- Nearly half (46 percent) of insurers expect to integrate blockchain within the next two years, and the vast majority (84 percent) say blockchain-based ledgers and smart contracts are reinventing the way they engage with new partners.
- Blockchain will become part of the future of how businesses transact, and insurance leaders should begin investing in the relevant skills and tools today.
Questions answered in this ultimate guide:
- What is blockchain?
- How does blockchain work?
- How can blockchain benefit the insurance industry?
- How is blockchain technology being implemented in insurance?
- How can the insurance industry prepare?
What is blockchain?
Blockchain is a distributed database system in which transactions and records can be signed, exchanged and verified without the control of a central party. This secure, open means of conducting business transactions creates a level of transparency, security and trust not previously possible. This technology is poised to revolutionize operations across a multitude of sectors, enabling additional stakeholders—such as brokers, vendors, reinsurers and ecosystem partners—to interact with each other. The result is a more connected ecosystem that ensures confidence in the security and accuracy of the data.
Blockchain can be combined with other technologies, notably smart contracts, to enable insurers to automate processes and develop innovative products that otherwise aren’t possible.
How does blockchain work?
Unlike a traditional centralized computer database system, blockchain is decentralized and its records are distributed and maintained on many different computers at once. The records are called a “distributed ledger” and users have controlled access to one shared copy of the ledger.
As information is added, each new “block” of information is “chained” to the previous one in a permanent, unbreakable sequence using advanced cryptography. Before new blocks can be added to the ledger, they must be confirmed by different computers in the system, and unique keys are required to access individual blocks. If someone tries to access a block of information without a proper key, the system rejects the attempt and leaves evidence of tampering.
The terms “blockchain” and “distributed ledger technology” (DLT) are sometimes used interchangeably, but they aren’t the same thing. That is, blockchain is a type of distributed ledger, but not every distributed ledger is a blockchain. Similarly, while blockchain enables cryptocurrency, it is much more than cryptocurrency. Later in this ultimate guide, we’ll look at some examples of how insurers have leveraged blockchain to their benefit.
How can blockchain benefit the insurance industry?
What is blockchain’s appeal?
Proof of blockchain’s popularity is evident, with $1.9 billion having been invested in 891 blockchain startups as of early 2017.
Unlike banking and capital markets, which have established exchanges that are particularly vulnerable to disruption by blockchain, insurance doesn’t have a natural exchange to which the technology can be applied—but that doesn’t mean it doesn’t promise to reshape the industry’s processes.
However, there are some obvious challenges. Insurers must develop and integrate the technology and connect all the relevant stakeholders that are involved in insurance transactions. Another factor is volume: in order to make a blockchain investment worthwhile, insurers must find a use-case with high-volume transactions.
How can blockchain help insurers get the basics right?
Within insurance, the claims and finance functions are high-value areas where blockchain could be beneficial, especially when you look at processes that need ongoing reconciliation with external parties. Consider how often Company A has a claim against Company B resulting in the exchange of money, typically in the form of a paper check or an electronic transaction. That could be completely automated using blockchain.
Presently, many insurers are applying a smart contract alongside the blockchain, which is triggered when well-defined terms and conditions are met. By setting up an insurance contract that pays out under these circumstances, an insurer can process transactions with no human intervention and greatly enhanced customer service.
In other words, blockchain can help deliver on the digital opportunities that insurers must get right. These opportunities aren’t glamorous but they’re important: as I’ve said before, get them right and you won’t win—but get them wrong and you will lose. Blockchain can help insurers deliver on some brilliant basics. For example:
- Streamlined subrogation
- A more transparent claims process
- Using shared loss histories to obtain data-driven insights on prospective customers for more sophisticated pricing
- Supporting more efficient payments between insurers and third parties, especially during the claims process
Finally, several reinsurers have successfully used blockchain to streamline previously complex, manual processes.
How can blockchain help carriers innovate?
If the world is going to open up into extended ecosystems—and it will—then companies from different ecosystems need to come together to provide products and services. In order to transact they will need a means to reliably exchange information. That’s exactly where blockchain can make a difference, because what it doesn’t require is two people working off the same core system. In that respect, it’s like connective tissue between players in an ecosystem—players that don’t have to share the same onerous administration systems or massive pieces of architecture. It allows collaboration in a much easier format and, importantly, it offers a high level of security.
And there’s also trust. With blockchain, trust can be delegated to the ledger, enabling insurers to collaborate more freely. In combination with this delegation of trust, insurers can create microservices—typically in the form of APIs—to enable digital partnerships at scale. In the longer term, blockchain will be the glue within powerful ecosystems that offer radically new, customer-centric business models and products.
In this video, the importance of frictionless business capabilities in establishing digital partnerships—and how blockchain and microservices can help insurers become more agile and overcome legacy systems is discussed:
Blockchain can also power new business models based on personalized, real-time risk assessment, rather than historical data and averaged pricing. It could, for example, enable P&C insurers to build more sophisticated usage-based insurance models in partnerships with auto manufacturers or makers of smart home devices. Other emerging customer-centric business models and products include:
- Peer-to-peer insurance
- Smart adjusting policies
- Smart-device insurance add-on
Further reading on how blockchain may change the insurance industry:
- Insurers need scale, and these technologies can help them achieve it
- Insurers are unblocking the blockchain and preparing for the future
- CB Insights: How blockchain could disrupt insurance
How is blockchain technology being implemented in insurance?
