Why ‘unhackable’ blockchain could revolutionise the insurance industry
The FCA recognises blockchain could revolutionise financial services and is pondering which areas it should support it
The technology is used to provide insurance solutions for the sharing economy
A blockchain is difficult – but not impossible – to hack
For insurers, blockchain could cut KYC and AML costs, swiften the claims process and reduce litigation
The technology could have an impact on the industry in the next five to 10 years
Everyone’s talking about it, but is anyone really doing it? There’s a continuous chatter surrounding blockchain, so isn’t it about time more firms used the distributed ledger system?
It’s a buzz word that’s been reverberating around the offices of many insurance companies but blockchain remains a grey area for most who work in the industry. PWC survey found that 56% of insurers recognise the potential benefits of using blockchain in their company but 57% admit they don’t know how to respond to the opportunity.
The mutual distributed ledger system has the potential to revolutionise the way companies in the financial industry exchange information and carry out transactions. It has the potential to reduce costs and manual effort in the interactions between parties in the insurance market.
Safeshare, start-up of the year at the 2016 British Insurance Awards, is already using blockchain technology to provide insurance solutions for sharing economy platforms and their users.
Other insurers, however, have adopted a wait-and-see approach. “Blockchain is a potentially exciting new technology that could possibly be used in all sorts of ways by insurers for the benefit of customers,” says Matthew Thomas, strategy and planning director at Ageas UK.
“The hype would suggest that it could be bigger than the internet in terms of disruption. But Ageas’s starting point with all new technology is to ask: ‘What does it do for our customers?’ It is not instantly clear what that is with blockchain. And that means, for us, it is a technology to think about more than to use at the moment.”
The Financial Conduct Authority is contemplating encouraging blockchain. Its director of strategy and competition Chris Woolard recently told the Financial Times the FCA was “talking to firms thinking about how to apply that to financial services and how it could benefit consumers or indeed make the business of compliance easier”.
“Blockchain is a complex technology that has some problems and is not readymade for use by business,” notes Thomas. “But it is definitely one for the future and insurers must make sure they are not behind the curve, especially compared to other financial sectors, like banking, which are already looking to use it in their operations.”
Dan Fiehn, director of IT at Markerstudy Group, predicts: “The development of blockchain technology will soon challenge many trusted intermediary institutions such as those involved in validating transactions, potentially replacing many of their key roles. This has to be a good thing for consumers as it will lead to the development of cheaper, quicker, and simpler transaction systems.”
However, Serge Taborin, director of digital innovation and new business at Aviva, deems it impossible to tell if blockchain will lead to cheaper products, perhaps because there haven’t been enough applications yet.
“Blockchain has a number of interesting characteristics, which could have a material impact on operational efficiencies and transparency. But the ultimate use cases, products offered and their cost will be determined by other factors, so it’s difficult to comment whether the products will ultimately be cheaper without being specific.”
Still, the distributed ledger system and smart contracts may help insurers cut the costs on their end as well as generating cheaper products for their customers. As their client base becomes more modern, smart contracts could be the way forward in staying profitable.
“In commercial claims, for example, the permanent record can mitigate the risk of disagreement and dispute,” says Tom Johansmeyer, assistant vice-president at Verisk Insurance Solutions. “In addition to reducing the likelihood of spend on dispute resolution, the increased speed of settlement when everyone agrees on the notes in the file can also reduce overheads related to claim handling significantly.
“Reduction of overheads across the insurance and reinsurance lifecycle can lead to less expensive products while also providing a foundation for achieving profitable growth, always a challenge in a mature insurance market.”
He suggests that the implementation of a totally new system could usher in a new look for the insurance industry. “While it’s still too early to tell the potential that blockchain could attain, early indications are positive. However, they may take some more creativity. In particular, changing how insurance works could integrate with the use of blockchain.”
A simpler process
Through using automatic ‘triggers’ that report straight back to the smart contract, claims can be paid out via a far simpler process. Original risk could benefit from parametric covers, says Johansmeyer.
“Think of a major terror event, which could require the efforts of loss adjusters for months before the claim is paid. The ability of insurance to soften the blow sustained by the claimant is thus reduced, given the difficulties associated with complex commercial terror claims,” he notes.
“A policy that triggered strictly on the number of fatalities, on the other hand, could pay out much faster. The trigger is easy to understand, requires minimal involvement from claims, and just needs an independent oracle to report a number to the smart contract.”
Besides simplifying transactions, blockchain also means that information is distributed among all stakeholders and equally accessible by each of them. As the storing of information is decentralised, the system could be less prey to cyber hacks, or at least the consequences of a hack could be minimised.
“By definition, blockchain is a distributed database and so the data is decentralised, says Taborin. “In part, this is what makes it so secure because the data is not held in one place which can be hacked. Whether it’s a good thing or not will depend on the use case. There are multiple factors to consider, for example security, cost, and ease of development, maintenance and usage that will determine this.”
Fiehn points out that this decentralised storage of information is the exact opposite of the way the insurance industry operates at the moment, with its innumerable intermediaries.
