Blockchain is a distinct type of Distributed Ledger Technology (DLT). DLTs involve ledgers, or databases, where the input and maintenance of data on the ledger are controlled on a peer-to-peer (P2P) basis. Blockchain is a new technology that ‘has quickly become a fixation in the financial services industry’. According to our Global FinTech survey, 22% of insurance, asset, and wealth management business is at risk of disruption from FinTechs. Blockchain in the insurance industry can be used either to enhance existing insurance processes or used to enable whole new insurance practices. As customers increasingly expect a personalized value proposition, blockchain could be the solution, with more reliable and secure data available faster more cheaply whilst reducing risk and fraud.
- Annual investments in InsurTech start-ups has increased fivefold over the past three years, with cumulative funding of InsurTechs reaching $3.4bn since 2010.
- Blockchain technology could empower people to manage (some of) their risk more directly, with peer-to-peer and mutual insurance platforms based on blockchains’
- Blockchain has the potential for modernizing, streamlining, and simplifying the siloed design of the financial industry infrastructure with a shared fabric of common information.
- Over $1 billion invested in blockchain companies since the technology’s creation in 2009, with a 59% increase in the last year.
One of the more disruptive applications of blockchain is the development of ‘smart contract’ models. Smart contracts contain self-executing protocols that work with a blockchain to enforce the performance of a contract across all counterparties. The industry is ‘uniquely positioned to benefit from blockchain technology’, which can help deliver on key digital opportunities to cut costs, increase efficiency, enhance customer experience, and improve data quality, collection, and analytics.
Blockchain Insurance Industry Initiative (B3i)
- Platform Solution to exchange (re-) insurance information
- Standardize & Compliance
- Distributed ledger (Blockchain)
- Smart Contract
- Cryptography (secure and private)
- Covers the major elements of the Property Cat XL reinsurance contract life cycle (i.e. smart contract setup, premium settlement, and claim settlement).
Blockchain enhancing Existing Insurance processes
Blockchain enhancing existing insurance processes means using technology to complement existing business practices. Blockchains can enable parties to share data in real-time in a manner that is trusted and traceable. Whenever a user adds a file to the blockchain database or requests to change it later, it counts as a new transaction that is stacked and time-stamped across the network. Subsequently, it makes the history of any file completely transparent from beginning to end. With private chains or a combination of public and private chains, companies can grant access to information on a need-to-know basis. These things enable a blockchain solution or a distributed ledger to leave no single point of failure. Blockchains do not present with a single point of failure and are therefore more secure and resilient than other databases.
Recent research has shown that 46% of insurers expect to integrate blockchain in the next two years and that 84% of insurers identify that blockchain and smart contracts can revolutionize the way that they engage with new partners.
Know-your-customer and anti-money laundering (KYC/AML) regulations are especially onerous for banks and insurance companies. Furthermore, it is one of the factors holding back financial innovation as early-stage startups have to deal with complicated processes, hire compliance teams, and pay huge amounts to KYC data providers.
Global efforts to combat financial terrorism and money laundering have proved to be incredibly expensive for both governments and financial firms. Recent reports highlighted that in 2014, firms spent an incredible $10 billion on AML (Anti-Money Laundering) compliance alone.
How a KYC Blockchain application would work
In this new architecture, data access would be solely based on user consent. To grant consent, a user only has to log in, probably through a One Time Password (OTP), and allocate a private key to the data. Although the data can now be accessed by a third party (the bank in this instance), ownership of the data remains with the user.
The concept of the Blockchain-based KYC platform is already being implemented by IT giants like IBM. The Shared Corporate Know Your Customer (KYC) project assures an efficient, secure, and decentralized mechanism to validate, collect, store, refresh, and share KYC information for customers.
The benefit of KYC Blockchain are:
- Distributed user data collection
- Automation and standardization of policy/operations
- Centralization of controls and risks
- Governance and data quality
- Communication and Transparency
- Suspicious Activity Reporting
- Comprehensive Authentication Process
Goldman Sachs estimates that American banks could save $3-5billion in AML compliance costs.
Fraud prevention is a critical and ongoing consideration for companies all over the world. Protection from identity theft and fraud is a constant challenge for everyone involved in buying and selling. Merchants, consumers, issuers, and acquirers know there are vulnerabilities in how payments and data are secured. Blockchain, a public, decentralized ledger first used to enable bitcoin trading, has the potential to serve as a secure accounting information system. A key feature of blockchain is that it decentralizes system management and authorization to a network of computers.
