While blockchain technology has been around for several years, financial services firms are only now starting to look at its applicability. Many large banks are developing proof of concepts for their back-office processing and settlement functions, and several consortia are working to establish industry-wide processes and technology. Predicting the future impact of technology as new as the blockchain is always difficult, but several real-world scenarios could apply to the insurance industry.
Loss Control for High-Value Goods
Insurers covering high-value goods, such as fine art or jewelry, take on greater loss exposures related to theft and disappearance. A chain of transit could be established using a blockchain and other technologies, such as radio frequency identification (RFID) tags or global positioning system sensors, to track the ownership, transit, and receipt of the insured goods. All handoffs would be automatically entered into the blockchain and could be audited by the insurer, the insured, and any appropriate third party.
With the introduction of usage-based insurance, the need to track, transmit, and store large volumes of data has only increased. With a blockchain, it could be possible to develop a system in which a user establishes a payment method with the insurance company and, based on daily vehicle usage, make small but frequent payments through a blockchain.
Carriers that participate in reinsurance contracts or layered programs could use the blockchain to provide contract information and validation. For example, all carriers participating in a layered aviation policy could issue and submit coverage information to a centralized blockchain ledger, which each party could then access to confirm coverage. In the event that a policy was endorsed or canceled, the blockchain would be automatically updated, thereby reducing coverage questions and improving the claims adjudication process.
As insurers increasingly track and store their insureds’ usage data, their cyber liability risk increases as they gather more—and more valuable—data over time. The blockchain supports the ability to submit anonymous data to the ledger, which may provide a mechanism for users to submit their detailed usage data anonymously (and probably automatically through a mobile app). This data can then be aggregated and used to build highly localized loss experience models and custom products.
Many technologies require multiple users to participate in order to become valuable (i.e., networking effects). For example, Facebook is more valuable when all your friends participate, as opposed to just a few. Blockchains exhibit similar attributes, so establishing standards and scale will be critical for any successful use of the technology. Insurers can look to the banking industry as a model, which has already formed working groups, technology consortia and partnerships with technology companies to establish proof of concepts.
Insurers looking to use a blockchain should:
- Develop the company’s knowledge of blockchain technology by participating in industry conferences, reviewing published material, and consulting with technology partners
- Form a technology and business working group to determine possible use cases
- Investigate opportunities to partner with other insurance organizations to lower costs and increase standardization
- Establish realistic goals for new technology adoption and develop one-, five-, and ten-year road maps
As technologies converge, their value becomes greater over time. With the combination of sensor data, mobile apps and location-tracking tools, the insurance industry has a once-in-a-century opportunity to fundamentally transform many long-standing processes and products. Carriers looking to leverage these tools should include a blockchain in their transformation portfolio as another way to form a new data-driven backbone in their organizations.
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