Blockchain continues to be a hot topic in the business world and news. Many people have heard of blockchain but may not be familiar with what it actually is. As a basic definition, blockchain is a data structure that enables the creation of a digital ledger of transactions and the ability to share them among a distributed network of computers.
The challenge of data authenticity and data controls in the insurance industry continues to grow at a time when regulators are increasing data security requirements. Regulators do not consistently request data from insurance carriers across all states and may be looking at incorrect, incomplete or outdated data. Carriers only share minimal information because they do not trust that their data is going to stay secure and private, or how it is going to be used once it leaves their data center.
The core benefit of blockchain is that it builds trust between parties sharing information. The information shared is encrypted as an electronic list of records or blocks.
It cannot be erased, which helps to ensure trust between users. Once information is recorded, it cannot be changed without changing all of the records, which also provides for secure transactions between users. We’ve observed how this would be valuable to the life insurance industry, as it helps to ensure information is accurate, secure and trusted.
According to PWC, almost 90% of financial services firms globally, especially the more traditional ones, fear FinTech challengers will chip away at their revenues.
Even today, the insurance industry is dominated by traditionalism and entrenched in bureaucracy. Many insurers remain oblivious to the opportunities that technologies such as the blockchain can open up for them, and those that are aware often have to cut through a lot of red tape for change to be implemented. Insurers who wish to remain current or start innovating to stay ahead should experiment with the many ways blockchain can simplify and streamline the way they do business.
Reporting agencies are becoming subject to more audits that increases their cost of compliance.
These challenges are amplified in the highly competitive, anti-trust, and anti-collusion environment that is the property and casualty insurance industry. Industry leaders are exploring new techniques to address these issues. In this post, we wanted to share a practical example of how the American Association of Insurance Services (AAIS) to start solving this problem.
The American Association of Insurance Services is the only national level not-for-profit advisory services organization that serves the property and casualty insurance industry. AAIS serves more than 700 member carriers for regulatory reporting and product development. ISO Verisk is the other national advisory organization for the P&C industry.
What are the Benefits of Blockchain in Insurance?
Blockchain technology will bring about significant efficiency gains, cost savings, transparency, faster payouts, and fraud mitigation while allowing for data to be shared in real-time between various parties in a trusted and traceable manner. Blockchains can also enable new insurance practices to build better products and markets.
Insurance companies operate in a highly competitive environment in which both retail and corporate customers expect the best value for money and a superior online experience.
Blockchain technology represents an occasion for positive change and growth in the insurance industry.
With Ethereum’s smart contracts and decentralized applications, insurance can be conducted over blockchain accounts, introducing more automation and tamper-proof audit trails. Notably, the low cost of smart contracts and their transactions means that many products can be rendered more competitive for penetration of underinsured markets in the developing world.
Finally, the emerging blockchain ecosystem will itself require insurance. Cyber insurance can be taken as a template for coverage, with extensions and endorsements for financial loss (hot wallets and exchanges), specie and crime (cold wallets and vaults), professional liability (developers), and surety bonds (technology and software projects). Insurers can cooperate with tech companies, such as ConsenSys Diligence, to assess risk and advise on best practices for loss control and mitigation.
Blockchain can solve a myriad of insurance challenges
There are several ways that the blockchain can add value to insurance, allowing for the following services to become available, or more efficient:
- Smart contracts for insurance policies and faster claim processing;
- Payment verification—which will enable financial transactions such as claims collections or pay-outs to be faster, more accurate and auditable;
- Compliance—enabling insurers to reduce regulatory oversights and the associated costs.
Due to the transparent nature of blockchain in insurance, its application resolves many of the challenges arising from insurance policies; such as obtaining client consent or approval, and cooperation to collectively invest funds in shared resources and infrastructures. All information about a policy is recorded accurately and in real-time. This includes dates, times, participants, locations, and values of every single transaction. Because blockchain distributes consent, this information is protected from any unwanted or illegal adjustment and tampering, making it safer than any preceding technology to date.
Looking at the market trends, the main challenge many insurance companies exploring blockchain technologies is the complexities required to make such a change.
Smart contracts help blockchain technology work. According to PwC, a smart contract is a digitally signed, computable agreement between two or more parties. A virtual third party, a software agent, can execute and enforce at least some of the terms of such agreements.2 The smart contract allows the information to be shared and executed in a secure manner. For example, consider this as an If/Then program: if an insured car is in an accident, then an insurance claim is paid. The use of a smart contract in blockchain allows this type of payment contract to be completed without human interaction, as the information is secure and automated. With the automation of the contract, we can begin to see how this powerful technology can help large organizations.
