Is blockchain disrupting the insurance market?

Blockchain has been a hot topic for the insurance sector for the past couple of years, but has this new technology disrupted the market as promised? Before diving into the deep end, let’s take a look at what the big blockchain promises are for the industry and if it really is pioneering a new wave of innovation across the board.

First, a quick recap on what blockchain is…

At the simplest level blockchain is what it says on the tin; a chain of blocks. However, we’re referring to digital information (blocks) being stored in a distributed database (the chain).

Blockchain provides a method of shared and transparent record keeping, similar to archives in a public library. For example, if a person books a flight online, information such as the date, time, airline, and cost can be stored as a ‘block’. Each transaction made on the booking website would add a new block with a unique code which links to the previous blocks, forming a chain shared across all participants so there is no corruptible central copy.

The big promises for the industry

  1. Security – The benefit of storing information like this is that it makes it incredibly difficult to hack and manipulate therefore reducing the chances of false claims. Blockchains are distributed across many computers and are automatically updated as a new block is added. As each block verifies its place in the chain unauthorised modification is prevented, such as the addition or removal of data.
  2. Transparency – In the case that a block is modified, a clear audit trail is created to track who made the changes. This functionality means the system effectively manages itself and does not need to be overseen by a third party which supports efficient data exchanges between insurers.
  3. Collaboration – With a secure database, different firms in the market place can share commonly required information to speed up repetitive processes. For example, if a person switched their insurance provider, their personal details could be accessed from a blockchain entity, helping to remove lengthy onboarding forms for clients.

Where has blockchain topped and flopped?

With the likes of those big promises, you’d expect all insurance firms to consider implementing blockchain based technology. In reality, there’s been widespread hesitation which could potentially be pinned down to the inconsistent success rate of the early adopters.

One area of functionality driving insurers to use blockchain is smart contracts. These contacts differ to written legal text as they’re encoded directly onto the blockchain and are automatically executed when the pre-defined criteria set by the parties involved is achieved. An example of smart contracts in use is AXA’s 2017 launch of Fizzy. The automated insurance platform records customers flight booking information and connects to global air traffic databases to track arrival and departure statuses. When a customer experiences a flight delay that meets or exceeds the travel insurance criteria (usually 2+ hours), Fizzy receives this information and begins its automatic process of notifying and paying the customer. This software means the customer has a quick and admin-free claims experience and the insurer reduces time spent processing and verifying each claim.

However, other examples of smart contracts paint a different picture. A group of investors called the Distributed Autonomous Organisation (DAO) were using blockchain to vote on what they invest in directly. This technology cut out lawyers, management fees, and the need to debate the decision in a boardroom. However, in 2016 an ‘attacker’ found a loophole in the way that the system was set up which enabled them to seize millions of dollars of other members’ invested funds. In an open letter to the DAO, the attacker claimed that their actions were legitimate as the criteria coded into the smart contract enabled the seizure to occur without breaking the legal terms. As a solution to this dilemma, members of the DAO voted to amend the software contact – which ultimately triggered the wider debate; are we socially ready to let software self-execute automatically? There is no disagreeing that the technology is capable of managing smart contracts. Yet, it seems there’s comfort in knowing a group of humans oversee the software to apply moral reasoning when the legal contract parameters are challenged. Possibly it is this anti-risk, comfort seeking mindset which has delayed the uptake of blockchain across the insurance market.

Perhaps another reason for slow adoption of blockchain is simply that other technologies complete some tasks better. The functionality of storing encrypted ‘blocks’ on a public ledger enables a method of secure, instant and trackable data sharing. In theory, blockchain should be the go-to software for this need, however processing volume transactions is much slower (and therefore more resource intensive and expensive) than utilising a centralised database. Numerous other companies are also providing more traditional cloud based data services with greater efficiencies at a lower cost. Amazon and Google as well as the likes of Dropbox and ask users for a small fee in return for securely encrypted file storage across multiple user hard drives. In addition, the data is protected by multiple security types including firewalls, IP tracking, and two-factor authorisation. This puts those companies on par, if not above, the security of blockchain that relies on single-point encryption.

While blockchain technology may not be competing with the mainstream software providers, there is still room in the market when it comes to solving niche problems. Beenest is a short term property letting platform designed to be the solution to Airbnb’s pain-points. Unlike Airbnb’s 3-5% rent ‘fee’, Beenest uses a ‘Bee Token’ model that uses smart contracts to bypass the need for financial institutions and therefore remove currency conversion fees and foreign transaction fees. Also, each user is asked to authenticate themselves through seamless 3rd party authentication platforms which is then stored on a secure, transparent and immutable block to remove the possibility of scams – something Airbnb is familiar with.

The introduction of blockchains raised many questions for the future of insurance, however the rate of success has been questionable.  As technology continues to develop, do you think more insurance firms will be utilising blockchain technology? We’d love to hear from you.

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