Blockchain in insurance: underwriting and claims fraud
With blockchain technology still in its infancy, many financial services sectors are adopting a cautious ‘wait and see’ approach. Yet in the insurance industry, blockchain is already expected to revolutionise the way companies do business.
A new forecast out this month from ReportLinker states that the global blockchain in insurance market is projected to grow from 2018’s $64.5m to $1,393.8m by 2023, a compound annual growth rate of 84.9%.
In addition, Pricewaterhouse Coopers estimates that potential cost savings from blockchain for the industry will range from 15% to 30% of annual current expenses. This is from improved processing speed, enhanced underwriting and impact on fraud – something that costs insurance companies globally more than $80bn every year.
How is blockchain being used?
There are several major initiatives in the sector to develop blockchain applications, also known as distributed ledger technology, and numerous leading insurance organisations are participating in alliances.
The 100-year-old US alliance of insurance bodies, The Institutes, has set up a RiskBlock Alliance to establish an industry-led consortium collaborating to unlock the potential of blockchain. Leading IT solution provider Accenture recently formed a partnership with the alliance to develop a production-grade platform to create and implement insurance blockchain and distributed ledger use cases.
The group delivered its first tool designed to establish proof of insurance in partnership with Nationwide Insurance in December 2017, and alliance members are now evaluating this tool for wider rollout. Additional use cases focusing on first notice of loss, subrogation (when more than one insurer shares a loss) and parametric insurance (a special kind of disaster cover) are being developed.
Major players in the insurance sector have also teamed together to implement a pilot project called B3i that is aimed at transacting reinsurance contracts amongst each other and in March it created an independent company with the aim of commercialising some of the solutions it has developed.
Gerhard Lohmann, CFO of reinsurance at world giant Swiss Re, has been appointed as chairman of the company and said that the transition of B3i from consortium to independent company is a concrete step forward to realising the enormous potential of blockchain for the insurance industry.
He said: “Personally, I am very excited to be at the forefront of this innovation that has the capability to transform the industry and help make insurance more affordable, accessible and attractive for market segments that are currently disenfranchised, or underprivileged.”
The collaborative effort will look at the ability of distributed ledger technologies to increase efficiencies in data shared between reinsurers and the insurers who reinsure their risks, called cedents. It is hoped that by streamlining communication and transactions this would filter down to provide better insurance services to customers.
The current 15 members of B3i reads like a First XV of the biggest and strongest insurance giants in the world. They include Achmea, Aegon, Ageas, Allianz, Generali, Hannover Re, Liberty Mutual, MunichRe, RGA, SCOR, Sompo Japan Nipponkoa Insurance, SwissRe, Tokio Marine Holdings, XL Catlin and Zurich Insurance Group.
Liberty Mutual joined the initiative in November 2017. James Slaughter is senior vice president and director global reinsurance strategy. He said that teaming across organisational and geographic boundaries was important because it broadened opportunities for innovation and provided the best solutions for customers and stakeholders.
Too focused on one platform?
The RiskBlock Alliance have selected R3’s Corda platform to build its first set of use cases. The announcement followed news that B3i has also switched to Corda away from Hyperledger Fabric’s blockchain.
Experts say that RiskBlock’s decision to utilise R3’s Corda, coupled with the recent transition by B3i, could be good for cross-industry interoperability, but it does also mean that much of the insurance and reinsurance industry’s participation with blockchain technology is in one place.
What potential can blockchain have?
A recent Fitch report, titled “Blockchain and Insurance—The Trust Machine,” said the insurance industry is taking tentative steps to explore the technology and the potential benefits include:
- Gaining expense and operating efficiencies through greater automation of core operating functions.
- Capturing more customer-specific data from remote electronic devices.
- Price risking more accurately through increasingly granular data analysis.
- Boosting speed and transparency in customer service via web-based tools.
- Reducing distribution costs by optimizing product design and understanding agent behaviour better.
According to B3i chief marketing officer, Ken Marke, the potential of blockchain technology in insurance arises from cryptographic security and the opportunity to develop smart automated contracts.
He said: “The blockchain provides a version of the truth that the network can trust, is validated by the network and has not been tampered with. To a great extent, this mitigates the opportunity for fraud. The information remains consistent and provides certainty, which is very relevant in executing and validating contracts such as insurance agreements.”
The ReportLinker forecast also anticipated that identity management, as well as fraud detection tools, will fuel the global increase of blockchain in the insurance market.
Traditionally, insurers have been relying upon physical processes to authenticate claim information related to ownership, history item, and authenticity of the product. Open ledger technology, including encryption and immutability, means that transparency in transactions is ensured. This should leave no room for criminals to defraud the system.
