Making blockchain a building block in the insurance value chain
Dutch Insurance Outlook 2018
The expectations for the disruption that will be brought on by blockchain technology are high. It is receiving a lot of attention, especially within the financial and FinTech world. Deloitte is of the opinion that there is also huge potential for the Dutch insurance industry to take the lead and further invest in blockchain knowledge and experience, in order to improve the economics and customer experience of the insurance industry. Despite the high expectations, however, it is important to distinguish between the real business opportunities blockchain offers and the inflated expectations in the market. In this article we elaborate on the opportunities that blockchain can offer insurers.
Blockchain has the potential to add value to insurers
We live in a time of rapid change in new technologies. These technologies don’t only offer a competitive advantage, but are necessary in order to stay relevant. Blockchain technology provides a solution that potentially improves efficiency in the insurance value chain by providing transparency, enabling secure real-time mutations and minimising the role of third parties.
Currently, we see an increase in the development of blockchain proofs of concept. Insurance companies are increasingly investing in practical knowledge and learning. A recent example is the ‘Blockchain Insurance Industry Initiative’ (B3i), by of a group of international insurers, including some Dutch companies, to explore the potential use of the distributed ledger technology between insurance and reinsurance companies and develop common standards for the industry. This will allow insurers to identify use cases that have a high potential for success, such as the ones described in this chapter. Blockchain potentially brings growth and new business offerings to existing players, but these players also run the risk of disruption. Blockchain is a technology which intends to remove the middle man. Large insurance companies need to show their added value or run the risk of having their role as a trusted third party taken over by, for instance, new startups that are using blockchain, or by incumbents that are moving faster.
Where do insurers stand now with regard to blockchain?
In 2017, Deloitte conducted a survey among Dutch insurers about blockchain technology. In the survey, 51 percent of insurance executives indicated they had very little to no understanding of the technology1. See the first figure on the right.
About half of all insurance companies indicated they had earmarked budgets for blockchain initiatives, though amounts vary. Respondents identified the major barriers in the use of blockchain as the complexity of the technology and privacy and regulatory concerns, see the second figure on the right.
The main benefits of blockchain technology are seen as administrative cost reduction and reducing settlement time, see the third figure on the right.
Basics of blockchain: a distributed ledger for trusted transactions
To better understand the use cases for insurers, we first give a brief introduction of blockchain technology in general. As described in more detail in a Deloitte report2, a blockchain is a digital, immutable, distributed ledger that chronologically records transactions in real time. The prerequisite for each subsequent transaction to be added to the ledger is the consensus of the network participants (called nodes), thereby creating a continuous mechanism of control with regard to manipulation, errors, and data quality.
A blockchain network therefore has the following qualities:
Confidentiality of information
The encryption of data and distributed storage makes the technology secure and robust, without needing a trusted third party. This makes it a good tool for the transfer of valuable information or assets that go beyond financial value.
Integrity of data
Data that is placed on a blockchain is immutable, and using digital signatures, the data integrity can be trusted because the records are tamper-proof. Every change is recorded, creating a chronological record of events that is a ‘single source of truth’ for everyone in the network.
The distributed structure of the network means that data is always available, and there is not ‘a single point of failure’. All relevant parties in the network share a copy of the blockchain and can access and view the same data.
Speed and convenience
Transactions on the blockchain are transmitted through the network in near real-time and can be pre-programmed with conditions under which a transaction will automatically execute. These conditional transactions are called ‘smart contracts’, and are a specific feature that can make blockchain networks attractive for the insurance industry.
To conclude, the blockchain offers qualities that could help insurers in times where clients request more flexibility (speed and real time underwriting), transparency and security but it can also be potentially disruptive.
Blockchain technology has applications in many areas of the insurance process
From the insurers’ perspective, client onboarding and the associated regulatory compliance is a cross-industry problem and source of friction for a large group of customers. This offers one of the most attractive blockchain use cases for cross-industry collaboration. By creating a platform that enables clients to securely manage their own validated data, it becomes possible to securely share that data between companies. This can greatly reduce the administrative burden of ‘Know Your Customer’ (KYC) and anti-money laundering (AML) procedures by only having the information vetted once by a trusted party.
