Trust, Transparency & Immutability: DLT’s Promise
In an ideal world scenario, devoid of friction, one would be able to purchase a car and autonomously set in motion the process to receive a quote for coverage. Once accepted, monetary assets movement would in turn trigger a smart contract on a new policy, while concurrently attaching ownership documentation. In this make-believe world, when in throes of a collision, sensors in connected vehicles would push a first notice of loss transaction, in turn relaying workflows for verification, repair, rental authorizations and payment via smart contracts. No manual claim filing and no administration requirement. Is this fiction or in the not too distant future?
In Hong Kong circa 2020, all 80 Motor insurance companies use the MIDAS system for real-time authentication of vehicle cover notes and policies, including multi-stakeholder verification. MIDAS or Motor Insurance DLT-based authentication system utilizes Distributed Ledger Technology. All underlying records are stored on a blockchain based Corda ledger in an immutable fashion to provide a single source of authentication. Minimal information with no personal identifiable information beyond that required for authentication, is recorded on the ledger and available through QR codes.
MIDAS was built jointly by the HK insurance industry and a local fintech startup. It received “Innovation of the Year” Award at the Asia Insurance Review Industry Awards in 2019, for innovating the way in which a platform of trust was built, using privacy by design principles.
The basics — What is blockchain?
Blockchain is a technology that aims to revolutionize operations across multiple sectors, enabling stakeholders — brokers, vendors, reinsurers and ecosystem partners — to interact with each other.
With its three fundamentals — trust, transparency and immutability — blockchain provides a single source of truth that is updated in real or near-real time. This allows parties to maintain comprehensive asset, contract and data ownership records without having physical possession. For the financial services industry, this implies outcomes are more certain with little room for contract (mis)interpretation and information discontinuities.
It can play alongside other tech, notably smart contracts, to enable carriers to automate processes and develop innovative products, otherwise not possible. As new information is added, each new “block” is “chained” to the previous one in a permanent, unbreakable sequence using advanced cryptography.
Blockchain is a type of distributed ledger but not every distributed ledger is a blockchain. Similarly, while blockchain enables cryptography, it is much more than cryptocurrency.
It can power new business models. With personalized, real-time risk assessment rather than historical data and average pricing, carriers can build more sophisticated usage-based insurance models in partnership with auto manufacturers or makers of smart devices.
Going mainstream
The global market for blockchain in insurance is expected to grow from $65 million to $1.39 billion in 5 years ending 2023, growing at 85%.
In an analysis of two use cases, between $99 and 277 million of savings for personal auto was realized in the US alone by third year of use.
The compelling factors in insurance
Blockchain generates seamless transactions that promote ease of doing business as well as ease of living for citizens via disintermediation and reduction of ad-hoc bureaucracy.
Insurance is known to ail from archaic systems and processes that can fall prey to exploitation, e.g.
- Insureds make multiple claims across different insurers for a single loss
- They withhold info from insurers that may affect their premiums.
- Brokers pocket premiums not meant for them.
- Insurers request compensation for services never submitted or upcode services rendered into higher price tiers.
These are most often due to difficulty in stakeholder coordination, slow or manual processes and financial incentive to exploit vulnerabilities.
Blockchain by virtue of its ability to provide shared view of truth, programmable transfers and transparency for relevant institutions, can assuage such shortcomings.
Few Use cases
Blockchain tech improves:
* Claim management: reduces fraudulent claims and automates claim submission
* Peer to Peer: guarantees payment from investor to customer in case an insurance demand event occurs
* Reinsurance: reduces operational costs of reinsurers and allows them to receive verified real-time data directly from insurers.
* Fraud detection & risk prevention: makes claims more reliable and less fraudulent.
While some believe standout growth use cases are lacking, there are several operational efficiencies use cases.
IOT implementations, for example, are big on blockchain. These devices often suffer from security vulnerabilities and scalability challenges. As the number of connected devices grows, current centralized system to authenticate, authorize and connect different nodes in a network will turn into a bottleneck, whereas blockchain would offer a secure decentralized solution.
Startups leveraging blockchain
Apart from the above, Etherisc is an example of a startup that using a community model, has developed several products: flight delay insurance, hurricane protection, crypto wallet insurance, collateral protection for crypto backed loans, crop insurance, social insurance.
An example of an incumbent that has actively piloted blockchains is Aviva. In the last couple of years, it has completed pilots to automate large parts of invoicing, detect claims fraud and automatically renew property leases using smart contracts. One learning for Aviva has been to join a consortium (B3i) that allows for a network effect, with many participants.
There are benefits in joining a industry focused blockchain consortium as one sits at the same table as competitors while working towards common goals. This has the financial benefit of reduced costs, with membership fee being significantly lower than cost of hiring and training blockchain developers. B3i is an example of a leading consortia network focused on insurance which has launched first live products on R3’s Corda.
Blocksure OS is another example of a live blockchain on R3’s corda. It uses Corda as its core so that each party (including brokers, insurers, MGA and loss adjusters) can maintain a traceable and trusted record of their side to an insurance transaction.
The benefits reported by Blocksure OS customers are:
-Up to 90% reduction in back office costs
-Transaction speeds of seconds not months
-Vastly improved data quality and governance
-Full auditability of all transaction events
Bradley Brandon-Cross, Director, Commercial and General, a Blocksure OS user says, “It has cost and efficiency benefits but that is not the key attraction. It allows Commercial and General to think innovatively about how we develop customers’ products. We can look at segments that were under served in the past as well as how conventional products are constructed. ”
Promises to Keep And Miles to Go
Ethereum is a popular decentralized open source blockchain featuring smart contract functionality. It hosts close to 2000 applications, with 15–20% being related to finance.
The number of insurance applications are in the low double digits, Etherisc being one such. The reality today is that there are a number of insurance blockchain applications in concept and pilot stages, with relatively few being operational. In the next 2–3 years, we can expect to see many more join the bandwagon with the promise of DLT, of trust, transparency and immutability finding more applications within insurance.
