Will Blockchain Change the Insurance Market?

Blockchain is emerging as a potentially disruptive force capable of transforming the insurance industry by making transactions faster, cheaper, more secure and transparent

Ramy Caspi
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Blockchain is emerging as a potentially disruptive force capable of transforming the insurance industry by making transactions faster, cheaper, more secure and transparent. New research from Long Finance, sponsored by PwC and conducted by Z/Yen, shows the wholesale insurance market is enthusiastic about implementing blockchain solutions. The report is based on interviews with brokers, insurers, reinsurers, regulators and trade bodies from across the global wholesale insurance market.

With cost reduction and improved efficiency, blockchain could be a transformative technology changing the way the industry operates, enabling revenue growth in the sector as higher-quality service leads to new business, and the potential for blockchain to deliver substantial value to financial services is enormous. For example, recent estimates have found that in banking, consistent use of blockchain in KYC/AML checks alone could save $2.5bn of the estimated $10bn global processing costs in the sector.

Blockchain is emerging as a potentially disruptive force capable of transforming the insurance industry by making transactions faster, cheaper, more secure and transparent.

Some of the First Mover Insurers (Trialblazers) are looking to blockchain to help drive their wider transformation agenda by focusing on new access to trusted information and new business models. These Trialblazers not only see the value in participating in the broader financial services blockchain ecosystem, but they also see blockchain as an opportunity to improve efficiency, lower the costs of transaction processing, enhance the customer experience, improve data quality, increase trust between parties and support auditability, among other benefits.

Aegon, Allianz, Munich Re, Swiss Re and Zurich have launched the Blockchain Insurance Industry Initiative B3i aiming to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services. If blockchain technology proves viable, it could streamline paper work and reconciliations for reinsurance and insurance contracts. It also has the potential to accelerate information and money flows, while improving auditability.

At AIG they announced their first successful blockchain pilot in collaboration with Standard Chartered Bank and IBM. AIG recognised the potential for a blockchain solution for its multinational insurance process, and so the pilot focused on whether a multinational insurance policy covering four countries could be digitally coded onto blockchain as a smart contract. In successfully proving that this was possible, AIG now have a foundation from which they can work to realise what they believe is the true potential of blockchain enhancing trust and contract certainty for their clients.

Jason Richards, Head P&C Business Management, said: "Technology is already disrupting the wider financial services world and is now starting to make its mark on insurance. We want to be at the heart of these developments and see Blockchain as one of those potential catalysts for change. By actively creating partnerships and making strategic investments we can build smarter solutions together with our clients."

Blockchain offers huge potential for enabling digital contracts and transactions amongst multiple parties to be executed in a secure, transparent and auditable way. By establishing trusted relationships among all participants, Blockchain could provide a consistent, automatic contract execution environment where transactions and contracts are stored on a shared ledger, thus reducing the administrative workload of multiple stakeholders to ensure contract consistency and execution.

What is Blockchain?

Blockchain is a data structure that allows for a secure digital ledger to be produced and shared among a network of various computers/devices. The ledger can be accessed securely across the network, without the need for one central authority. Once data has been added to the ledger, it is intended to remain there. As such, all users of the network must approve transactions before they are recorded and verified. Blockchain offers transparency, as all users of the network may access the most up-to-date version of the ledger. In Mckinsey & Company’s “Blockchain in Insurance – opportunity or threat” white paper they note that whilst insurance generally lags behind the banking sector technologically, it is uniquely positioned to benefit from the use of Blockchain.

At its core, blockchain is the latest technological advancement which enables the insurance industry to do what it has always done: record transactions and in doing so provide certainty. The potential economic value of blockchain is that it could dramatically improve the ease of transacting whilst at the same time increasing the level of visibility and trust for all parties involved.

On a more technical level, blockchain is a mutual distributable ledger which facilitates the process of chronologically recording transactions and tracking assets between parties in a business network. Each new transaction, or block, is validated by every party in the network to ensure there is consensus about what is being recorded. Once validation has been given, no block can be tampered with or changed; even if a mistake is made, it can only be rectified with a new block, meaning both the mistake and its correction are recorded in blockchain for all parties to see. Transactions are facilitated by smart contracts; digitalised legally binding documents coded onto blockchain.

The potential to dramatically reduce transaction costs and operational friction, whilst simultaneously increasing the level of trust and transparency, means there is no shortage of real world examples to illustrate the possible uses and benefits of blockchain across a multitude of settings.

The top challenges where blockchain can be leveraged by insurers:

  • Underwriting: Accepting liability for commercial risks involves mitigating exposure to the insurer to the extent affordable premiums can be offered to the insured. Limiting exposure involves finding other more efficient risk pools to recede risks at a lower price. The options available for recession are limited by the insurer’s ability to share information about the insured as well as rigid standards of risk recession.
  • Claim settlement: Settling claims is often a lengthy and complicated process. Pools of property and casualty (P&C) risks are usually shared by multiple parties, including insurers and reinsurers, who are expected to jointly indemnify the insured of losses to the extent of the insured’s interest. However, the risk is distributed across complex layers of paper contracts with very little transparency and information sharing between stakeholders, leading to inefficiencies from cost and time perspectives.
  • Fraud and abuse: Inspecting and analyzing enormous amounts of structured and unstructured data to uncover fraudulent activity is a daunting task.
  • Cost reduction: By comparing the process of record keeping, Blockchain has the potential to vastly reduce costs in the insurance market. Santander has suggested that Blockchain could reduce annual costs by up to $20bn for finance firms by 2022. It is likely that Santander based this prediction on the challenges posed by complex systems and paper-heavy processes within the insurance sector. Having a digital ledger would provide a single secure system accessible to multiple parties, such a system would be simpler and cheaper to operate in the long-run. The substantial investments into the development of Blockchain supports the benefits it could bring in terms of cost, security, and simplicity. However, the challenge will be when it comes to implementing the process on a complete industry scale, there will need to be continued wide scale testing before insurance firms officially put into practice Blockchain technology. 
  • Anti-Money Laundering (AML) and Know Your Customer (KYC): AML and KYC requirements must be met by all parties involved. PWC and Z/Yen (a London based commercial “think tank”) has created a Blockchain prototype that would make the current manual insurance documentation process quicker and more effective. The idea is that customer documents will be stored whilst allowing the clients to view and control their records. The insurance companies involved will be entitled to access the files for a set period of time only.

