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 renters and homeowners insurance provider, Lemonade, which makes extensive use of distributed ledger technology and AI.
In the mass-market personal lines space, motor and health insurers have made some headway, while specialists like Etherisc and Insurwave offer decentralised blockchain-based insurance platforms and others like Chainlink and Chainproof provide 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 automating claims payments. Among B3i’s stated ambitions was creating an application that fully digitises the reinsurance process.
There are many potential use cases for distributed ledger technology in insurance, notably its potential for facilitating smart contracts, where a transparent shared immutable record is held and a claims payment can be automatically triggered by data confirming the occurrence of a specified event. This is particularly relevant to parametric insurance products.
Distributed ledger technology has also been 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 products, bringing the benefits of insurance to previously under-served customers around the world.
As with any technology with the potential to improve claims efficiency and performance, DOCOsoft has been paying close attention to developments in the blockchain space. There are a number of 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, as are secure transmission of sensitive evidence and improved fraud detection. The end-to-end transparency of blockchain-enabled transactions could also reduce friction in insurer-customer relations.
However, developing and implementing blockchain-based solutions prove both expensive and time consuming, requiring fundamental changes to established ways of working. Moving to a blockchain model can also require a degree of consensus and cooperation that is not always easy to achieve among P&C businesses whose technology investment priorities differ widely. The participants in the B3i initiative ultimately drew a line and walked away from their investment of time and money.
B3i ceased trading and filed for insolvency in July 2022. Swiss Re executives subsequently 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 claims-focused perspective, this reflects the reality that blockchain’s potential to reduce costs by automating 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 implementation costs are unlikely to be outweighed, within an economically viable timescale, by either efficiency gains or any other positive outcomes realised.
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. DOCOsoft’s clients 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. There are also questions around what effect future regulation could have on the legal acceptability, or otherwise, of distributed ledger contracts.
Early assumptions about the invulnerability of distributed ledger insurance contracts to malicious tampering or corruption now look optimistic. In a number of cases hackers have gained access to users’ private encryption keys and used these to create fraudulent transactions. As cyber criminals gain access to greater computing power, this only becomes more likely.
Blockchain will no doubt continue to provide the basis for digital currencies - and for simple, clearly defined, high-volume insurance products. But, with more revolutionary technologies like quantum computing just over 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. We continue to monitor developments with interest, but DOCOsoft’s recommendation would be to focus your tech spend where it achieves more immediate bottom-line benefits.