems capable of detecting the effects of natural catastrophes – a smart contract can trigger claims settlement processes, with automatic transfer and registration of assets via straight-through processing. This creates an accurate, shared, dated and timed audit trail of every transaction, meaning it’s almost impossible to manipulate records or other important data.


Reducing Cost, Delay and Fraud

Blockchain-based insurance claims processes saved insurers USD1.1bn worldwide during 2021; and those savings will increase to USD10bn per year by 2024, according to a study published by Juniper Research in January 2022. The potential for such savings is particularly significant in Property and Casualty (P&C) insurance, because the current P&C ecosystem tends to distribute data across multiple locations, controlled by multiple companies.

Further cost savings could follow around customer service and administrative processes, including quotation and onboarding, if insurers and brokers had access to a shared, secure blockchain-based repository of consumer information. Analysis by Boston Consulting Group suggests that an “all-blockchain” auto insurer could have a combined operating ratio 10 to 13 points lower than that of an auto insurer using conventional methods.

A blockchain-based system would also give reinsurers the ability to allocate capital for claims in near real-time. Analysis from PwC suggests blockchain could drive savings of up to USD10bn for the global reinsurance industry, with positive financial and operational implications for insurers, brokers and their clients.

This approach can also reduce the incidence of P&C insurance fraud, as suspicious behaviour can be detected more easily in a more secure, transparent, collaborative system. An example of this in action is ClaimShare – an app based on blockchain and AI, developed by IntellectEU in partnership with KPMG. It allows insurers to share claims data, without identifying customers, to stamp out “double-dipping”: making multiple claims for the same incident with multiple insurance companies, a practice that costs the insurance industry and its customers billions of dollars each year.


Unknown and Emerging Risks

Of course, no technology is risk-free. Although blockchain allows companies to move assets or funds swiftly without having to pass through a central intermediary, this creates risks that would otherwise have been caught by that missing link. In some situations, it may be necessary for blockchain participants to agree on governance practices and structures – which may prove difficult, in part because more companies may join the arrangement at a later date.

Cyber security and other technical risks would require mitigation. Although the blockchain itself is theoretically secure, criminals could still attack the systems that store the cryptographic keys that secure it, creating risks related to data leaks. Other technical flaws in the blockchain or the software used to access it could create business continuity problems that undermine the benefits blockchain can offer.

There are also human-related risks associated with smart contracts. After all, a digital version of a flawed business or legal agreement is still a flawed agreement. Problems could arise if the language in a contract is ambiguous, with conditions or wordings including “reasonableness” or “good faith”. Some elements of a theoretically automated, blockchain-driven claims settlement process could then be unusable.

Disagreements may also arise in relation to questions of legal liability in the event of a dispute. Legal issues in relation to blockchain may end up having to be debated in court, or settled out of court, perhaps at significant expense. Any technical or legal problems related to use of blockchain by an insurer or broker that impairs its operations or inconveniences or harms its clients could create further reputational and regulatory risks.

Finally, there is the fact that the regulatory regime that will govern the use of blockchain technologies is still evolving, at both State and Federal level; with its development being driven in part by regulators’ concerns over cryptocurrencies. The evolution of what is still a patchwork of regulatory requirements does not yet represent a deeply concerning set of risks for insurance companies seeking to use blockchain, but this might change, perhaps for reasons that have little to do with insurance. It will certainly be necessary to continue to monitor regulatory developments for the foreseeable future.


An Integral Role in the Future of Insurance?

Clearly, any insurer or broker considering use of blockchain to deliver insurance services would need to develop a good understanding of these risks, then to address them through implementation of a risk management programme, including the use of business interruption, various liability covers and cyber insurance policies. Alesco is well-placed to help brokers and clients to define and source the covers needed to manage and mitigate those risks.

Only by creating effective strategies to manage the risks associated with these technologies can the insurance industry experience the full benefits of using them to improve the operation and profitability of P&C and other forms of insurance.

There will be other questions to settle in relation to regulation and the law; and there is clearly a need for widely accepted standards for the technology, to simplify and reduce the expense of its adoption and further development. To unlock the full potential of these technologies, insurers and brokers will have to collaborate closely and, in some cases, be willing to make quite sizable cultural changes.

But even though the technology is still early in its lifecycle, the sheer potential of blockchain as a tool for insurance makes it seem inevitable that it will be integral to the future of the industry.