Over the past couple of years, insurers have migrated away from their conservative image, leveraging several emerging technologies, including blockchain, to re-think their current business models. One of the most significant technologies leading this digital transformation, blockchain is streamlining back-office processes and systems – and heading into 2019, insurers are accelerating their deployment of the most innovative use cases of enterprise blockchain technology yet.
Laying the back-office building blocks
Insurance companies face a complex web of challenges in today’s market. Regulatory demands are piling up, fraudulent claims are commonplace, and the flow of data is ever increasing. Meanwhile, as digital technology permeates the financial services industry more broadly, customers expect a greater level of innovation than ever before.
Despite the growing demand for tailored products and services, insurers recognised that for transformation to be sustainable, it must begin in the back office. Legacy systems combined with patchwork solutions have perpetuated a closed-off information environment with data silos and resulting operational inefficiencies. Building customer-facing digital solutions on these crumbling foundations would have disastrous consequences.
That is why, over the past two years, insurers have been hard at work behind the scenes deploying cutting-edge enterprise blockchain platforms to overhaul and modernise their back offices. Integrating even just the foundational technology can have a huge impact on a company’s transparency, stability and efficiency.
By taking the first step of moving its transactions onto a shared ledger, an insurer can potentially eliminate fraudulent and duplicate claims by logging each transaction in a decentralised repository. Instantly, an insurance company is able to verify the authenticity of a customer, policy or claim. This is a simple premise but a huge step forward for the industry.
In addition, with the rise of the Internet of Things (IoT) and connected devices, blockchain provides an efficient and secure way to manage, share and leverage an ever-growing amount of data.
with the rise of the Internet of Things (IoT) and connected devices, blockchain provides an efficient and secure way to manage, share and leverage an ever-growing amount of data
Purpose-built enterprise blockchain platforms like Corda overcome the challenges of traditional public blockchains by ensuring sensitive data is only shared with parties that have a need to see it in each instance.
The potential efficiency gains for both the insurer and the insured are dramatic. Consider, for example, a reinsurer, insurer and broker consolidating their policy data and storing it on a blockchain – the underwriting and application process could be reduced from weeks or even months to near real-time, with no burden on each entity having to gather, reconcile and submit documents.
These core benefits of blockchain technology are now being realised across the global insurance industry, with forward-thinking initiatives such as the RiskBlock Alliance and [ITIC Geneva 2018 contributors] B3i leveraging the power of collaboration to drive adoption and deployment.
By moving to a model in which disparate parties such as insurers, reinsurers and brokers can share and store policy information in a cryptographically secure way, the industry has laid the foundations for the next phase of blockchain-enabled innovation.
A convergence of technologies
Insurers are acutely aware of the need to evolve in order to stay competitive, and streamlining market operations with blockchain technology is freeing up precious capital and resources previously spent on auditing and administrative costs.
Dynamic pricing is an example of an emerging blockchain-enabled innovation that benefits both the insurer and the customer
Newly created roles such as chief digital officer and chief innovation officer are now commonplace across the industry, with firms vying to increase their market share by developing solutions that meet customers’ demands for innovation while increasing efficiency and profitability. Once data has been migrated to a blockchain platform, the potential to apply other technologies such as artificial intelligence (AI) to utilise this immutable, real-time information is vast.
Dynamic pricing is an example of an emerging blockchain-enabled innovation that benefits both the insurer and the customer, with broad-ranging potential across health insurance, car insurance, property insurance and beyond.
Taking the case of shipping insurance, advances in technologies such as AI and telematics enable insurers to access detailed, real-time information about a ship’s location, age and condition. This means that if a ship enters pirate waters, its location data can automatically be updated on the blockchain and the insurer can make the necessary adjustments to its risk profile and policy pricing. The same applies to the inverse scenario – for example if a ship is young, in good condition and doesn’t stray from safe waters. Now consider that the ship is transporting refrigerated cargo, which is also insured. How does an insurer know whether a temperature spike is taking place in a crate at sea a thousand miles from its destination that could potentially destroy the cargo? Thanks to telematics, sensors in the cargo containers can communicate accurate information about temperature, humidity and atmosphere. This information can be updated in a smart contract on a blockchain platform in real time, enabling an automatic pay-out to the customer if the cargo is spoiled by high or low temperatures. This saves the insurance company time and money while providing the customer with a better experience.
Dynamic pricing also has huge potential in the health insurance space. Health insurers require a vast amount of information about a customer’s medical history and lifestyle in order to piece together a policy, and provision of false or inaccurate information is commonplace. Blockchain enables insurers to accumulate data from multiple verified sources with updates occurring in real time, allowing them to carry out more frequent risk assessments and customise pricing accordingly.
Usage-based insurance (UBI) is another innovation currently reshaping the car insurance industry. Many cars now come equipped with connected features or advanced driver-assisted systems, which are having a profound impact on the way auto insurers handle policies.
Traditionally, car insurance policies have been based on driver characteristics like age, personal information and accident history. With UBI, insurers are able to incorporate driving behaviour data such as speed and hard braking that is updated in real time on the blockchain. In addition, telematics technology in the car can measure the time a driver spends on the road each day, opening up opportunities for pay-as-you-drive insurance policies that incorporate this data into a smart contract.
A digital future
These developments would be innovative in any sector, but when you consider that the processes underpinning the insurance industry have remained largely unchanged for hundreds of years, the evolution is even more dramatic.
By harnessing the potential of blockchain to tackle back-office challenges head-on, insurers have made the necessary investment to position themselves to take advantage of the myriad of opportunities and further efficiencies that blockchain – and its convergence with other new technologies – will deliver over the coming years. ■
This article features in the February 2019 issue of ITIJ.