In 2016, Deloitte developed a KYC blockchain platform3 to simplify the sharing and transfer of validated KYC information. Customers only need to provide access to their identity information when the company is required to onboard the customer. After an initial verification of the personal information, this information, along with the proof of validation, can be shared with other companies. This removes the need to check the same data over and over again. The onboarding of new clients is faster and more efficient, without reducing security. The immutability of the data also makes it easy for auditors to verify AML and KYC compliance at a later stage. Finally, by putting the customer in control of sharing his or her personal information, this decentralised identity solution goes a long way towards satisfying the requirements of new European privacy directives (mainly GDPR4).
It should be noted that a KYC platform as described will only add value if it is used by multiple parties. This means that ideally, insurers should aim for an industry-wide initiative, creating an open standard that others can join. The challenge here is to find companies that are willing to start together and take the first step to implement this in their onboarding process, in such a way that collaboration can be further expanded.
Identity and data access management
Blockchain technology can, in addition, be used to develop digital identity schemes that aggregate user information across a variety of sources. As opposed to the client onboarding, which is seen from an insurer’s perspective, identity and data access management is seen from a client and consumer perspective. The blockchain provides the means of validation and verification, and the data can be encrypted so that it cannot be intercepted or viewed without the user's permission. Customers control the data – such as social media, birth and death registries, government issued ID, biometric data, and health records – on their own devices5. On the blockchain, they can grant temporary access to specific data to trusted third parties, such as insurance companies (e.g. driver behaviour data that is created at the lease company can be exchanged with the insurer through blockchain). This creates a more efficient and trusted relationship between insurance companies and their customers.
An identity management solution becomes most beneficial for insurance companies when developed in a consortium with other parties. Several start-ups use blockchain technology to create a user-centric global digital identity. Identity networks have much more uses than just insurance of course, but the benefits for insurance companies are obvious. For example, a single source of truth regarding clients’ (insurance) histories on a blockchain can be instrumental in reducing administrative costs and fraud. At the same time, it can enable insurers to better engage with customers and provide customised offerings based on a richer understanding of the clients’ behaviours and interests—assuming the customer is agreeable to data being leveraged in this way. This could allow insurers to use the trustworthy data as input for analytics to predict future events more accurately, thus facilitating underwriting and risk selection (see also the section on data analytics in insurance).
Fraudulent claims and costs associated with reimbursement can potentially be reduced using blockchain technology. This works as follows: The assets to be insured are registered on a distributed, shared ledger. This blockchain ledger provides a history of all relevant moments in the lifecycle of the asset, and any registered claims can be checked against this trusted log of events. Fraud risks are reduced due to the blockchain’s immutability and trusted time stamps. Note that a blockchain will not prevent all types of fraud, especially in cases of collusion between parties, but it will make fraud harder to conceal. Fraud detection measures are therefore still important, but can now be aided by the transparency of information provided by a blockchain-based network.
In comparison with insured objects as assets, the blockchain basically provides data as an asset as well. One could think of many examples. One commonly known example is administrating claim-free insurance years for car insurance. In current processes, this is often a point of debate between the insured and the insurer. But also data items, such as marital status or information on inheritants can be of great value in the blockchain for life insurance and pensions business.
Other opportunities in fraud detection lie in joint efforts (that may be cross-industry) to identify patterns across data. Specific benchmarking can be performed even on anonymous data, to find possible fraudulent claims or illogical patterns. An example is to be able to identify claim patterns from health institutions to insurers.
Automatic claims processing
A key moment in the insurance lifecycle and the cause of much friction is the claims process. A cross-industry blockchain could dramatically reduce claim costs and make for a better customer experience. For an industry-wide solution, multiple insurers would record contracts and claims on the blockchain, and thus would be able to ensure only valid claims are paid. Smart contracts can enable the automatic payment of claims if pre-determined criteria are met. This makes the claims process faster, cheaper, more transparent and potentially more accurate. Note that for existing insurance companies this would require a significant investment: existing processes would need to be overhauled, and existing systems would need to be integrated. Companies should research whether the added value outweighs the required investments.
The B3i initiative, for instance, explores a process for reinsurance activities using blockchain and smart contract technology features for the major elements of the Property Cat XL (excess of loss) reinsurance contract life cycle—from smart contract setup, to premium settlement and claim settlement.
