A Closer Look At The Potential Of Blockchain Technology For Insurance
The global interest in cryptocurrencies has reached fever pitch in recent years. But what sometimes gets lost in the stories of Bitcoin millionaires or disruption to financial systems are the practical applications of the technology on which they are based; the blockchain.
One such application is the use of blockchain’s smart contract and distributed ledger capabilities in the insurance and reinsurance industry. Efficiencies can be gained across operations, with faster and more trusted processes speeding up claims and reducing costs for providers.
And while there is still plenty of work needed to prove the function and value of blockchain applications in the insurance sector, the possibilities are significant.
Blockchain opportunities in the insurance workflow
Applications that firms may exploit in the future mainly focus on improving trust and increasing efficiency, such as:
- Developing more resource-efficient and streamlined administration with distributed ledgers,
- Enabling the automated execution of secure smart contracts between trusted partners,
- Significantly enhancing and simplifying auditability by utilizing traceable transactions recorded on a selectively open and immutable record,
- Improving safeguards and combating fraud, and
- Enhancing the trusted flow of both capital and information in value-adding products that bring benefits for providers, claimants, and third-party clients.
Blockchain use also sits within a broader trend in the industry — that of companies investing in technology in order to generate growth. A 2017 report by Clyde & Co found that 80% of firms were increasing spending on ‘insurtech.’ This could see additional new applications combining blockchain functions being brought in, such as automatic triggering of reimbursements as a result of data acquired from online sources (e.g. travel delays) or physical sensors (e.g. smart home, Internet of Things (IoT) sensors identifying damp or other forms of damage).
Companies implementing these or any other blockchain application will need to ensure they understand the full cybersecurity context of the new innovation.
The security issues — opportunities and requirements
A recent academic paper by Valentina Gatteschi et al entitled Blockchain and Smart Contracts for Insurance: Is the Technology Mature Enough? argues that blockchain technology in the insurance sector is still in the ‘innovation trigger phase.’ The whole range of applications are yet to be defined and tested, and there is a risk that distrust in the underlying technologies could prevent the full security benefits from being realized if some actors do not openly participate in certain business networks.
However, companies can help mitigate this by implementing applications using ‘permissioned blockchains’ rather than fully open and distributed ledgers. In such networks, only certain core stakeholders would oversee changes to the blockchain and, by limiting the number of network nodes that are trusted, the network’s overall security and privacy can be enhanced.
Insurance claims require the rapid communication of private and potentially very sensitive personal and legal information, at scale. Any new infrastructure technologies must work effectively with existing regulatory and data protection. For example, the encryption assets required to support these extensive blockchains must be delivered rapidly enough to keep pace with their volume and velocity. Companies deploying integrated business networks utilizing blockchain to enhance information flow will also need to ensure that cryptographic keys and machine identity portfolios are managed effectively.
Provided the necessary trust and security needs can be met (both technically and in terms of overall perception) blockchain is showing significant potential to change the enormous global insurance industry. And while readily-deployable applications and use cases may emerge gradually, the overall trend towards using new technological solutions to existing business problems could speed up the adoption of the blockchain.