The role of blockchain in the P&C world
The distributed ledger or blockchain technology that underpins cryptocurrencies like bitcoin and ethereum, has long been heralded as a game changer for the insurance sector. A lot of the early hype focused on US-based renter’s and homeowners insurance provider Lemonade which makes extensive use of distributed ledger technology and AI and donates profits to charity.
Also operating primarily in the mass-market personal lines space are providers like motor insurer Root and health insurer Oscar, while specialists like Etherisc and Insurwave offer decentralised blockchain-based insurance platforms. Others like Chainlink and Chainproof are focusing on the provision of blockchain-enabled smart contracts.
Early evidence of blockchain moving into the P&C world came with initiatives like that announced by distributed ledger protocol and application designer Guardtime and logistics business Maersk which aimed to establish a blockchain-based marine cargo insurance and risk management platform using smart contracts and creating an immutable chain-of-shipping ledger.
The big player at the interface between blockchain and P&C (re)insurance, however was The Blockchain Insurance Industry Initiative (B3i) set up in 2016 by Aegon, Allianz, Munich Re, Swiss Re and Zurich – and joined a year later by another 10 companies – to explore the potential for applying blockchain to catastrophe excess of loss coverage and to automating and streamlining the payment of claims. Among B3i’s stated ambitions was the creation of an application that fully digitises the reinsurance process. Then, in April last year, Allianz and Swiss Re announced that they had placed the first ever blockchain excess of loss reinsurance contract.
Certainly, there are many potential use cases for distributed ledger technology in the world of insurance. There has been particular interest in its potential for facilitating smart contracts, where a transparent shared immutable record is held, independently of insurer, insured, or any intermediary, and a claims payment can be automatically triggered by data confirming the occurrence of a specified event. This is particularly applicable to parametric insurance products.
Such smart contracts play into blockchain’s obvious potential for enabling disintermediation in the P&C space – although the universal desirability of this remains very much a moot point. Distributed ledger technology has also been widely touted as a route to backend efficiency and enhanced pricing and risk assessment. It could also help both established insurers and legacy-free insurtechs – or combinations of the two – to develop new kinds of insurance product. This is arguably the area showing the most exciting potential currently. Such new products could help insurance providers reach previously under-served customers around the world, beyond traditional insurance-purchasing demographics.
As we would with any new technology that has the potential to improve claims efficiency and performance, DOCOsoft has been paying close attention to developments in the blockchain space for quite some time now. There are a number of specific ways in which distributed ledger technology could potentially support and empower the claims management process. Automation of coverage-verification and claims payments are among the more obvious of these. The secure transmission of sensitive evidence is also frequently invoked, as is improved fraud detection. The end-to-end transparency and fairness of blockchain-enabled transactions could also help to remove friction from insurer-customer relations.
However… developing and implementing blockchain-based solutions can take a while. Lead times of around five years, from identifying a use case to putting it into practice, are frequently quoted. Adopting distributed ledger solutions can also prove expensive and require fundamental changes to established ways of working. Another issue, in the P&C context, is that moving to a blockchain model can require a degree of consensus and cooperation that is not always easy to achieve between parties whose technology investment priorities may differ widely. The participants in the B3i initiative invested many millions, along with a great deal of time and effort, in the pursuit of blockchain-based reinsurance, but ultimately drew a line and walked away.
B3i filed for insolvency and ceased trading in July 2022. When questioned about this shortly afterwards at a media call on their latest half year results, Swiss Re executives noted that they still viewed blockchain reinsurance solutions as ‘an interesting opportunity for the industry’ but not something likely to prove profitable in the foreseeable future. Ultimately, to make blockchain reinsurance work, Group CEO Christian Mumenthaler said, ‘You would need all insurance companies to create smart contracts first and then construct a digital reinsurance contract that can be traded afterwards.’ In other words, without standardisation and universal adoption, distributed ledger reinsurance will remain an elusive goal.
From a specifically claims-focused perspective, this reflects the reality that blockchain’s potential to reduce costs by automating claims payments whenever the parameters in a smart contract are breached is significantly more applicable to the high-volume personal lines market than to the P&C sphere, where the cost of implementing distributed ledger technology solutions is unlikely to be outweighed, within an economically viable timescale, by the value of any efficiency gains or other any positive outcomes realised.
In the years since blockchain was first identified as a potential route forward for the insurance sector, other factors have come into play. The decidedly mixed fortunes of the blockchain-driven cryptocurrency market have not helped. But, more significantly, other technologies have come to the fore that offer a more compelling investment case than blockchain. Certainly, DOCOsoft’s clients in the P&C market are more interested in the massively expanding potential – and more rapid deployment timescales – of AI and machine learning solutions.
There are also increasing concerns about insurers’ ability to access the clean data on which distributed ledger insurance contracts depend to operate as intended. Along with a profusion of rival approaches and a troubling absence of standardisation, there are also significant questions around what effect future regulation could have on the legal acceptability, or otherwise, of distributed ledger contracts.
Meanwhile, initial assumptions around the invulnerability of distributed ledger insurance contracts to malicious tampering or corruption have already been proved over-optimistic. Hackers or other ‘bad actors’ who gained access to users’ private encryption keys gain the ability to use these to create fraudulent transactions. In case that sounds unduly alarmist, it’s already happened, and, as cyber criminals gain access to greater and greater computing power, it only becomes more likely.
Blockchain will no doubt continue to serve very adequately as the basis for digital currencies – and for simple, clearly defined, high-volume insurance products – for the foreseeable future. But, with even more revolutionary technologies like quantum computing looming just beyond the horizon, blockchain’s opportunity to gain real traction in the P&C market may already have come and gone. Blockchain-based solutions will have their specialist uses within the P&C (re)insurance sector, of course, but the future is unlikely to be blockchain-shaped. While we continue to monitor developments in distributed ledger technology with great interest, DOCOsoft’s recommendation would still typically be to focus your tech spend where it will achieve more immediate and tangible bottom-line benefits.