Many insurtech companies are already experimenting with radical new products for the ever-evolving demands of the insurance customer in the digital age. But blockchain isn’t just for insurtechs; incumbent insurers, as well as reinsurers, are leveraging the technology to improve outcomes for both customer and carrier.
For example, Accenture helped Zurich Benelux leverage a blockchain-based system to reimagine how surety bonds are executed. Surety bonds are often used in construction projects. These three-party agreements are designed to guarantee performance or more general fulfilment of an obligation in a business transaction. According to Finaccord, the total value of gross written premiums and commissions for insurance-backed surety bonds across Europe is projected to reach €3.26 billion by 2019.
The blockchain-based system integrates with Zurich Benelux’s existing surety-management back-end. A new user interface improves transparency with a one-stop digital hub for customers to manage and track their surety bonds, get detailed bond history records, complete new bond requests and view bond forecasts.
Here’s another way that blockchain has improved transparency and reduced processing times: Tokio Marine, a Japanese P&C insurer, tested blockchain for marine cargo insurance certificates. It reportedly reduced the time it took for a shipper to receive an insurance certificate by 85 percent.
Or consider how Allianz used blockchain and smart contracts to remove friction from a complex process. Catastrophe (cat) swaps and bonds are used to transfer specific risks, typically natural disaster risks, from an insurer to investors. Allianz successfully piloted the use of blockchain and smart contracts to accelerate the contract management process for cat swaps and bonds.
Insurers can unlock trapped value by combining blockchain with other technologies, too. Accenture has developed a blockchain-based proof of concept that leverages data from smart sensors to enable smart-vineyard insurance.
How can consortia help the insurance industry develop blockchain capabilities?
Founded in 2016 with backing from notable firms like AIG and AIA, and founding members like Allianz, Aegon and Swiss Re, B3i was an early insurance-focused consortium that aimed to develop blockchain solutions for the insurance industry. Early in 2018 the consortium announced its transition to a full-fledged company based in Switzerland, a hub of blockchain technology. Similarly, the R3 consortium includes over 200 companies on six continents, with the aim of reducing friction in financial services transactions.
The Institutes is well-known as an insurance education and certification body, and Accenture is honored to be part of its RiskBlock Alliance, a blockchain consortium for the risk management and insurance industry. Accenture will be the lead framework architect, responsible for building a production-grade platform to develop and implement blockchain use cases.
At a time when the industry is under pressure from disruption, RiskBlock can help carriers find ways to streamline processes, reduce their portfolio of risk, create greater efficiencies and be more cost effective within ecosystems. However, that’s just the tip of the iceberg. Ultimately, blockchain could help carriers find new value chains and new ways to develop the technology to create new revenue streams and operating models.
RiskBlock has identified over 40 blockchain use cases that address core digital capabilities, as well as innovation. For example, RiskBlock alliance is ready to implement and test products to streamline first notice of loss, proof of insurance and subrogation, as well as develop new products like parametric claims processes based on smart contracts.
How can the insurance industry prepare?
When the internet first came to the mass market, few people understood how it would transform every facet of life. Could blockchain revolutionize how insurance business gets done? Recent Accenture research shows that nearly half (46 percent) of insurers expect to integrate blockchain within the next two years, and the vast majority (84 percent) say blockchain-based ledgers and smart contracts are reinventing the way they engage with new partners.
To help enable blockchain, insurers will need a strong focus on open architecture and microservices. Here’s why: Increasingly, insurers will be expected to send and receive information—quickly—and it’s too costly and slow to do that with custom, point-to-point integration. Insurers will need to rethink their architecture to be able to infuse blockchain throughout their organizations, from front-end to back-end.
Blockchain proponents say the technology could become foundational. If there’s a possibility of that happening—and it isn’t out of the question—then carriers should be looking at how to bring blockchain into their architecture stack. While its actual implementation will depend on an insurer’s maturity and standards, each and every insurer should be looking at it and the role it can play within their business.
Collaboration and partnerships in new ecosystems will be key to leveraging new technologies for the greatest benefit. Blockchain has the potential to lift and carry the entire insurance industry to a new level. But each organization will have to decide for itself what role it should—and can—play in this new network of possibilities.
Blockchain can enable insurers to transform their business processes to unlock trapped value, reduce duplicative efforts and process inefficiencies, mitigate fraud and loss, and much more.
And that’s just the beginning: The promise and implications of blockchain are so profound that the technology could revolutionize business practices as we know them. Insurers would be wise to embrace the technology today—or risk falling behind the curve in the near future.
To discuss how Accenture can help you leverage blockchain to reimagine your business processes and fuel innovation, please get in touch.
To learn more, I recommend exploring these resources:
- Don’t write blockchain’s obituary just yet
- Accenture blockchain solutions for insurance
- Unblocking blockchain: Unlocking the value of distributed ledger technology for insurers
- Three models for insurers to generate value from blockchain