“One of the unavoidable issues that intermediaries present is that the information they hold is centrally administered behind closed doors. This has resulted in natural monopolies forming, which, in turn, has increased complexity, cost and added time to each and every transaction. Centralisation also increases the impact if information gets manipulated or hacked.”
need for central authority and reduce risks of fraud
58% of experts and executives surveyed believed that 10% of global gross domestic product will be stored on blockchain technology by 2025
According to Fiehn, blockchain could assist with underwriting and have a huge impact on brokers. “In our industry, the technology has many possibilities including reducing fraud, enabling a new generation of products that better reflect actual risk and facilitating the creation of large layered commercial insurance programs.
“The potential applications are enormous, as is the impact it will have on the trusted middleman that sits in between transactions.”
Although the seemingly ‘unhackable’ nature of blockchain is an attractive aspect of it, most in the industry would be quick to agree that no system is totally ‘unfraudable’. In fact, blockchain is vulnerable to a hack, it just takes hackers more effort to break into the system.
In June, a thief stole more than $50m worth of ‘ether’, a bitcoin-type cryptocurrency, by draining the account of a decentralised autonomous organisation that relied on a blockchain platform.
“It’s prudent to be cautious when using the word ‘never’ even though blockchain is theoretically ‘unhackable’,” says Taborin. “But the blockchain concept undoubtedly offers an extremely high security level.”
Michael Mainelli, executive chairman of Zyen, explains how strong the system is: “It’s absolutely unhackable. Because of the cryptographic nature of the blockchain, all records are sewn into one another.
“Every time you make a transaction, you make a unique signature for that transaction, which is binded into the record. So to break this chain – or forge it – means that you have to go right to the beginning of the chain and re-write everything.”
But a hack is different to a fraud, he notes. “It’s impossible to insert something into the middle of the chain and have it be the same thing. So it’s impossible to break into the chain but that doesn’t mean that there can’t be any fraud across them. They’re unforgeable records but that isn’t an adequate protection against fraud.”
This doesn’t make fraud impossible, just more difficult. Besides this heightened security, blockchain could also facilitate and quicken insurers’ processes, including the Know Your Customer and Anti-Money Laundering processes.
“One of the places where blockchain will come in incredibly useful is in the KYC and AML issues,” says Jonathan Howe, UK insurance leader at PWC.
“During the customer compliance process, if insurers are able to share information through the blockchain, this could potentially speed up the process. Both AML and KYC are costly and irritating processes and blockchain gives a really good solution to that.”
The sometimes laborious claims process could also become easier and swifter.
“The claims process concerns the underwriters, brokers and the insured. Keeping in the blockchain all the documents needed for that claims process means that everyone will have a real-time view of what is happening in the claims process – including the customer,” says Howe. “It means everyone has access to the same data in an instance and timely fashion.”
Legal costs could be cut as the blockchain’s cryptography would keep a timely record of every piece of information relating to the incident that the claim arose from. “When claims go legal, there’s a lot of costs involved and a lot of money is spent on low-grade discovery,” Mainelli points out.
“A lot of key data would be held in the blockchain, which would pull out information on what exactly happened, and so they could just refer to that instead of trying to discover what happened. Information recording the incident would be timestamped, irrefutable and immutable. The blockchain would establish an agreed starting point from which lawyers could work on.”
Not the only option
When it comes to storing data, blockchain is not the industry’s only option. Other platforms are being used, for example the cloud, which could be cheaper and simpler to use.
“It’s appropriate to think: ‘It could do that job but why would you use it?’ And there are a lot of questions surrounding how the blockchain would have an advantage over alternative systems,” says Howe.
“The data-sharing aspect is one of those advantages but if you find yourself being able to do things without the system, you could probably find something easier and cheaper to use.”
Since stating that it would consider approving the use of blockchain across a small number of firms, the FCA has said nothing else on the matter and has refused to comment specifically on blockchain in the insurance industry.
However, John Benjamin, partner at DWF, believes that it would be in the FCA’s best interests to provide a framework within which blockchain could be implemented. “Innovation is being encouraged and the FCA, compared to other regulators is far more forward-thinking in its approach.
“Reducing operational costs, which blockchain does, is something that is to be encouraged by the FCA,” he adds. “The appropriate adoption of blockchain technology in the insurance industry is something that it would definitely support.
“Both the fintech and insurtech sector are based in London and obviously there’s an interaction between the two. And those two industries are working quite closely with each other, so creating a framework in order for that to exist would be in the FCA’s interests.”
Benjamin notes that the ‘ether’ thief got their virtual hands on cryptocurrency via a loophole – and it was technically legal. He suggests that if blockchain is to take the industry by storm, some new laws might be needed to close any loopholes.
“Law tends to lag much behind any industry and, in any industry, the hackers are always one step ahead. Whatever laws we decide to implement as a result of blockchain, nothing is foolproof.”
The insurance industry is renowned for being slow when it comes to new technology. That’s why George Hallam, external communications at blockchain platform Ethereum, says insurers may take time to warm to the system.
“The technology is fairly recent. It’s new and not perfect yet by any stretch of the imagination and there’s still a lot of work that needs to be done to bring blockchain to where it’s going to be,” he says.
He suggests blockchain could hit the insurance industry in a big way in the near future. “From an insurer’s perspective, this system has the potential to make a huge difference in the next 10-five years. Insurers should definitely be looking towards how they can properly use the technology in this time in order to reduce costs for themselves as well as their customers.”