The insurance industry is on the cusp of unleashing a spate of new applications based on the blockchain technology underlying crypto-currencies like Bitcoin. The deep technicalities of blockchain – which comes in a variety of flavours – are complex, but the general idea is simple to follow. Distributed ledger technology offers a decentralised, virtually fraud-proof way of providing a total audit trail of all the elements and actions in insurance contracts. Couple this with ‘smart contracts’, which can automate all the steps involved in accepting and paying claims, and you are looking at some seriously disruptive and transformative technology.

Ken Marke, Chief Marketing Officer at the Blockchain Insurance Industry Initiative B3i, which was formed specifically to investigate and develop applications based on distributed ledger, points out that smart contracts are easiest to implement where the trigger points for the contract are taken from a trusted, public database. The group began by looking at a couple of simple applications and its first choice was the area of catastrophe (Cat XOL) reinsurance. “Whether or not a catastrophe contract pays out is completely driven by a specific weather event that is simply a matter of public record,” he said. “You can’t ‘game’ it, so the process of checking whether the terms of the insurance contract have been met, triggering a payment, can be fully automated with reference to a trusted public database.” The B3i consortium was formed in December 2016 and developed a prototype proof-of-concept during the first quarter of 2017. More insurance company members joined, and on 23 March 2018, it became incorporated in Zurich as a legal entity, B3i Services AG, which is currently involved in funding rounds to develop further applications for the sector.
 

Maarten Ectors, the Chief Digital Officer for General Insurance at Legal and General, has been looking into how to apply next-generation blockchain in insurance and financial services. “For me, the thing that is so remarkable about the distributed ledger is that different business units or different organisations can all see the same data and no one can alter their own copy of that data without others knowing. That knocks a lot of the problems on the head that you encounter when you think about how to transfer money between parties that do not trust each other and may have conflicts of interest,” he says. “Where, today, the processes for transferring high monetary values around the world tend to be very clunky, they could become instantaneous and completely auditable. For me, crypto-currencies and Bitcoin are just so much noise. They tend to obscure the importance of the distributed ledger and the fact that the ledger enables smart contracts, which can automate transactions, which can be executed with very high levels of confidence.”

It is not a person at the insurance company who decides that a claim is valid and should be paid. The smart contract contains all the decision-making criteria and it triggers the payment without human intervention

This doesn’t mean that the insurance industry is in for an easy ride. People will always try to game the system, Ectors notes. He points out that you would have to have clauses in the terms and conditions that precluded payment where the customer had themselves caused the flight delay – by, for example, having an accomplice behaving disruptively on the inbound flight, causing it to divert. That fact would not be instantly visible to an automated process, so the insurance company will still need some investigative capabilities to look into these kinds of cases. Or, alternatively, it could take the view that such instances are statistically insignificant and not worth the cost of investigating – in which case a small fraud could rapidly turn into a big fraud. Blockchain will undoubtedly force fraudsters to work a lot harder and get vastly more imaginative, but while it may not kill fraud altogether, it will make it a lot more difficult for fraudsters to succeed.

Transforming insurance processes

Ectors argues that beyond the simple, straightforward applications, there are many more challenging applications that can be given the distributed ledger/smart contract treatment. Life and medical insurance could be made cheaper, for example, provided the applicant agreed to exercise, say, by running for a few hours every week, with accompanying biometric feedback. “If you decide to have a whopper hamburger and chips four nights a week, the contract could impose a monthly cash penalty until you got back to a healthier lifestyle. We are only just beginning to think through where this could go,” he says. 

Today, it might take two to five working days for a payment from the insurer to reach the user's account. Cryptos could cut this delay to seconds

The point is that the Internet of Things (IOT), coupled with smart contracts and distributed ledger technology can – and almost certainly will – transform a large number of processes in insurance. “With smart contracts you can build all sorts of data points and checks into the contract, so you can start calculating risk on an individual basis instead of statistically via actuarial numbers. That is a huge change,” he says. The cost of motoring insurance, for example, could be very tightly linked to the insurer’s ability to influence driver behaviour. Medical travel insurance could also benefit. “Smart watches could tell the insurer some key data points such as your heart rate, your location and your temperature. Those data points could enable me to influence your risk positively and decrease the risk premium I apply to your case,” Ectors notes.

