The Insurance Implications of Blockchain
About 5 minutes into a speech on blockchain for insurance at CordaCon2019, featuring a mind-bending stream of blockchain lingo, I thought to myself, “Blockchain is a powerful solution for insurance. No doubt about it. But it’s a whole new language. There’s NO WAY a non-technical insurance executive would still be listening at this point.”
I believe it’s crucially important for leaders of incumbent insurance operations to understand the implications of blockchain on the industry, and also how it impacts their own business. Otherwise, they will make incorrect budget and resource allocations and investments in the tech future of their enterprise. But, as we can all appreciate, they’ll never get there unless someone speaks in plain language and helps them “connect the dots” in the context of what they already understand.
First, a word of definition. Since its invention in 2008 by the enigmatic “Satoshi Nakamoto” (see the original Bitcoin Whitepaper), the word Blockchain is now often used as an umbrella term for many related technologies and applications – digital currency (e.g. Bitcoin), distributed ledger technology (DLT), cryptography, peer-to-peer transactions, and to describe the communication layer at the intersection of AI, IoT, ML, and more.
In the B2B world, perhaps the simplest definition is this: the modern architecture for sharing and trusting data. This would include data collection, transmission, transaction, storage, recordkeeping, audit, and compliance.
Blockchain architecture is a 1. faster, 2. more efficient, and 3. safer method of sharing and trusting data.
At the highest level, these three reasons explain why savvy enterprise operations, across the globe, in all industries, those who see past the trendy hypesters and fraudsters towards the real business benefits, have begun gradually shifting enterprise tech infrastructures to blockchain architecture.
The Insurance Implications of Blockchain: (at a high level)
Exhaustive content on the implications of blockchain in insurance is available from all the likely sources via a quick Google search, on any insurance-related keyword, followed by ‘blockchain’. The purpose of this post is to provide an easy-to-read, non-technical, quick summary for the busy insurance executive.
It’s About Value Chain Optimization
Drilling into the context of the typical insurance product lifecycle approach and across the entire (re) insurance value chain, from risk assessment, customer onboarding to claims payments, and everything in between and around, including accounting, audit, and compliance, here’s where blockchain can make the business run faster, more efficiently, and more securely.
Of course, the corresponding implications by extension, for related third parties, such as Brokers and Agents, TPAs, Actuaries, Marketing Partners, and Reinsurance companies, also become clear with a deeper understanding of DLT.
Again, this is not intended to be exhaustive – only a high-level look at the obvious benefits. In a nutshell, Blockchain architecture is a faster, more efficient, and safer method of sharing and trusting data.
What are the ways that blockchain can make the business of insurance run faster?
Claims Adjudication & Payments – “Verification” and Trust is one of the core use-cases of DLT. Faster claims resolutions can be achieved by a shared single source of the truth between two or more stakeholders who benefit from reduced data reconciliation needs between them. For this reason alone, much of the early work in DLT is around making conventional claims processes run faster. Claims subrogation is another well-known use case that removes friction.
Onboarding & Underwriting – Trusted connections to trusted sources of trust-worthy data about people, places, and things, when used properly and efficiently, have the effect of making applications, underwriting, quoting and binding faster, simpler, and more reliable – with downstream benefits as well, such as claims fraud.
Reconciliations – Again, because of the immutable nature of DLT, early DLT deployments are virtually eliminating the need for the reconciliation loop. You heard that right. Certainly, the vast majority of effort is eliminated. This removal of a significant bottleneck in the insurance workflow helps the insurance process run faster.
Audit – Giving auditors access to the blockchain network, in real-time, helps the audit function to use automated tools for due-diligence. Removing the cliché’d “manually-automated” processes of the previous architectural era increases the speed of insurance.
Compliance – Similar to Audit, giving regulators access to the network helps the compliance function run faster, which increases the speed of insurance.
2. More Efficient
What are the ways that blockchain can make the business of insurance run more efficiently?
Operational side of product development – Integrating external, trusted ledgers to feed the actuarial tables with trusted, real-time data from trusted sources, is proving to be a less expensive, and more accurate, method for the actuarial side of product development.