According to the 2017 Identity Fraud Study by Javelin Strategy & Research, 15.4 million consumers were victims of fraud or identity theft in 2016. This is an increase of 16% from 2015. According to this report, CNP fraud numbers for 2016 increased by 40% from 2015, account takeover fraud increased 31%, and new account fraud was up 20%. These increases in fraud numbers accounted for theft of $16 billion in 2016.
Blockchain can eliminate these vulnerabilities:
- Real-time monitoring - Timestamps fix a traceable timeline, featuring the how, who, when, and where of accountability.
- Real identities - Each block (account, credit card, transaction) is linked to a real person or company. Identities cannot be hidden or buried in paperwork.
- Eliminate third-party approval - Blockchain relies on 51% approval of those involved in the transaction. Third-party approval is not required or permitted. Only those in the chain can access and approve.
- Paper is replaced with digital data - Proof of purchase, approval records, receipt of items, and other payment data is stored in the blockchain. The merchant, issuer, acquirer, and customer all have access to the same secure data and saving time and money.
- Error and complexity are thwarted - Fake data, errors in approval, double purchases, etc. are prevented within the linked blockchain process. Fraudulent data cannot be inserted into the blockchain.
Reinsurance protects insurers when large numbers of claims come in at once, such as during a natural disaster. Blockchain technology can reduce risk by facilitating information-sharing and cut costs by automating processes, ultimately saving reinsurers up to $10B. Reinsurers provide insurance for insurers in an arcane and inefficient system determined by one-off contracts and manual processes. Depending on the type of reinsurance purchased, it can cover a proportion of an insurer’s risk during a set period, or cover specific risks such as earthquakes or hurricanes.
Blockchain technology has the potential to upend current reinsurance processes by streamlining the flow of information between insurers and reinsurers on a shared ledger. Using blockchain technology, detailed transactions around premiums and losses can exist on an insurer and reinsurer’s computer systems at the same time, eliminating the need to reconcile books between institutions for each claim.
Blockchain enabling new Insurance practices
Blockchain enabling new insurance practices is about using smart contracts and apps to conduct actual insurance with blockchain accounts. While such implementations are in many respects more radical and sometimes more speculative than insurance with blockchain, they present exciting opportunities for innovation that can result in new products and new markets.
Index-based or Parametric Insurance
Index-based insurance relies on an underlying index to determine compensation to insureds. The index can be, among other things, about temperature, rainfall, windspeed, or flight time. This type of insurance does not indemnify pure loss. While index-based insurance is relatively cheap to administer by comparison with more conventional insurance products, blockchain can further reduce the costs. Index-based insurance is especially effective in developing countries due to its simplicity.
Blockchain can further reduce the costs that are involved through the comprehensive automation of every step of the index-based insurance process.
Peer-to-Peer (P2P) Insurance
Peer-to-Peer (P2P) insurance involves a group with some degree of affinity (family, friends, business associates, etc.) who team up to contribute to insure each other against loss.
How is P2P insurance different?
P2P insurance also works on the fundamental of pooling of risks. P2P insurers form a group of people with similar insurance needs and each member contributes to cover themselves against the potential financial loss. In the case of claims, the contribution is directed to the affected set of people. The remaining money after the payouts, expenses, and fees is returned to the group or passed on to a charity.
The efficiency brought by Blockchain results in lesser premiums. Once the premium has been set, the members put the money into an escrow account. In case of a claim event, which is generally approved by the voting mechanism, the amount is paid to the claimant. Any remaining money is re-distributed to the members or passed on to a charity.
Gathering and processing data on claims can be challenging as well as expensive. Data is manually entered and shared between different parties with different systems, which can produce errors in transmission. Blockchain technology can automate a great deal of claims-handling and reduce settlement times. Blockchain technologies facilitate the formation of a secure connection between two parties who don’t fully trust one another, without the need for an intermediary.
All recorded data can be verified automatically with code. The networks’ participants can choose to set different permission standards to avoid any privacy violations. Blockchain technology can ensure that valid claims are paid in a matter of seconds, rather than days or weeks.