Who Uses Blockchain?
Organizations with large amounts of stored records that need information to be moved and shared can benefit from using blockchain, which can include insurance companies, banks, hospitals and even governments. It is important to understand that there is not just one blockchain in the world. There are different types of blockchains in use globally, with many types of blockchain initiatives in development.
- Open or public blockchain: used for governments or nonprofit organizations, where information is open to the public.
- Closed or private blockchain: allows only invited users to participate, see and use the information. This would be of interest to insurance companies to use and share information on insurance policies for administration, billing and claims payments. Only information that is needed to be shared is shared.
Getting into Blockchain
Insurance companies can start by exploring blockchain within their organisations. Insurers can begin independently. For example, by running hackathons and building up a developer community to receive exposure to new technologies such as blockchain.
The first step for insurance companies with blockchain technology will likely be to look at smart contracts followed by exploring identity validation.
Currently, the industry is highly centralised and the introduction of new blockchain fuelled structures, such as mutual insurance and peer-to-peer models based on the blockchain, could fundamentally affect the status quo – what is stamped into a blockchain cannot be reversed or altered.
Research suggests that the insurance industry is currently falling behind in terms of understanding the nature of blockchain and subsequently maximising the opportunities it presents. Every insurance company’s core computer system is a centralised transaction ledger, and if the insurance industry does not begin to learn about, evaluate, build with and eventually embrace blockchain technology, they leave themselves vulnerable to displacement by the insurers who are using blockchain to disrupt the industry.
Blockchain for Insurance Claims Processing
Blockchain in claims processing can help establish an efficient, transparent, and customer-focused model built on trust. Typically, the claims process involves a customer making a insurance claim request via a call to a customer support centre or through an intimation made through a mobile app. Instead of this tedious process, a direct link can be created between the claimant, insurer, and third parties where all data is being directly uploaded and making an audit trail available.
Making the claims process an insurance company-centric process would not require much buy-in from external stakeholders.
All over the world, insurance is changing and moving closer towards ”Insurance on the Go”. Consumers want the flexibility to take out insurance for their special requirements, only for the period required; such as travel insurance for the length of a holiday or vacation, or even just for an Uber ride. How is it that insurance claims can not be processed at the same pace? When there is a need to claim, the consumer would expect the funds to be immediately available.
Blockchain for customer retention
Blockchains with smart contracts could be applied to offer consumers claim submissions at a low handling cost if underwriting and claims handling can be automated based on defined rules and the availability of reliable data sources. Payouts to these insured consumers can be triggered when the claim is submitted. And it can then be paid conveniently by accessing verified databases, through intelligent rules taking the user’s social media profile into account, as well as market changes that can assist with any possible fraud predictions.
One of the key business objectives of any insurer is customer retention. Insurers are constantly looking for new ways to improve customer satisfaction and increase their customer-centricity.
For example, many insurers are investing in loyalty programs for their customers which offer points-based benefits. The blockchain can facilitate this and even take it up a notch, enabling a platform that enables easy exchange of points between different loyalty programs – a virtual loyalty trading platform.
While loyalty programs are already in existence, it is the concept and execution of interoperability enabled by blockchain that can help usher in a truly effective loyalty and rewards program.
Blockchain technology, through smart contracting and unique customisation abilities, enables loyalty program providers to partner with other loyalty program providers that make sense for their customers, opening up a whole new world of possibilities for customer satisfaction and rewards.
The goal will be to reduce and almost eliminate the silo effect that dominates the current loyalty operation. A blockchain-supported loyalty platform can keep all of those programs under one ‘umbrella’—possibly translating to high levels of issuance and redemption, and greater value for end customers.
Blockchain network can also help leverage knowledge of customer preferences in real-time, enabling the end-user to ‘become the operator’ of the platform. This gives the customer the ability to exchange, for example, airline points for restaurant points, implying that the customer can choose the reward that works best for them. This effectively increases their freedom of choice and provides a better consent platform for the insurer.
OpenIDL (the open insurance data link) is the only U.S. P&C insurance industry network that supports insurance ecosystem reporting with built-in data controls and improved security. First and foremost, openIDL is an organization of members who are committed to the secure and efficient exchange of data to meet the needs of conducting business today and in the future — and establishing the standards for the data exchange, in the same way the internet has done for web applications.
Based on blockchain technology, openIDL allows insurance data owners to provide access to their data to others in the insurance ecosystem in the context of specific use cases, or better yet insights and answers to questions based upon the data.
