blockchain in insurance

1. Blockchain
in insurance:
applications and
pursuing a path
to adoption

2. 1 | Blockchain in insurance
Blockchain has the potential to evolve into
a core, underlying element in the technology
“stacks” of most P&C carriers, supporting a
diverse range of processes and part of your
company’s future technology “plumbing.”
Blockchain, or distributed ledger technology, has quickly become a
fixation in the financial services industry as a result of its potential to
revolutionize and transform our thinking about data sharing and security.
In considering the technology, senior business and IT leaders at property
and casualty (P&C) companies must balance their natural skepticism
about “next big thing” trends with a clear recognition of both the large-
scale impacts and significant upside.
After all, it’s not hype to say that the value creation opportunity is
huge and the possibilities of future applications are many. Similarly,
it’s not hard to see how distributed, secure, peer-to-peer ledgers — the
mysterious and exotic-sounding technology behind blockchain — may
one day be as common in the insurance industry as Structured Query
Language (SQL) databases. Blockchain has the potential to evolve into a
core, underlying element in the technology “stacks” of most P&C carriers,
supporting a diverse range of processes and part of your company’s
future technology “plumbing.”
P&C executives must also keep in mind that these are still very early
days. Blockchain in 2016 is roughly where the World Wide Web was in
1996 — on the radar of forward-thinking companies, but still a long way
from adoption at scale. Therefore, the question for most P&C companies
is not whether they will adopt blockchain, but rather what and how to
start testing and proving out the value proposition.

