Blockchain and the insurance industry

  • Zurich, as part of a group of Europe’s largest insurers, has launched the Blockchain Insurance Industry Initiative ‘B3i’
  • The initiative aims to transform the industry through a shared and transparent record of data
  • With the potential for blockchain to become a feature of the insurance industry, we explore the various applications it could serve

The Blockchain Insurance Industry Initiative ‘B3i’, of which Zurich was a founding member, was launched in October 2016 to examine the potential advantages blockchain technology could bring to the insurance industry.

The technology (see boxout) is expanding beyond its cryptocurrency origins and starting to make waves across a number of industries, including banking, cyber security and healthcare.

Alessandro Spadoni, Chief Architect, Shared Application Services at Zurich, and Zurich’s representative on B3i, explains that the consortium is, “undertaking a measured experiment to determine what the business case is. What is the prize, what are the costs and what are the technical challenges and risks that exist around this very nascent and maturing technology?”

B3i is due to present its smart contract management system, based on blockchain principles, at the 2017 Monte Carlo RVS conference. The prototype has the potential to radically simplify how the insurance industry does business.

The system covers the major elements of the Property Cat XL reinsurance contract life cycle, including smart contract set-up, premium settlement and claim settlement.

Transparency and efficiency

So, why is this being developed and what applications can blockchain technology serve for insurers, brokers and customers?

Alessandro explains: “There are indisputable opportunities for blockchain to drive more efficiency across the insurance industry.”

The widely-held hope is that blockchain technology could deliver a shared and transparent record of industry-wide contract and claims-related information.

While smart contracts and claims automation are technically feasible using alternative technology, the addition of blockchain adds a level of transparency and trustworthiness.

Crucially, blockchain can remove the need for a central authority to control operations, and places the customer in control of the relationship with the service supplier.

For example, automated claims-handling processes based on blockchain technology, smart contracts and publically available data can be developed. When a certain set of conditions is met, such as a flight being cancelled, the contract can be resolved automatically, without requiring additional assessment.

Not only does this approach increase customer trust, the technology has the potential to streamline communications and transactions by allowing for automatic data transfers in seconds.

“From a customer perspective, they should be getting a better service if we can operate and process claims more efficiently,” adds Alessandro.

Fraud detection and pricing

One of the most exciting possibilities for the insurance sector is the possibility that blockchain could assist in creating an incorruptible, international and cross-industry database that can be used to flag possible signs of insurance fraud.

Given that the ABI estimates that fraud adds an average of £50 to every UK policyholder’s insurance bill, the potential for blockchain to reduce the chances of fraud is intriguing.

The database could be used to detect identity fraud, and to check claims history and police reports, alongside a host of other information that may be required from insurers when dealing with contracts and claims.

In this manner, contracts and claims could be recorded onto the blockchain, ensuring that only valid claims are made and multiple claims for one accident are rejected. The addition of smart contracts can also ensure that payments are triggered when certain conditions are met and validated.

Reducing admin costs

On a practical level, there is the potential to reduce the cost of insurance by simplifying transactions and minimising the administration burden. By storing contracts and transactions on a shared ledger, not only is contract consistency and execution ensured, but the administrative burden is reduced for multiple stakeholders.

Automation of workflow, while reducing the administration burden, also helps reduce the chances of data entry duplication, and the disputes and delays this can lead to. In addition, blockchain can save time by opening up the potential for the automation of policyholder identity verification and contract validity checking.

“This should result in less administration and effort,” explains Alessandro, adding that, “the aspiration is that these savings will trickle down all the way through the value chain.”

Cyber security

Another of the main advantages of blockchain, which should help to allay fears of personal data loss, is that the technology is secure by design. The decentralised ledger, which serves to record transactions across multiple computers, removes the central hub that functions as an obvious target for attack.

Crucially, this means that data in a ‘block’ cannot be retroactively altered by any party, ensuring consistent and transparent contracts. According to Alessandro, this means that: “Blockchain can deliver faster cycle times and reduce disputes and errors.”

This presents a significant advantage, as the reconciliation following a major claim can be expensive and time consuming if disparities in the fine print are uncovered following a claim. In the aftermath of 9/11, disparities led to an insurance dispute of $3.5bn.

Ultimately, blockchain technology has the potential to transform how transactions, policies and claims are recorded and reconciled. If B3i ultimately proves the validity of the technology, blockchain could serve to reduce error rates in contracts and claims, boost security and deliver significant cost reductions across the insurance value chain.