Is Blockchain Technology Mature Enough For The Insurance Industry?
The insurance industry, just like others, started to explore the application of blockchain technology through considerable investments from both big and small companies.
Blockchain made its first appearance in 2008 with the Bitcoin initiative, to transfer online payments from one party to another without relying on intermediaries. Even though Bitcoin is so far the most known cryptocurrency, more than 1300 cryptocurrencies have been created since, which are used as exchange tokens in many different blockchain-based applications. Whereas cryptocurrencies have become mediums of speculation, blockchain itself is about the underlying ability to transfer and guarantee, using cryptographic operations, the authentication, and non-repudiation of information.
5 distinct characteristics mark blockchain as a potentially disruptive technology:
- Decentralized validation: the validation of transactions is performed by network nodes without the need for intermediaries
- Data redundancy: each network node has a local copy of the blockchain, which prevents data loss
- Data immutability: data stored in the blockchain cannot be modified or deleted
- Trust: cryptography ensures trust between parties; a transaction that has been validated via user credentials cannot be repudiated
- Transparency: every authorized user can read the blockchain and the transactions stored therein
The idea of a ‘smart contract’ has been known since the 90s. But it was only with blockchain technology where smart contracts began moving from concept to potential reality.
Insurance-specific blockchain use cases include:
- Improvement of Customer Experience and Lowering Down of Operating Costs
- Data Entry/Identity Verification
- Premium Computation/Risk Assessment/Frauds Prevention
- Peer-to-Peer Insurance
With so many compelling strengths, the most relevant weaknesses of blockchain are related to scalability, energy consumption, and performance. Today, the number of blockchain transactions that can be handled per second is extremely low compared to traditional systems (mainly because of the computational power required to validate new blocks). The immutability and self-execution of code may be considered another weakness; hackers could exploit bugs in smart contracts to steal money.
So, the question here, is blockchain technology mature enough for insurance? We are concluding that while blockchain is indeed a huge invention that could have an impact similar to the World Wide Web in the 90s, the technology needs several improvements before going mainstream. It must become more user-friendly, and resources and best practices must materialize. There’s also the question of energy and compute resources.
Insurance companies are strongly advised to start looking into blockchain, to acquire attendant competencies and creating prototype solutions. Such activities will prove useful in evaluating how existing processes will be influenced and to what extent the technology will be accepted by internal and external stakeholders.