3. 2
Blockchain in insurance |

4. 3 | Blockchain in insurance
Below, we look at emerging
blockchain applications and five
key areas where we see the
most potential for transformations
and disruptions to play out.
Fraud detection and risk
prevention
Thanks to its ability to provide a public ledger across
multiple untrusted parties, blockchain has the potential
to eliminate errors and detect fraudulent activity. A
decentralized digital repository can independently verify
the authenticity of customers, policies and transactions
(such as claims) by providing a complete historical
record. As such, insurers would be able to identify
duplicate transactions or those involving suspicious
parties.
First-moving insurers (including some outside of P&C)
are already exploring the use of blockchain to reduce
fraud and risks associated with payments across
borders and transactions involving multiple currencies.
In specialty insurance and reinsurance markets, where
insurers are often removed from the end clients,
blockchain may be used to address the considerable
inefficiencies, gaps and errors caused by poor data
quality in both front and back offices. Health insurers
and regulators in the US view blockchain as a powerful
tool for combating Medicare fraud. Validation and
verification, which can add value to many insurance
processes, form the heart of the blockchain business
case.
Claims prevention and
management
Alongside big data, mobile and digital technologies,
blockchain is essential to establishing an efficient,
transparent and customer-focused claims model based
on higher degrees of trust. Within claims prevention,
new data streams can enhance the risk selection process
by combining location, external risk and analytics. A
distributed ledger can enable the insurer and various third
parties to easily and instantly access and update relevant
information (e.g., claim forms, evidence, police reports and
third-party review reports).
The use of data from a mobile phone or sensors can
streamline claims submission, reduce loss adjuster costs
and increase customer satisfaction, with blockchain
systems facilitating communications and coordination
among all parties. Consider how sensors can trigger
alerts to insurers that a crash has occurred (thereby
initiating a new claim), and then route secure and relevant
data to preapproved and conveniently located medical
teams, towing services and/or repair garages. Here
again, blockchain is the network connecting and ordering
data from the multiple devices and apps involved in the
multidimensional process.
Similarly, the combination of sensor data, satellite
imagery, mobile technologies and blockchain could be
used to facilitate claims payments and rescue services
when natural disasters occur in remote areas. Data from
weather stations could determine claims amounts based on
actual weather readings, with blockchain enabling greater
automation, more efficient data sharing and stronger
safeguards against fraud.
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5. 4
Blockchain in insurance |
Internet of Things (IoT) and
product development
As more devices and objects are connected to the IoT,
the amount of data that will be created and collected will
increase significantly. This data will be hugely valuable to
insurers as they look to develop more accurate actuarial
models, or new products such as usage-based insurance
(UBI) models. In the auto insurance market, for example,
consider how encrypted data gathered about driving
times and distances, acceleration and braking patterns,
and other behaviors can be used to identify high-risk
drivers, validate information included on applications
and give consumers more control over their premiums.
The challenge in this future state, however, is how
to manage the sheer volume of data and logic as
thousands or millions of devices are communicating
with each other. With blockchain, you can manage large,
complex networks by having the devices communicate
and manage each other on a peer-to-peer basis,
securely, instead of building an expensive data center to
handle the processing and storage load. Having these
devices manage themselves is significantly cheaper than
the data center model.
New distribution and payment
models
A number of global insurers are developing alliances and
exploring new payment business models (and bitcoin
technologies) to achieve capital efficiencies through
single global ledgers. Increased automation to capture
risk data in contracts also offers new opportunities
to build market knowledge, streamline payments and
attract financing risk. At minimum, global insurers
can use blockchain to cut asset management costs
by reducing the hedging fees they pay to protect
themselves from currency fluctuations in international
transactions.
Mobile wallets are another potential use case. Insurers
developing these offerings typically restrict consumers’
options and limit the data that can be included. With
blockchain, wallets can achieve customer engagement
on a much greater scale, with tailored functionalities and
more integrated data. Consumers could have all their
identities and insurance information available instantly.
Reinsurance
P&C insurers seeking clearer visibility into their reinsurance
contracts and risk exposures may gain it through
blockchain. Consider the case of an insurer seeking to
offload an equal amount of risk to two separate reinsurers.
A blockchain ledger could provide insight and notification
if one of those reinsurers then tried to offload some of its
portion to a subsidiary of the other reinsurer. It also would
help insurers gain confidence that, as they pay out claims,
they are appropriately rebalancing their capital exposures
against specific risks.
Within reinsurance, the benefits of blockchain include
more accurate reserve calculations based on actual
participating contracts and automatic calculation updates
once underlying data is updated. Plus, insurers gain more
flexibility in moving capital and enhanced transparency into
known risks, capital efficiency and capital requirements for
compliance. Practically speaking, audit trails become easier
to follow, modeling requirements are greatly reduced and
there is less need for coordination between finance and IT.
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6. 5 | Blockchain in insurance
The three-step path to
adoption and maturation
After identifying high-impact areas for blockchain technology, insurance
companies should begin testing and proving out new models. We see a fairly
clear path forward in this regard, starting with low-risk, internal prototypes
and pilots in the short term, later expanding to broader deployments involving
partners and third-party networks. As with firms in other industries, the
adoption curve for P&C insurers involves evolution from internally focused
projects to customer-facing ones and, ultimately, to widespread adoption
enabled by the IoT.
Internal proofs of
concept
For many insurers, a simple,
internally focused use case will be
the right place to start. Internal
reconciliation of customer data
sets and internal claims processing
with smart contracts are two likely
candidates for experimentation.
The opportunity to streamline
internal processes, such as
monthly closes, may also be
attractive. By choosing narrow-
scope projects to address internal
business gaps in the short term,
you position your organization
with the right insights and
strategies to appropriately address
the larger opportunities and
business issues down the road.
Customer-facing
processes
As the technology progresses and
internally deployed solutions verify
the viability and functionality of
blockchain solutions, insurers
will next turn to implementations
that support customer-facing
applications. Ideally, you can
deploy strategically in an
ecosystem where your enterprise
is a market maker, which provides
leverage to drive adoption.
Distribution networks or well-
defined partnerships will also be
candidates for first-generation
blockchain deployments. One
important step here is to develop
the requisite legal, regulatory
and tax frameworks to shape the
development of the technology
architecture.
IoT
enablement
The long game for P&C insurers
is to integrate blockchain
deployments with hardware and
software components that allow
for communication among devices
and transmission of external
data streams. The intersection
of big data, IoT and blockchain is
the most compelling long-term
value proposition. Consider how
sensor hardware can deliver near-
real-time information about the
performance of an automobile via
a blockchain mechanism, allowing
insurers to adjust premiums
through smart contracting
software.
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7. 6
Blockchain in insurance |
The blockchain bottom line: the time
for experimentation is now
In an era of “point innovations”
such as mobile apps and robo-
advice models, blockchain stands
out as a more foundational or
architectural development. In that
sense, blockchain may support,
and subsequently drive, increased
use and broader adoption of the
many other digital innovations
that have helped reshape the P&C
landscape.
Executives skeptical of the hype
should recognize how blockchain’s
enablement of increased trust
and transparency speaks to the
heart of the insurance business.
After all, the industry’s inherent
bond of trust and “promise to
pay” are based on disclosure of
accurate personal data describing
the insurable interests of the
client, the agreement to a contract
between two parties and timely
exchange of payment. Blockchain
can help remove friction, errors
and risks from all of these
essential steps. There is substance
behind the hype, but the insurance
industry must make investments
now to be in a position to
take advantage of efficiencies
and opportunities blockchain
technology can deliver long term.
Executives skeptical
of the hype
should recognize
how blockchain’s
enablement of
increased trust
and transparency
speaks to the heart
of the insurance
business.

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