What’s blockchain all about and why is it such a game-changer for insurers?
Blockchain is seldom out of the news nowadays, with much of the coverage linked to Bitcoin, the cryptocurrency for which it’s the enabling technology. But blockchain’s applications are much wider and insurance is one industry that’s likely to be significantly disrupted [for Accenture’s perspective on how this will play out, take a look at our PoV ‘Using blockchain to get ahead of the game’]
So what exactly is blockchain? Think of it as a secure transaction-ledger database, shared by parties in a collective network that’s updated through an infinite number of ‘blocks’. Using cryptographic logic, it verifies, then stores, every transaction that takes place between these parties.
One of blockchain’s main attractions is that it provides a secure, but open way to conduct business transactions. But what’s even more exciting, especially in the context of insurance broking, is the potential combination of blockchain with other innovative technologies.
Combined with smart contracts technology, for example, it enables automated contracts that can securely compute and record transactions in a distributed ledger, allowing for automatic verification and collective agreement. In plain English, blockchain will soon, we believe, provide a consistent mechanism for embedding trust into transactions.
This is why brokers need to be ready for the disruption that’s coming their way. As the bridge between insurers, re-insurers and consumers, they have a crucial role to play in establishing trust. Blockchain fundamentally changes the basis on which transactions take place – replacing the traditional notion of utmost good faith with provable trust.
Using blockchain, all transaction participants would be able to store, amend and share verifiable data between themselves. They’d be working with, and have real time visibility into, a single ‘golden source’ of data. There’d be no need for manual management and synchronisation of multiple ledgers, a time consuming, costly and error-prone process.
Because blockchain is secure, immutable and tamper-proof (unlike legacy systems and paper-based alternatives), it reduces concerns around identification and fraud. By providing a trusted ‘digital fingerprint’, it builds confidence that all parties are who they claim to be.
Establishing provable trust is one of Blockchain’s key strengths. Another is the efficiency that it provides. The insurance industry spends billions every year on programmes designed to enhance and streamline back-office processes. Blockchain-enabled smart contracts will achieve these objectives for insurers, just as they’ve already done in the capital markets.
Digital brokers will be able to use blockchain-enabled smart contracts to simplify their existing back-office processes, transforming what are typically cumbersome, multiple-touch environments into low-touch, seamless transaction-processing engines. This supports a key trend in the industry – the drive to standardise and automate commoditised activities to allow for more focus on value-adding tasks.
Because blockchain reduces the need for reconciliation between parties, it will dramatically increase the speed of settlement, with the automation of associated decisions governed by predefined conditions embedded in smart contracts. In the same way, renewals would evolve from an expensive, labyrinthine process into a zero-touch automated one. From a regulatory perspective, meanwhile, the immutability and traceability of data in blockchain-enabled smart contracts will cut compliance complexity across the contract lifecycle.
It’s clear that blockchain potentially has an enormous amount to offer brokers.. So how should they get started? First, recognise that the technology is not a ‘silver bullet’ solution that can be installed overnight. Like all digital game-changers, its true value can only be realised through a strategic approach.
Still cutting edge, smart contracts have yet to be combined with blockchain on an industrial scale in insurance. This means it’s essential for the industry to spend time working through the end-to-end impact of blockchain on the business – from proof of concept to delivery models, ways of working and the new skillsets that will be required (in data, analytics and cloud).
Obviously, cost is another big consideration. Despite leveraging open-source technology, blockchain comes at a price. R&D funding will be required to upskill and revolutionise existing capabilities. Executive-level buy-in will be needed from the outset to make sure these investments have the sponsorship they need within the organisation.
Blockchain has huge potential for the insurance industry, bringing very significant business and cost advantages over legacy operating and business models. But don’t underestimate the implementation challenge ahead. Thanks for reading.
 Without undermining blockchain’s key features, Accenture recently patented a technique to allow financial institutions and regulators, in extraordinary circumstances, to edit information stored in this technology, eg when a trade is assigned to the wrong counterparty (www.ft.com/content/f5cd6754-7e83-11e6-8e50-8ec15fb462f4)