Insurance Type Blockchain Programs

  • Peer-to-peer insurance: Blockchain has the power to transition new and existing models of insurance, including P2P insurance, parametric insurance and microinsurance, into a new digital age. Blockchain is powerful because of its secure platform connecting capabilities. New distribution methods like peer-to-peer insurance (P2P) could end up restructuring the entire market. P2P insurance empowers policyholders to a greater portion of the premiums rather than the individual private wealth managers working to produce returns for insurance companies. A number of well-funded startups are already beginning to stake their place in the P2P insurance market. One example, Dynamis, is a peer-to-peer supplemental unemployment insurance protocol that uses the policy holders’ social capital to replace underwriters. Enigma, enables different parties to jointly store and run computations on data while keeping the data completely private. In the foreseeable future, specific P2P insurance platforms may begin to use smart contracts to set claims and match demand between consumers in an online market, solving many of the current issues when transferring digital assets or accessing private data.
  • Parametric insurance: Another use case for blockchain is parametric insurance. Instead of indemnifying the pure loss, insurers would agree to pay a certain amount upon the occurrence of triggers within preset smart contracts. For example, if an earthquake were to occur in a given region above a magnitude of 5, the smart contract would automatically pay 20 percent of the insurance claim to policy holders. Contracts require mutually trusted third-party administrators (TPAs) to adjust. As parametric insurance becomes popular, its process will likely improve to play a key role in the widespread adoption of smart contracts. Product-creating startups like Rainvow can be used to create cross-border risk pools, allowing individuals from all over the world to access its exchange protocol via digital currencies. Rainvow’s Ethereum platform facilitates niche coverages to automatically compensate unforeseen transportation costs on rainy days. Platform-creating startups like Factom facilitate highly specific insurance policies. These systems allow TPAs to create triggers or oracles for smart contracts, promising to make parametric insurance easier and more adoptable by insurance carriers. The fast growth of IoT-based technologies and sensors have fueled startups and corporations, giving access to real-time data that may ultimately give way to new methods of settling insurance disputes.  Automobiles could be assigned tokens by their manufacturers; rather than having the incident go through an insurance company, vehicles could adopt tech for cars to assess driving accidents automatically. A fender-bender would trigger instant compensation within the smart contract based on sensor and party data.
  • Microinsurance: Blockchain has several perceived benefits in microinsurance, as well. It can enable trust between peers to increase transparency for populations living in remote regions of the world. Its beauty lies in its simplicity. The virtual nature of the transactions could side-step governmental bureaucracy to make geographic limitations irrelevant within its context. These features make the future of microinsurance very appealing. Helperbit, an Italian blockchain startup, uses the blockchain protocol to enable philanthropists to donate digital currencies to underfunded, hard to reach nonprofits in remote regions of the world. It even allows people to trace their donation and the manner in which it is used. Their risk assessment platform allows Good Samaritans to pool their money while limiting fraud exposure.


Digitizing the insurance value chain through the use of blockchain and distributed ledger technologies (DLT) has the potential to revolutionise the insurance market, from the way insurance products are distributed, underwritten and administered, to the way the market is regulated.

Perhaps even more exciting than the benefits of digitizing the distribution chain is the potential for innovative new products and new business models to transform the industry. Much like the expansion of applications for the world wide web from two initial use cases at its launch - sending emails and file transfer - to the seemingly limitless use cases available today, distributed ledger technologies present a fertile ground for an explosion of innovation in the insurance industry.

Not only does blockchain offer the promise of cost reduction and efficiency, but it could also enable revenue growth, as insurers attract new business through higher-quality service. Relationships with stakeholders, ranging from customers to regulators, will improve as errors are reduced and accuracy improved. It may even be possible to reduce capital requirements as insurers on opposite sides of a transaction proceed to agreement more quickly. Above all, blockchain technologies can help the wholesale insurance sector fulfil its role in underpinning the global economy more effectively. Just as blockchain is being pursued as a force for positive change in other areas of society – from identification for refugees to better public service delivery – it can also help wholesale insurance to discharge its responsibilities for the common good.

Adam Woodhouse, director of CIO services at KPMG points out that the insurance industry needs to invest a lot more to obtain the top-to-toe overhaul of process that is need for the benefits of digitalisation to be realised.

In the longer term, the potential disruption to the insurance industry from blockchain technology is staggering. Blockchain technologies will enable the creation of assets in a new, distributed form — such as documents, credentials, assessments and transactions — that span the entire insurance value chain. These distributed assets will challenge the traditional insurance business model.