Initially funded by AAIS and developed by AAIS and IBM, openIDL is being developed by the industry for the industry. Today, openIDL allows an insurance carrier to provide their statistical agent of choice access to their historical policy and claim events data in the context of responding to a state regulator data call. On top of the data access platform, openIDL supports a number of ecosystem use cases with applications and ecosystem workflows that make use of the data — regulatory reporting, risk modeling and product development.
The core openIDL elements:
- openIDL members: U.S. P&C insurance industry ecosystem members (for example, insurers, re-insurers, brokers, regulators and advisory organizations)
- openIDL data access platform: Blockchain ledger that allows data owners to provide access to their data in the context of a use case or application
- openIDL applications: Industry use case implementations that use the openIDL data
The first application, regulatory reporting, was built by AAIS but other applications will be built by ecosystem members. openIDL is focused on analytical use cases (like catastrophe modeling and product development) as opposed to transactional use cases (like quote or bind).
Blockchain Value proposition
The first application for openIDL is regulatory reporting. Today, regulatory reporting — statistical reporting and data calls — is a mandatory effort that is costly to insurance carriers and provides limited value to regulators. Because there is no data standard or audit trail for the data used in reports, regulators may be looking at incomplete, outdated or inaccurate data. This can lead to increased data calls to insurers or even audits, which are very costly for the industry and, typically, insurers participating in data calls get no immediate value out of the process.
In contrast, regulatory reporting with openIDL offers data controls for insurers, allowing them to control who has access to specific data sets (typically their statistical agent of choice), for what purpose, and for how long.
Regulators or others looking at a report can validate its authenticity by accessing an audit trail for the data that has been used to build the report. Insurers get immediate trusted industry insights when the data call concludes. We believe these features are going to lead to a decrease in direct data calls, exams or audits. Early estimates show a five-year $5 million cost reduction in statistical agent fees and full-time equivalent (FTE) cost for a medium size insurance carrier. A highly qualified stat reporting staff can be redeployed to higher value analytics and data management activities.
Beyond the immediate operational efficiencies of regulatory reporting, openIDL provides a harmonized data model for the industry, a practical way for all insurance ecosystem members to participate, and a new opportunity to participate in high value ecosystem processes while having strong controls over one’s own data.
We believe that in the medium term, these features are going to allow an insurance company or any other participant to derive valuable insights, become more independent, and have more choices for analytical and data services partners.
Blockchain and Life Insurance Industry
Magdalena Ramada-Sarasola, PhD (InsurTech Innovation Leader EMEA, Willis Towers Watson) writes that blockchain has the potential to generate disruption in the insurance industry six ways:
- Event triggered smart contracts
- Increased back-end efficiency
- Better pricing and risk assessment
- New types of insurance
- Reaching the underserved
Cost savings is a major benefit that blockchain can provide. It is logical to see that claims, administration, underwriting and product development can be impacted by the use of blockchain, and today, much of blockchain use cases have been focused on cost reduction efforts. Initial areas considered for insurance companies include using blockchain to build automation in paying claims.
Blockchain has the ability to help automate claims functions by verifying coverage between companies and reinsurers. An analysis by Gartner estimates blockchain will generate $3.1 trillion in new business value by 2030.
It will also automate payments between parties for claims and thus lower administrative costs for insurance companies. We can also envision a future state where new life insurance applications are submitted using blockchain.
Another potential use of blockchain would be the transmission of any type of digital evidence for underwriting, including the use of electronic health records (EHR). When digital evidence is easier to incorporate into underwriting, we can expect future changes into other areas of pricing and product development.
The combination of the Internet of Things (IoT) and Artificial Intelligence (AI) will lead to automation of insurance processes that will make our industry look very different in the near future. However, these are still new technologies that require proper due diligence before being fully leveraged by the insurance industry.
Blockchain Technology and governance
Under the hood, the openIDL network is powered by the The Linux Foundation’s Hyperledger Fabric blockchain technology, which is developed following a proven open source governance model. openIDL supports multi-cloud where your peer (the node in the network that you control) can run in your cloud service provider of choice.
Finally, openIDL is based on a strong industry model and a set of practical tools and processes for a participant to quickly onboard and get value.
The most important aspect of openIDL is its members, as shown in the above image. openIDL is incorporated as a not-for-profit entity. The openIDL entity operates following proven principles such as the ones followed by the open source community and the Linux Foundation. As a P&C carrier or industry player, you have the opportunity to become an openIDL charter member and shape what openIDL becomes. You can nominate representatives to the openIDL executive and technical steering committees.
AUTHORS: Mark Lounds – Manager Munich Re Underwriting Services, Bertrand Portier – IBM Distinguished Engineer, Blockchain in Financial Services, Jackie Du Plooy – Executive Director specialist in business transformation and growth at Monstarlab UAE