Blockchain Tech to Disrupt and Drive the Insurance Sector

Around the globe in 2022, approximately $6 trillion in insurance premiums will be paid, and the sector is predicted to continue to enjoy solid growth in the years ahead. Though the basic business model has remained largely unchanged for centuries, technology has been driving increased efficiency in recent years. In addition to digitalisation and machine learning, the use of blockchain – the technology underpinning cryptocurrencies – has the potential to both disrupt and stimulate the industry.

Ways of insuring against risk have been around for thousands of years and were in use at least since the merchants and traders of ancient Babylon took out loan contracts on their ships and cargo that did not have to be repaid in full if they were lost. The same principle of paying to spread risk around in order to mitigate misfortune remains the core of the insurance business to this day.

The industry is now undergoing technology-driven change, collectively referred to as InsurTech, with blockchain becoming central to that shift. First proposed at the dawn of the 1990s, a chain of blocks secured cryptographically was first put to use with the launch of bitcoin in 2009. Five years later, blockchain technology for other purposes than cryptocurrency became a reality. Such digital ledgers of transactions have since been deployed in numerous settings and are on the brink of being used far more widely.

Blockchain beyond bitcoin

Encrypted, secure, trustworthy records of information and interactions have multiple applications in the field of insurance, with more almost certain to emerge down the line.

Blockchain-based smart contracts, which automatically execute when certain conditions are met, have already begun to be utilised in insurance.

For example, if an insured car is hit by another vehicle, an insurance pay-out is automatically triggered; a similar process in agricultural insurance could pay out if no rainfall was recorded in a certain area for a specified time frame. Smart contracts eliminate the need for individual judgements in settlements, remove the possibility of human error, keep shared information secure, and increase the speed and efficiency of operations.

More automated and efficient processes also facilitate the viability of offerings such as on-demand insurance or microinsurance. Blockchain ledgers help simplify the recording of policies, risks, claims and settlements to the point where on-demand coverage – which can be switched on and off by policyholders as needed – becomes a more realistic business model. Similarly, microinsurance is coverage against very specific eventualities and so needs very large volumes to make it worthwhile for issuers, something achievable through blockchain technology.

An example of a company leveraging blockchain tech is German start-up Ryskex, which is using it to automate the claims process for its B2B insurance platform, and to allow users to hedge risk by trading securitised assets based on their policies. As well as ensuring improved trust and transaction security, the firm maintains that it has reduced administrative costs to a minimal level.

Better, stronger, faster

In addition to increased efficiency and trust, blockchain can help combat fraud and enhance cybersecurity. Fraudulent claims are estimated to amount to more than $80 billion annually in the US alone.

A system where payouts are only made when independently verifiable conditions are fulfilled automatically prevents a certain proportion of dubious claims, while patterns that suggest fraud become easier to detect.

Though building platforms and storing data on blockchains doesn’t guarantee immunity from cyberattack, the decentralised architecture, consensus mechanisms and transparency do create some inherent resilience. For example, hackers wanting to make changes to a digital ledger would have to take control of a majority of nodes (computers) in a network; not impossible but far more challenging than finding a single point of weakness to exploit.

New frontiers

When combined with developments such as AI and big data analysis, blockchain tech promises to open up the possibility for innovative business models like peer-to-peer (P2P) insurance, and new offerings from the legacy insurers.

P2P allows groups of people or entities with mutual interests to pool their resources and organise their own insurance system, which in some ways calls back to the earliest days of the business. The P2P model could help bring insurance to people currently underserved by the industry, who could also be more easily reached by new services enabled by lower-cost, blockchain-enabled coverage from the mainstream industry.

Blockchain has already made inroads into insurance in Japan, traditionally a paper-heavy industry. Tokio Marine is one of 20 global firms invested in the Swiss-based Blockchain Insurance Industry Initiative (B3i), which is tackling issues including climate and nuclear risks. Meanwhile, Japanese InsurTech start-up iChain is promoting both distributed storing of information on the blockchain to insurance companies, and management of policies, claims and payouts to customers.

The Japanese insurance sector, the world’s third-largest, is on course to be shaken up by blockchain innovation and people with knowledge and skills in the tech will find themselves in increasingly high demand.

By: Gavin Blair

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