Operational side of product management – In the production environment, connecting the asset or policyholder to IoT devices (think Fitbit® or Biosole®), Oracles, and other immutable, trusted ledgers, this architecture will substantially decrease the need for, and corresponding costs of, internally stored data.
Transactions Fees – Much has been done in the eCommerce era to reduce the fees associated with intermediaries in financial transactions. The immutable, digital, and programmable nature of contracts and agreements, and their corresponding payments, in many cases, is eliminating the need for intermediaries. This is especially true in cross-boarder payments. (Side note to Brokers and Agents: Don’t be misled - your role is secure. But as always, adaptation is important and will be a point of differentiation.)
System Administration – The immutable, digital, and programmable nature of DLT, combined with Cloud and AI, is significantly reducing the overhead cost of operating internal databases, networks, hardware, software licenses, etc.
System Security – Advanced Cryptography and Decentralization are the game-changers of Distributed Ledger Technology. Because of these two key innovations in computer science, the cost associated with securing conventional IT systems from threats, both external hackers and internal fraud, embezzlement, treason, etc., is seeing significant reductions.
Policy Administration – Again, advanced Cryptography and Decentralizated architecture, combined with ubiquitous high-speed networks, are generating viable cost-saving strategies for policy administration, such as the self-execution of policy clauses to say, trigger a policy amendment (i.e. endorsement) based on pre-agreed triggers, or pay a claim based on the agreed triggers or reducing the need for manually processing these client service functions. Self-executing code based on triggers from trusted sources of data (e.g. Oracles) reduces costs and speeds up the fulfillment pieces of a policy contract.
Audit – Giving auditors access to the network not only increases speed, it also reduces costs. Time is money. The faster auditors can accomplish their audits, the lower the cost, not to mention the costs associated with inaccuracies, and the potential fines and penalties to suit.
Compliance – Savings associated with potential fines and penalties (exempting outright bad-actor-fraud of course) is perhaps the biggest area of savings, not even including the costs of reputation damage and repair following a conventional systems failure.
What are the ways that blockchain can make the business of insurance run more safely?
Cyber Security – As we enter the 2020’s, it’s no secret that hacking is a business. Conventional architectures are easy marks. Without getting too technical (here’s a deep-dive video walk-through of blockchain architecture), advanced Cryptography and Decentralized architecture has been found to be tamper-proof, at least in Layer 1. Of course, humans are easily tricked or corrupted, and accidents happen. But the technology of blockchain architecture is indisputably safer than conventional topographies.
Provenance – The immutable nature of advanced Cryptography makes certain the documentation associated with the chronology of the insurance records and transactions, such as policy ownership and changes or the location and state of an object. This advancement in certainty makes the industry safer from errors and omissions, and of course fraud itself.
Underwriting Risk – Garbage In, Garbage Out. Again, while much has been done in the internet era to improve the quality of actuarial and underwriting processes and procedures, nonetheless, approvals are often given based on incorrect information. Retrieving data from IoT devices, Oracles, and other immutable, trusted ledgers not only will substantially decrease costs, it will also decrease risk.
Audit Controls – Bad data and related practices increase the chance of unfavorable audits, thereby exposing the company to greater risk of AMBest™ ratings downgrades, etc.
Compliance - Advanced Cryptography and the Decentralization architecture secures the enterprise from attack by internal and external threats. A clean running operation, combined with compliant operational standards, is much more likely to pass compliance tests.
In summary, dating back to the 1600s and sharing the financial risks of trans-Atlantic shipping of goods from the New World, insurance has always been about money and risk of loss. DLT architecture - advanced Cryptography and the Decentralization - is the modern architecture for sharing and trusting data - collection, transmission, transaction, storage, recordkeeping, audit, and compliance. Looking holistically at Blockchain architecture for insurance, Blockchain is a faster, more efficient, and safer method of sharing and trusting data along the insurance product lifecycle.
Stay tuned to this channel. In the months ahead, we will expand on these broad strokes. In the meantime, we stress the importance of getting started by identifying which of the current corporate pain points might be reduced or eliminated altogether with the modern architecture called blockchain.
For a deep-dive, here’s some of the best recent content.