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Blockchain May Link Insurance to a Seamless Future

You might not know or think much about blockchain, but it is linking the world around you and snaking into insurance.

Certainly by now you are familiar with its first offspring — bitcoin. In fact, you might even have a bitcoin wallet that you might be peering into several times an hour to check the latest crazy gain or loss. You might have even checked it while reading that previous sentence.

Even though some are predicting that bitcoin will become the global currency, its underlying mechanism has even bigger potential. And that is blockchain, which encrypts data so that it can’t be changed and places it into a decentralized, linked system that others can access for verification. It is loosely called a ledger. 

The system was created after the 2008 crash, when the Federal Reserve, along with other quasi-governmental and governmental entities, manipulated currency and markets to stabilize the economy. Bitcoin provided a way to exchange value peer to peer anonymously without an outside agency regulating it.

It was the first time that a system proved dependable enough to support a digital currency.

But the underlying blockchain theory spawned other ideas, especially Ethereum. That blockchain was different because it contains smart contracts.

That means it doesn’t just store value, it also does things. In fact, it does anything — well, anything a developer can code.

Walmart is using blockchain for its supply chain management; Visa and Docusign are working on a system to allow consumers to get in a car on a dealer’s lot, configure the lease and insurance, and drive off; and the Internet of Things is trying to figure out how your refrigerator will see that you’re low on mustard, order it, pay for it and have it delivered before you have your next hot dog.

Besides the whiz-bang consumer applications, blockchain based on Ethereum can automate administration, increasing efficiency and accuracy simultaneously.

And that woke up the usually sleepy world of insurance.

The Institutes, a property/casualty professional development organization, is leading a consortium to create RiskBlock, a blockchain for P/C insurance.

It would be a private permission block, which restricts access to and shares data with authorized parties in a centralized system. Unlike bitcoin, it would not be a peer-to-peer transaction in a decentralized system that the public can see.

LIMRA and The Institutes announced in September that they are collaborating to expand RiskBlock to the life insurance and retirement arenas.

Peter Miller, CEO of The Institutes, said the organization expects to offer a system in the P/C arena this month, but at press time, he was not certain which of four initiatives they would unveil first.

The four are proof of insurance, subrogation (paying first and determining fault later), first notice of loss and parametric insurance, which pays when certain parameters are met, such as crop insurance issuing a benefit when a drought is declared.

The first one is likely to be proof of insurance, Miller said.

“It would be much easier for a person to make sure that was updated, because it can come right off the blockchain,” Miller said of being able to provide proof of auto insurance. “It might be multiple organizations that would have access to those records. We have a prototype app to do that. So that would be much easier for consumers.”

Although the application is different, the technology can be applied to life insurance, he said.

“The basic underlying principles are still consistent,” Miller said. “A lot of what we’re doing is applicable. What the blockchain really does is create trust.”

He illustrated how the system would create trust in the case of a car accident.

“The accident would be recorded, and then the data might be sent to a garage and it might be sent to my insurance company or your insurance company because we want to know who’s at fault,” Miller said. “Then the repair might be made. Then there needs to be a payment. So there are multiple parties that are involved in that transaction, and we all agree to trust that data so it can be used over time.”

The current system has inherent friction in just sorting out the facts in about 10 million annual transactions involving car accidents annually.

“This is where the blockchain does a very good job,” Miller said. “Because we all agreed this data is what is right and it can’t be changed. I can’t come back later and try to change the circumstances of that accident, because you will know it, the garage will know it and all the insurers will know it. That assurance is not possible today because insurance company A would have a record of it in their database, and insurance company B would have a record in their database, and they might be different, and then it becomes a dispute.”

Robert Kerzner, CEO of LIMRA, said it makes sense that the P/C industry is pushing ahead with this technology because of the larger volume of transactions and processes it handles. As the P/C initiatives are developed and tested at the industry’s massive scale, the life industry will identify applications that could cross over.