Innovative services and new products
With the increasing use of new connected devices (the Internet of things) and online platforms, customers are increasingly enabled to participate in the sharing economy. This creates new market opportunities based on the changing attitudes of customers, for instance for start-ups. Blockchain technology can be used for these market opportunities, by facilitating products like peer-to-peer insurance, by connecting with Internet of things devices, or by processing claims based on voting mechanisms written into smart contracts. Pay-per-use insurance can be effectively arranged for a short 20-minute ride in a loaned car, a service that relies on the near real-time processing blockchain provides.
Potential growth opportunities for insurers thanks to blockchain innovation
A report by Deloitte and the World Economic Forum5 examines the impact of blockchain on the future of financial services, including insurance. While cautioning that blockchain is not an all-encompassing solution but rather one of many technologies that form the basis for ‘next-gen infrastructure’, the authors assert that blockchain will “redraw processes and call into question orthodoxies that are foundational to today’s business models”.
It will take several years before blockchain reaches its full potential in the insurance industry. The unique qualities of blockchains, like the distributed and immutable storage of data, does bring a lot of potential for insurers. As shown in the previous use cases, processes can become more efficient, enabling the insurer to be more competitive and supporting sustainable growth. The challenges for applying this technology lie in the involvement of technology developers, start-ups, regulators, and legal authorities. Blockchain networks are meant to exchange trusted data between parties that don’t necessarily trust each other, so setting up a blockchain solution within a single company will not create many benefits.
Blockchain technology brings insurance companies the opportunity to offer new products and services to their clients. Part of this is that new players are entering the market which could disrupt the market. If a smaller, more flexible start-up can launch an innovative business offering, it is key for incumbents to demonstrate their added value to prevent losing their customers. Currently, the initiatives are still very much in the proof of concept phase. Insurance companies will need to explore use cases and experiment in order to establish where blockchain can bring added value to them and their customers.
The figure on the right shows the use cases described in the previous paragraphs ranked by their time to develop and the degree of disruption for the industry. It is clear that applications that are more at the heart of the insurance process will have a greater potential for disruption but, due to the added complexity and need for more thorough testing, these will take longer to implement.
What should insurers do with blockchain technology?
The previous paragraphs have outlined the various possibilities of blockchain technology for processes within the insurance industry. The question is how insurers should further use this new technology to protect their market position.
Blockchain technology can provide insurers with one of the building blocks for automating their processes. To successfully integrate blockchain technology, Deloitte has some important recommendations:
- Combine technologies. Blockchain technology is most effective when combined with other technologies, such as advanced analytics, robotic process automation, and Internet of things sensors. Blockchain becomes a tool for fundamentally rearranging business processes and improving data exchange with partners.
- Acquire expertise. Existing IT departments may not have the manpower or expertise to practically implement a blockchain. Insurers should therefore identify and invest in a relationship with technology partners, as well as engaging with experts in the field of blockchain development.
- Establish industry standards. Individual insurers, as well as the industry as a whole, should pro-actively work with a broader network of stakeholders on standards. Establishing open and interoperable industry standards ensures that the applications built on them are future proof and can be used across the industry.
- Gain hands-on experience. Insurers should experiment and develop proofs of concept and prototypes. Hands-on experience will enable them to create the next generation of products and services. Building prototypes also provides a platform for engaging with other stakeholders, such as regulators and banks, as well as players from other industries and non-traditional competitors.
Building up knowledge through experimentation and conversation with stakeholders helps to distinguish the current hype around blockchain from the real business opportunities. It is important to realise that most start-ups are still far from actual implementation and that for the foreseeable future, the existing way of working will continue to exist in parallel to blockchain-based solutions. Insurers should act on the developments in the market and embrace the current state of the technology, in order to become frontrunners in this domain. The greatest opportunities extend beyond making incremental improvements to current business models: Instead, they lie in harnessing blockchain technology to create entirely new value propositions like interactive policies, instant claim settling, and peer-to-peer micro insurance. This adds value for both the customer and insurer, and will grow the insurer’s business at the same time.
4 Note that blockchain applications that are fully GDPR compliant will require further research and clarification of terms. For example: how does the role of ‘processor’ of personal information in the GDPR apply to a blockchain network of multiple nodes all processing the same (encrypted or pseudonymous) data.
5 Real privacy for the end-user is only assured when the application is open-source and can be checked by privacy watchdog organisations. Alternatively, different applications could be available from different companies, and consumers can have the freedom to choose which application best fits their needs.