Blockchain is a revolutionary technology that is likely to have a far-reaching impact on business — on a par with the transformative effect of the Internet. Not surprisingly, the huge potential promised by blockchain has prompted a flurry of research activity across different sectors as diverse organizations race to develop applications.
In this article, we’ll explore some benefits blockchain could bring to the insurance industry and the different challenges that will need to be overcome.
Blockchain has strong potential in the short and long-term in several different areas, particularly where it links with emerging technologies such as the Internet of Things (IoT) and Artificial Intelligence (AI). But its potential for delivering new applications also depends on the development of blockchain technology itself. In the medium and short term, there are three categories where blockchain can be applied:
- Data storage and exchange
Numerous data and files can be stored using blockchain. The technology provides for more secure, traceable records compared with current storage means.
- Peer-to-peer electronic payment
Bitcoin (and other blockchain-based cash systems) is a cryptographic proof-based electronic payment system (instead of a trust-based one). This feature is highly efficient while ensuring transparent and traceable electronic transfer.
- Smart contracts
Smart contracts are digital protocols whereby various parameters are set up in advance. When pre-set parameters are satisfied, smart contracts can execute various tasks without human intervention, greatly increasing efficiency.
Data storage and peer-to-peer electronic transfer are feasible blockchain applications for the short term. At this stage, the technical advantages of blockchain are mainly reflected in data exchange efficiencies, as well as larger-scale data acquisition.
Smart contracts via blockchain will play a more important role in the medium to long-term. By that time, blockchain-based technology will have a far-reaching impact on the business model of insurance companies, industrial management models and institutional regulation. Of course, there will be challenges to overcome and further technological innovation will be needed as blockchain’s own deficiencies or risks emerge during its evolution. But just like Internet technology decades ago, blockchain promises to be a transformative technology.
Challenges and problems
Decentralization strengthens information sharing and reduces the monopoly advantages that information asymmetry provides. Under such circumstances, insurance companies have to pay more attention to pricing, product development, claims services, and even reputation risk. All this adds up to new challenges for the company management.
At the same time, every aspect of the insurance industry must be more focused on ensuring the accuracy of the original information at the initial stage of its business. Knowing how to respond to false declarations from insureds will be crucial.
From a more macro perspective, “localized blocks” of data will be inevitable in the early phase of development in line with the pace of technological development and regulatory constraints.
In theory, it is impossible to hack blockchain but data protection will be an issue for localized blocks. Therefore higher cybersecurity protection will be required to protect these localized blocks.
The interaction of blockchain with other technologies could mean that existing intermediary roles are replaced by new technologies in different sectors. If the insurance industry wants to ensure the continuous development of the intermediary it should address the possible disruptive risks to existing distribution business models posed by blockchain.
The necessary investment (both tangible and intangible costs) associated with adopting blockchain technology is a big consideration for many companies at this stage. Insurance companies and reinsurance companies operate numerous systems and the decision to integrate blockchain based technology/platform shouldn’t be taken lightly. At the current stage of blockchain evolution, this could be one of the biggest obstacles facing insurers.
Overall, blockchain is an inspiring prospect and there is every reason to believe that this technological breakthrough will bring positive effects to individual insurers everywhere. But at the same time, we need to understand the mutual challenges that lie ahead and work together to promote our industry’s development in what promises to be an exciting new era.