As well as insurance-only blockchain solutions, insurance ecosystem blockchains are gaining some traction. Marine cargo company Maersk and IBM, for example, are establishing a joint venture to provide more efficient and secure methods for conducting global trade using blockchain technology.
The cost and size of the world’s trading ecosystems continue to grow in complexity. More than $4tn in goods are shipped each year, and more than 80% of the goods consumers use daily is carried by the ocean shipping industry.
According to a new report from Boston Consulting Company, ecosystem blockchains can give insurers external data that can be used to do a better job of setting prices and limiting their exposure to fraud. Currently, risk assessment is based on an insurer’s internal data and on the customer’s history. Spotting fraud is the responsibility of insurance adjustors who use their observations and experience to flag suspicious claims.
It also estimates that blockchains could help the worldwide property and casualty insurance industry reduce its combined operating ratio – a widespread measure of commercial success in insurance – by five to 13 percentage points and generate upwards of $200bn more in technical margin from its current gross written premiums.
Commercial brokers and blockchain
Insurance agents and brokers will also need to define their blockchain strategy to get ahead of the game. An Accenture report for commercial brokers said that the fundamentals of blockchain – trust, transparency and immutability, together with automation enabled by smart contracts – create a unique foundation for utilizing emerging technologies.
Key areas for brokers to consider are:
- Delivery: Smart contracts are cutting-edge and, to date, have not been combined with blockchain on an industrial scale for insurance.
- Investment: Despite leveraging open source technology, blockchain comes at a price. Research and development funding will be required to upskill existing capabilities.
- Buy-In: Blockchain-enabled products and services must be sponsored and championed at an executive level to ensure they are not seen as just another fad.
- Governance: Robust yet flexible governance and change management must pave the way for a “fail fast” culture that can quickly develop innovative products and services.
Patrick Schmid, vice president of the RiskBlock Alliance, said blockchain applications will lift administrative burdens and allow for greater efficiencies for brokers.
He said: “Documentation difficulties, such as data updates that might not be duplicated in other versions of the same contract, may lead to processing delays, which in turn increase the overall cost of insurance.
“A consortium blockchain, like the one proposed by The Institutes RiskBlock Alliance, can help by providing access to contract documentation via keys. These keys can be shared with the related insurers and brokers, allowing permissioned and secure access to the documentation and updates that are reflected across the board. In this way, a blockchain can help ensure consistency among various parties and dramatically cut administrative costs.”
There are both managerial and technical obstacles to the adoption of blockchain technology in the insurance sector.
An editorial from Aon recently attempted to step back from the hype and debunk some confusing myths and inaccuracies. It said that blockchain technology allows us to re-democratize data and reassert the individual’s control over their private data. But it will require infrastructure and an alternative revenue model. It concluded that insurers are well positioned to provide these services.
The Fitch report says that part of the challenge is that investment costs relative to benefits are uncertain, and there are numerous legal, regulatory and security issues that need to be addressed to facilitate wide-scale adoption.
Uncertain regulatory status was also highlighted in the ReportLinker research and it forecast that a lack of common standards could weigh on overall growth.
Enthusiasts, however, believe that drawing up regulations for blockchains at this early stage would be a mistake as the history of peer-to-peer technology suggests that it is likely to be several years before the technology’s full potential becomes clear.
An article in the Economist suggested that regulators should find ways to accommodate new approaches within existing frameworks, rather than risk stifling a fast-evolving idea with overly prescriptive rules.
Other challenges highlighted by the Boston Consulting Group include scalability and computational power, security and robustness of the software.
The best loss is the loss that never happened
For insurance companies, blockchain technology has the potential to lower costs, ease data retrieval, simplify and streamline processes, help combat fraud and lower regulatory burdens. And Peter Miller, president of The Institutes, the insurance educational organization sponsoring the RiskBlock Alliance, says that these benefits are the tip of the iceberg.
He predicts that blockchain applications, combined with the use of distributed risk sensors (the “Internet of Things”) and data analytics, will enable “real-time” monitoring of risk that, in turn, triggers loss control actions.
“I’m very excited about this technology because it’s going to help our industry do its job better. It’s going to allow us to provide more services at less cost. The best loss is the loss that never happened.”
So, will blockchain be a game changer for the insurance industry? No one at this stage can say for sure.
As the Boston Consulting Group report concluded: “That’s exactly why insurers must have a plan for blockchain: it could surface in unexpected ways and hand a competitive advantage to early adopters. If there’s any industry that should understand the importance of preparing for contingencies, it’s this one.”