Where the insurer is working with an approved hospital the distributed ledger could capture all the processes associated with emergency treatment given to a traveller. The fact that the documents are all unalterable will help to cut down on fraud. Even close collusion between a traveller and a corrupt doctor would tend to get exposed, since the medical procedures would have to match the treatment being claimed for. Laurent Benichou, Director of Research and Development at AXA GIE, argues that current contractual processes in the insurance sector inevitably create resentment among some customers. “In this industry, we as insurers believe in the noble purpose of insurance and to be at the service of our customers. However, we know we have to do more as the speed and transparency with which we interact with our customers is essential to build trust,” he says. 

A challenge that insurers face with customers is the exclusion terms to contracts along with the time it takes to process some claims, creates resentment. One of the first applications AXA focused on to solve this problem was travel insurance, with a view to automating payment to customers if they experienced significant delays to their flights. The application is called Fizzy and it pays out automatically if a flight is delayed by more than two hours. “What made this a really practical application is the fact that whether or not a flight is delayed, and whether the delay is significant enough to meet the terms of the travel insurance contract, is a matter of public record,” Benichou explains. The user simply signs up online and the signing up process creates a smart contract that is embedded in the distributed ledger, with both parties having a complete, unalterable copy. Once the contract is in place, neither side can alter any of the terms, so there is near zero opportunity for fraud. Flight delays automatically trigger the smart contract which issues a command to the insurance company’s accounting system to pay a pre-agreed sum direct to the user’s bank account.

Who, exactly, will be buying medical travel insurance or other forms of cover when there are very few workers able to afford such things?

The user does not initiate the claim. It is all automatic. The smart contract records the payment with all the details of the transaction, so the fact that payment was made, and the reasons why it was made, are beyond dispute. “The key point here is that it is not a person at the insurance company who decides that a claim is valid and should be paid. The smart contract contains all the decision-making criteria and it triggers the payment without human intervention,” Benichou notes. From the insurance company’s point of view, what it has is a fast-acting and fool-proof process that will immediately satisfy the terms of its contract with the customer and that involves no human action at all. It also, presumably, can count on having a satisfied customer, since they have received a cash compensation, exactly as agreed, without having to do a thing. 

Smart contracts

With medical travel insurance, a smart contract based on distributed ledger technology could automate payment direct to the hospital as soon as the hospital raises an invoice, provided sufficient ‘solid’ data points could be crafted into the contract. It will be a lot harder to achieve such a system than was the case for travel delay insurance, but in principle it could be doable, though not without challenges, Benichou says. Similarly, if the insurance contract includes compensation for the customer, they could receive payment automatically. He points out that if the industry decided that indemnifying pay-outs to customers could be made using some agreed crypto-currency instead of the traditional banking system, then the payment could be almost instantaneous. “Today, it might take two to five working days for a payment from the insurer to reach the user’s account. Cryptos could cut this delay to seconds,” he says. 

different business units or different organisations can all see the same data and no one can alter their own copy of that data without others knowing

Clearly the health and medical components in travel insurance involve far higher levels of complexity than flight delays, but he argues that switching to distributed ledger would still bring huge benefits. “For health, what is interesting is that you can store data in a very immutable way. This does not stop some clever fraud or over-charging at the foreign hospital’s end, but there will be an immutable record of the fraud,” Benichou notes. The General Data Protection Regulation imposes strict rules around storing any kind of private data, so putting medical records inside the distributed leger will have some issues. However, since distributed ledgers are virtually un-hackable, this should not be an insurmountable problem. As Willie Fleming, Project Director of the Scotcoin Project, notes, when you combine the certainty and privacy offered by distributed ledger technology with smart contracts, the transformative power of the resulting applications for any sector can be pretty startling. “A smart contract is like any other business contract that is written in a codified way, but its unique feature is that the various clauses in the contract can be actioned automatically on the back of various pre-defined triggers,” he says.

The one real difference between a smart contract and other business logic applications is that business logic generally delivers information to a human decision maker, as for instance, a claims processor, who then decides if the claim is valid or not. With a smart contract you can do away with the human in the loop. Fleming offers rather a dire warning to the insurance sector on the potential consequences of this. “It is clear to me that smart contracts and the distributed ledger will have the same impact on white collar workers that robotics and automation have had on blue collar workers. Jobs will vanish by the thousands and the hundreds of thousands. So who, exactly, will be buying medical travel insurance or other forms of cover when there are very few workers able to afford such things?” he questions. 

In the past, while technological change has eliminated some job categories, it has spawned new and previously undreamed-of employment opportunities. Perhaps this will be the case with blockchain and distributed ledger technology, but the signs so far are not hopeful. What it will do, Fleming suggests, is to massively increase profits in the short term for early adopters in the insurance sector, who will find they need far fewer people to bring new products to market – but this could end up being at the cost of a general shrinking of the pool of people who can afford insurance. ■