Written by EC3 Legal Senior Partner David Coupe and Kevin Sookhee Director at Intrepid Tech Ventures
There is a new wave in insurance which is almost as dramatic as the digital era that exploded in the nineties. Blockchain and emerging technologies are set to transform the digital landscape, and should not be ignored by insurers or their agents. If these emerging technologies are not embraced, we may see business models become redundant as they become unable to manage their cost base or keep up with the changing demands from consumers - think Mothercare in 2019.
Despite what some might think, this is not a ‘fad’ or a temporary trend. It is a real opportunity for insurers to transform their business process and their approach to risk selection to drive genuine value in any insurance business. As an industry we must embrace this, or risk losing out to innovative newcomers and data-centric giants who have access to consumer patterns and behaviours.
The global landscape is a challenging place as a result of ever demanding compliance needs, diminishing growth in developing markets, the rising cost of fraudulent claims, and unsurprisingly, the availability of infinite data that needs to be analysed.
IBM estimates that there will be 43 trillion gigabytes of data available by 2020 – an increase of 300 times as compared to 2005. This further enhances the need for effective data management and digital transformation to maintain the basic efficiencies across business processes. There is so much data available to mine that if insurers are unable to do this quickly and efficiently, they will likely start to lose customers to competitors.
Without using smart technology solutions, the head count required simply to manage the demands is likely to eat into any available profit margin. The competitive landscape is also changing with the likes of data giants such as Google and Amazon circling the insurance space.
Today, we also live in a connected environment and consumers expect access ‘Anytime and Anywhere’ and with Any Device’ (ATAWAD). Access at the press of a button means that customer renewals are at their lowest and the cost of retaining customers is at an all-time high. The modern customer is more informed about the product and has additional channels to access it and is happy to switch between products if a better deal becomes available. In addition, the modern consumer is easily able and willing to share a good or bad experience using social media – multiplying the impact of a single review.
Blockchain and new technologies give insurers the option to measure, control and set prices, engage customers, reduce costs, improve operational efficiency and increase access to insurance. This is driven by the availability of data to have a better understanding of the risks at the granular level.
What is Blockchain?
Blockchain is one type of distributed ledger technology. Distributed ledgers use independent computers (referred to as nodes) to record, share and synchronise transactions in their respective electronic ledgers (instead of keeping data centralised as in a traditional ledger). Blockchain organises data into blocks, which are chained together in an “append only” mode. It is essentially a database of information which is not stored in one place but across a variety of data servers that participate in the network. Its decentralised nature means there is no central point. The name blockchain appropriately defines how the technology works and in the manner in which data is stored. Data is packaged into blocks which are linked to other blocks of similar information forming a chain. This act makes the information stored on a blockchain more trustworthy as the blockchain is immutable and therefore once data is recorded in a block, it is very difficult to alter it.
Where can we use blockchain technologies across the insurance value chain?
The key components from the nature of blockchain can be best explained using a simple example. Let us consider a distribution chain of insurers, reinsurers and intermediaries that want to share motor vehicle accident history data. Each party will have its own version of the data in its IT system and they need to reconcile the information between them. Having the information on a blockchain originally stored by an intermediary when the policy is sold or the claim notified, creates a single version of “the truth” and will require the information for each policyholder only one time.
Now, let us consider the information required for placing a motor policy. The various components of the policy, i.e. the policyholder ID, car registration number, vehicle chassis number, driver’s license number, property plot number, etc) can be updated regularly. The new information is logged and timestamped on a global ledger where all participants can see the update. In addition, as the data being distributed is dynamically updated on the ledger, the latest state of the policy’s component parts is reflected on the blockchain, thereby again creating a single source of the truth and thereby reducing the margin of error.
One major aspect of blockchain technology which increases the number of blockchain use cases in the insurance industry is the invention of smart contracts. A smart contract is a series of control statements or code embedded on a blockchain, whereby the code contains a series of conditions, rules, expiry dates and any other relevant information needed for the contract to be executed once these terms are met. It is not what the lawyer’s would recognise ever to be a contract!
In comparison to traditional contracts, an example of a smart contract example would include conditions pre-written in a programming language which is hard coded. This compares to a traditional contract where the terms and conditions may be subjective and open to judicial interpretation. Moreover, a smart contract behaves in an automated way, since, if these pre-defined conditions are met, the contract is executed. This is a more objective and data-driven approach to ensure contract conditions are respected and executed on time.
The use of smart contracts can vastly improve the customer experience and reduce operating costs. In the insurance industry, a smart contract could help to increase the speed of processing claims as well as help to reduce the costs associated with the manual processing of claims. Another example could be the use of a smart contract to encode the rules for enabling the transfer of funds from an insurer to the insured. An application could consist of an automatic transfer or funds if, for example, the customer repairs his or her damaged car at a certified repair centre. Such repair centre would notify the smart contract to prove the insured’s identity and confirm the repair.
Other examples could involve using a smart contract in travel insurance where refunds would be automatically given to travelers if, for example, their flight/train is delayed and/or if they have lost their luggage.
Consumer use of connected devices has grown exponentially – there are estimates that by 2030, each person will own 15 connected devices. The use of smart contracts in combination with connected devices could result in some interesting developments.
An example is in agriculture where smart contracts have an interesting use case in the form of helping farmers insure their crops and claim damages with insurance companies. With the use of IoT devices, data such as weather data, crop yields, temperatures, soil humidity could be captured. Crop insurance policies can be modeled into smart contracts on a blockchain and indexed to local weather.
If a catastrophic weather event happens, the policies are automatically activated or executed and this new mechanism will help to facilitate transparent and timely payouts to farmers. Smart contracts have some interesting use cases in the insurance value chain. Other examples are in travel insurance and in home insurance. In travel insurance, the idea is to exploit a smart contract to automatically reimburse travelers if their plane or train has been delayed. Automatic payouts can be disbursed by matching flight data or train data and if the delay exceeds a number of hours.
These types of solutions bring benefits to the various stakeholders of the insurance value chain. The insurance company benefits by reducing the amount of resources normally dedicated to handling requests but customers would also be entitled to automatic payouts without the need to make a claim. Blockchain can also help in reducing fraud and reduce administrative costs through automation of industry specific chains. Examples include validation and verification of information for claims and payments processing purposes, the re-use of medical examination results and smart contracts.
Companies can combine the use of various new technologies with blockchain – including combining predictive analytics and artificial intelligence to enhance consumer experience and reduce fraud and cost. The possibilities when combining these new technologies are endless and many unexplored areas mean that the opportunity for transformation in the industry is ever-growing.