 “We’re just beginning to identify the use cases,” Kerzner said. “There are transactions that should be shared, need to be shared. The key is that if we can find the right ones, we can save our members a lot of money. Our organizations are trusted by the industry, and we believe we’re in the best position of anyone to put together these concepts. We can get 20 or 30 or 40 companies at a table to say, ‘Let’s agree on how we’re gonna build this, what we’re going to do.’”

What exactly is a blockchain?

A blockchain is a distributed database and decentralized ledger that maintains a continuously growing list of records, called blocks, in chronological order. In most blockchains, new blocks and the data within (transactions, smart contracts and so forth) are confirmed and verified through a consensus process called mining. This verification process removes intermediary validation and establishes trust without the use of a centralized authority.
After a block is confirmed and the data within it is verified through the decentralized consensus process, the block is time-stamped and added to the preexisting blocks in the chain; hence the term “blockchain.” Each computer in the system has a copy. The blockchain is encrypted, and it is considered immutable, which means that it is protected against tampering and revision. If implemented, this technology has the potential to simplify processes and drastically lower costs.
From The Institutes report: Blockchain Building Blocks: Creating a world of opportunity for insurance from an evolving area of technology


What Blockchain Could Mean For Insurance

Blockchain could have widespread ramifications across the insurance value chain, increasing market reach and customer personalization while also cutting cost. The Institutes’ RiskBlock initiative identified these ramifications for property/casualty insurance:

  • Insurance products, pricing and distribution may be wildly altered as blockchain proliferation and its associated smart contracts spawn new products — like parametric insurance and insurance implanted in transactional purchases — and realize efficiencies in the insurance process, thereby lowering prices and allowing for broader reach into emerging markets.
  • Underwriting and risk management may see data-sharing capabilities and risk registries emerge through blockchain-enabled provenance features and peer-to-peer insurance models, as well as shared industry ledgers.
  • Policyholder acquisition and servicing could become more efficient because new customer data will be increasingly confirmed at the origin. In addition, insurance life cycle documents will be easily updated with blockchain technology, avoiding repeat entry and verification and easing concerns with know-your-customer/anti-money laundering regulations.
  • Claims management itself could be simplified through smart contracts, while an industry-wide shared ledger could help with multilayer settlements and fraud inspection.
  • Finance, payments and accounting in insurance could also change. A distributed ledger like blockchain could allow for lower-cost international payments, more efficiency in subrogation via smart contracts, and new forms of raising capital.» Insurance regulation and compliance could be transformed, as regulators would be able to monitor all insurance variables in real time and potentially create an industry-wide proof of insurance ledger.


From The Institutes report: Blockchain Building Blocks: Creating a world of opportunity for insurance from an evolving area of technology

Glossary of Terms

Distributed Database: A database with portions that are stored in multiple locations and processing that is distributed among multiple database nodes.

Decentralized Ledger: Ledgers, or systems of record for a business’s economic activities and interest, that are dispersed instead of reliant on and housed within one third-party system, such as a financial institution.

Double-Spending Problem: The risk, particularly when digital currency is exchanged, that a person could concurrently send a single unit of currency to two different sources.

Smart Contract: Computer protocols that facilitate, verify and enforce the performance of a contract and that can be self-executing and self-enforcing.

Ether: The cryptocurrency that runs the Ethereum Virtual Machine and its blockchain. Although it is a token, like bitcoin, ether is the fuel that powers Ethereum’s computing platform. Ether is often likened to gasoline, as owners can offer ether to enact Ethereum-based smart contracts.

Public Blockchain: An open platform that anyone in the world can join, provided that they are able to show proof of work. A public blockchain is considered fully decentralized.

Private Blockchain: Only the owner can make changes. This is similar to the current infrastructure, in which the owner (a centralized authority) has the power to change the rules, revert transactions, etc., based on need.

Hybrid (or Consortium) Blockchain:  A mix of both public and private blockchains. The ability to read and write can be extended to a certain number of people/nodes. A consortium blockchain can be used by groups of organizations that work together on developing different models by collaborating with each other, thereby developing solutions while maintaining intellectual property rights.


Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Steve may be reached at [email protected] Follow him on Twitter @INNSteveM. [email protected].

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