Blockchain has taken the global insurance industry by storm. Insurtech start-ups have begun to probe this emerging technology, and insurers and reinsurers have watched, explored, and tested. So far, however, blockchain remains a discussion topic more than an implementation effort. The likely reason for this is a lack of insurance industry knowledge amongst blockchain-focused companies. This is a challenge our industry is uniquely positioned to overcome.
The Benefits of Blockchain
The global insurance industry has taken an interest in blockchain because of certain fundamental benefits that the technology provides. Records written to a blockchain are permanent. They can’t be deleted. As a result, blockchain-based solutions provide a reliable audit trail, significantly reduced fraud risk, the opportunity to streamline policy administration and claim handling, and accelerated post-event activity (such as claim payment).
While still an emerging technology, it’s clear that blockchain addresses some of the most important difficulties the insurance industry strives to improve or remedy. However, the specific ways in which blockchain can help remain the subject of debate. Quite simply, sufficient solution development hasn’t occurred yet to show how blockchain can make a difference.
So far, several insurers have taken the initiative to develop relevant solutions. Undoubtedly, that will support progress, but it still shows the gaps that exist in the blockchain ecosystem.
The Cost of Insurtech Ignorance
Most of the blockchain start-ups I’ve spoken with over the past year have had to navigate the insurance industry themselves. Consequently, how they see and understand the space is disproportionately influenced by search engine optimisation strategies, trends in media coverage, and finding the ‘easy wins’ where insurance activity fits tightly with traditional applications of blockchain. Ultimately, this could wind up costing insurers the opportunity to source the right capabilities.
To date, the industry loss warranty (ILW) space has been the natural fit that blockchain start-ups have sought. It makes sense. The ILW structure—non-underwritten reinsurance contracts that trigger on an independent, third-party industry loss estimate—integrates cleanly into the smart contract framework that has become a popular application of blockchain. PCS® serves as the ‘oracle’—the independent external party that provides reliable information to the smart contract implemented on the blockchain.
The recent catastrophe swap that Allianz ART completed underscores the potential of this technology in the ILW market. And it could drive the market to complete similar risk-transfer transactions. After all, the first one is always the hardest. But is more ILW activity all we should really hope for?
The problems with the blockchain community’s movement into the ILW space are painfully clear. They have led to the risk that blockchain start-ups will begin to see the ILW market as the most relevant slice of the insurance industry. With only approximately US$4 billion in ILWs traded annually (two-thirds of which is U.S./Canadian catastrophe through PCS), the opportunity immediately becomes quite small, leading blockchain start-ups to eye larger sectors, such as banking and broader financial services, where there’s both more revenue potential and a history of early adoption.
As a result, the insurance industry stands to lose access to innovative thinking because of what’s ultimately a misperception of opportunity size. Fortunately, as an industry, we can fix this problem.
Your Start-up Education Checklist
For blockchain to live up to its potential in the insurance industry, we need to make it easier for the start-ups considering our sector to understand the challenges insurers face and the upside they stand to realise. Whether it comes in the form of industry consortia that drive the education of solution providers or through direct engagement with start-ups on a one-off basis, the insurance industry must take the lead. It’s incumbent upon us to make our needs and requirements clear to get the solutions that make the most sense—and to keep the blockchain start-up world engaged with insurance.
Integrating blockchain into insurance company operations starts the way any operational improvement initiative does: fully understanding and documenting the key challenges one faces and identifying potential solutions to them. From here, it’s crucial to open and maintain a dialogue with blockchain providers. This will give them the industry understanding they need to move beyond the ILW market and develop the types of products that insurers can use to manage claim dispute risk, reduce cycle times, cut overheads, and ultimately improve loss and combined ratios.
Blockchain technology doesn’t have to be a solution in search of a problem. The key is to work together with the insurtech community to ensure they apply emerging technologies such as blockchain to the right aspects of insurance operations in a manner that’s relevant, implementable, and scalable. Doing so will contribute to profitable growth for both insurers and the start-ups they choose to engage.