Chain reaction: Is blockchain the next shift in insurance?
Blockchain technology will revolutionise insurance in the coming decade, but how will it open new markets and spawn new models in the sector?
This month marks 12 years since the first Bitcoin was mined by its architect, the enigmatic person or group known only under the pseudonym Satoshi Nakamoto, and whose identity remains shrouded in shadows to this day. In January 2009, Nakamoto’s creation unleashed a new form of currency into the world, and with it the underlying blockchain network.
Managing the global flow of cryptocoins was the original vision for blockchain. But, as with the internet, its unique capabilities drew interest from all corners of the world. Its distributed ledger technology (DLT) has been put to use on everything from overhauling rental property management to anonymised illicit trade in arms and narcotics on the dark web. In the insurance industry, insurtechs quickly identified how the technology’s innate security and transparency could be beneficial.
Blockchain 101
As with our surface-level understanding on how algorithms influence buying habits or what we stream on Netflix, a technical background isn’t necessary to see where blockchain ties neatly into the underlying mechanics of the modern insurance industry. Fundamentally it comprises three elements:
The block: this is where a document or piece of data is stored.
The chain: which bonds the blocks together to form the network.
The hash: a code that acts both as an encryption instrument and a unique identifier for each block.
The hash is the cornerstone, protecting the contents of each block through cryptography and acting as an infallible unique marker that ensures a single point of truth. If this issue of InsurTech Digital were to be stored in a block, for instance, even removing the full-stop at the end of this sentence would alter the hash entirely. On the blockchain, even infinitesimal tampering is spotlit.
In short, this form of public ledger sidesteps many of the shortcomings insurance firms spend millions of dollars and thousands of man-hours addressing. It is air-tight, immutable and transparent. Could a concertina of traditional technology, legacy systems and the odd filing cabinet stuffed with paper contracts offer the same result? Perhaps, says Mark Wales, CEO and cofounder of Galileo, “but blockchain technology provides a single technology supporting a private network of participants, real-time transactions, the distributed segregated data aligned across the network and security and compliance while capturing all the transactions on an immutable ledger. You would require a more expensive and complicated set of alternate technologies to do this.”
Short-term and long-term gain
As a tool for providing greater assurance in an ever muddier tide of Big Data, blockchain is revolutionary. In the short-term it offers cost savings and efficiencies to legacy systems and a key-turn solution for firms thrust into the digital arena for the first time due to COVID-19, or those taking organic first steps into a modernised digital transformation project. The scope of long-term value in the blockchain, however, far outweighs these upfront boons.
In February this year, a study on the nascent implementation of blockchain into the existing insurance system from the UK’s Institute and Faculty of Actuaries concluded that collaboration remains both the primary strength and weakness of this technology: “The excitement surrounding blockchain has not yet led to a tangible impact on the insurance industry… Blockchain adoption is a team sport relying on the collaboration of multiple stakeholders… The insurance industry, in turn, needs to collaborate to formulate blockchain standards and to ensure interoperability between different solutions.”
In cases where blockchain adoption accelerates, its ability to offer a single point of truth opens the doors to full transparency and strengthened partnerships between insurtechs and incumbents, insurers and their customers. Everyone knows they are looking at the same information about policyholders, their terms and even their claims, eliminating data duplication and pulling the rug out beneath traditional fraud activity. Organisations on the periphery of the process also benefit greatly; after all, the fundamentals of blockchain ensure no direct, one-on-one relationship is necessary.
“Reinsurers can have real-time access so they can understand their exposures,” Wales says. “Medical service providers can input details of services and get real-time feedback on claims and payments.”
New models, new markets
In more imaginative implementations, blockchain already underpins novel forms of risk protection - not insurance as we know it, by definition, but community-driven cover. Nexus Mutual is one such startup, promising a “people powered alternative” to traditional insurance. Its tokenised economy leverages the Ethereum blockchain, allowing members to share risk together in the style of mutual insurance, forgoing the intermediary of an insurance firm. Members decide which claims are valid, and all decisions are recorded and handled in real-time on the public ledger by smart contracts.
In emerging markets, the technology is rapidly revolutionising insurance in some of the most under-insured populations on earth. In countries across APAC, adult insurance literacy is among the lowest in the world, creating an ideal environment for a new shift in financial inclusion through digital solutions and technologies such as blockchain.
Galileo Platforms last month rolled out its blockchain infrastructure in the Philippines, one of the many markets of Southeast Asia where millions of people are invisible to traditional insurance models. Galileo is partnering with mobile-first life insurer Singlife Philippines, and the country’s biggest digital wallet, GCash. It makes Singlife the first insurer in the world to leverage blockchain as the core policy administrator.
“The Philippines is under-insured, yet insurers are struggling to reach these customers using their traditional distribution channels and operating models,” Wales, says, going on to explain how complexity and cost are the biggest hurdles to overcome in order to offer flexible, digital “low-premium high-volume products” - the most valuable products for the market.
“The platform is universal and not limited to Asia,” Wales adds. “We have started in Asia because there are millions of people entering the insurance market and insurers struggling to reach them. We’re also developing solutions for mature markets. This includes flexible individual and group health insurance solutions where the individuals can pick and choose their coverages and levels.”
The question of whether blockchain will impact the insurance industry is an emphatic ‘yes’. But, as we have seen in the 12 years since the technology’s inception, how incisive or transformative that impact will be lies in the hands of the insurtech sector and its ability to innovate.
