Blockchain: The Next Disruptor?
Multi-party commercial insurance is extraordinarily process intensive.
Quoting, binding, servicing and managing a commercial insurance program is a complicated tangle of communications and transactions between clients, brokers, direct insurers, co-insurers, reinsurers, cedents, captives, network partners, claims adjustors, outside attorneys and tax and regulatory authorities. Mountains of data are shared, numerous contracts are signed and executed, and monies are transferred between different participants. Also, the volume and complexity of these communications and transactions grow exponentially as clients’ businesses become more global and include operations in multiple countries.
Could blockchain make it possible to manage these intricate, multi-party transactions more efficiently and securely, and at a lower cost?
It’s not just about the cryptocurrencies
Some commentators have characterized blockchain as the fifth major wave in computing, after mainframes, personal computers, the Internet and social networks, and predict it will be broadly disruptive in many industries, including insurance.
Blockchain was originally developed as the technology underlying Bitcoin transactions. And while Bitcoin and other cryptocurrencies continue to evolve – recent hacks notwithstanding – tech professionals are increasingly interested in how blockchain’s flexibility and resilience could enable greater efficiency, transparency and security in a wide range of industries.
So what is it?
A blockchain is a shared permanent record of transactions between multiple parties where authorized users can access the history of a business transaction providing greater transparency and simplified reconciliation between all of the parties.
In a blockchain, a batch of valid transactions, or “blocks,” are linked together to form a chain, hence the name. Each block is “time-stamped” and includes the unique signature (or “hash”) from the previous block; these serve to uphold the integrity of the chain.
Every member of a blockchain owns the database yet no single entity controls it. Also, every authorized user always has an updated copy and new transactions cannot be validated until they are reconciled with the last version. That means fraud is practically impossible, and an intermediary isn’t needed to verify information between parties.
And because information added to a blockchain cannot be altered, it provides an unchangeable and auditable record of all transactions.
Finally, blockchains are extremely flexible and can be used not only to document the course of a commercial transaction but also to keep track of physical assets such as land deeds, leased equipment and valuable items like fine art or gems.
Upending insurance processes?
Blockchain technology offers the possibility of simplifying transactions between multiple parties in insurance contracts and improving the way companies delegate authority, process payments and reconcile business. The potential benefits include shorter turnaround times as well as increased data quality and security.
For example, each participant in a multi-party insurance contract could access identical copies of the exposure data and legal documents, thereby streamlining the process of quoting, negotiating and binding a policy.
Blockchain and smart contracts could also offer benefits for insurers working with delegated authorities like managing general agents (MGAs) or third-party administrators (TPAs). In these operating models, insurers and brokers typically pay third parties to aggregate and validate data coming from MGAs and TPAs; a blockchain linking insurers and delegated authorities could eliminate the need for such intermediaries.
The technology also lends itself to “smart contracts” where a blockchain is programmed to execute specific actions after a set of conditions is met. With blockchain-enabled smart contracts, for instance, payments between clients, brokers and (re)insurers could be triggered automatically once certain conditions are fulfilled. For example, a blockchain could be created to automate claims payments when coverage and quantum have been validated; that could benefit clients by reducing time to settlement and (re)insurers through efficiency savings. The technology could also be used to issue certificates in multiple countries or for moving monies between a captive and parent company.
For now, these and other potential applications are just that – potential – as the (re)insurance industry is only starting to use blockchain in a few test environments. In this early phase, most attention is focused on transactions where multiple parties are involved, and a verifiable, indisputable historical record is needed. For transactions and processes lacking these characteristics, traditional databases or third-party service providers will likely remain a simpler and easier option.
Disrupting other sectors?
There is also growing interest in blockchain technology in other industry sectors.
Coindesk, an online site that follows cryptocurrencies and blockchain, reports that through Q1 2016, “total venture capital investment in Bitcoin and blockchain startups now exceeds $1.1bn.” And recent investments have gone overwhelmingly to blockchain-related startups while investments in Bitcoin-related startups focusing on payments and trading are declining.
The next generation of blockchain applications, for example, could facilitate real estate deals by streamlining transactions between buyers, sellers, intermediaries, banks and title insurers, and by documenting the contract history and actual ownership of the properties. In fact, some observers have suggested that blockchain could preclude the need for title insurance as the “facts” about a property are validated and stored in a blockchain.
Blockchain can also be used for asset tracking. Major diamond clearinghouses, for instance, now routinely “fingerprint” their diamonds to prove provenance, and this data could be stored securely in a blockchain that is available to buyers, brokers, insurers and law enforcement agencies. The same approach could be used with other valuable commodities as well as with fine art and artifacts.
Leasing companies are also looking into blockchain as a simpler, more efficient mechanism for keeping track of their assets. And blockchain could be used to monitor equipment and materials at construction sites, and facilitate scheduling on projects where there are many contractors and sub-contractors.
It’s the end of the world as we know it (and I feel fine)
Bitcoin and the underlying blockchain technology were introduced as open-source software in 2009. Since then, there has been a growing realization that a decentralized, secure ledger that tracks assets and transactions is a powerful and flexible tool. Observers are divided, however, on whether the potentially radical and transformative effects of blockchain technology will be realized in the near-term, one-two years, or are still five-ten years distant.
Whatever the timeframe, XL Catlin is interested in the possibilities, and we are actively exploring several blockchain initiatives to understand where and how the technology could be most relevant. And while it’s too soon to say how quickly blockchain will be implemented in (re)insurance and other industries, we believe it will be as disruptive to multi-party financial transactions as spreadsheets have been to accounting.
Source: State of Blockchain Q1 2016: Blockchain Funding Overtakes Bitcoin. (n.d.) Retrieved from http://www.coindesk.com/state-of-blockchain-q1-2016/