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Blockchain in Insurance v1.4

by jcp

By: Nish Kotecha, Chairman Finboot

The insurance industry is not known for its technological leadershipbut it is waking up to a new dawn. Traditional practices are making way for digital tools, which are driving down costs and increasing productivity.

The Lloyds of London building stands tall but mostly empty as brokers and underwriters – much like the rest of us -remain cautious aboutface to face meetings with the Covid-19 Pandemic still looming. Leaders of both brokerage and underwriting firms describe a “chicken and egg” situation, with each waiting for the other side to commit larger numbers to the underwriting room, according to a recent article in the Financial Times.

Similarly, to open exchanges such as the London Metal Exchange and the London Stock Exchange, which are operating entirely online, the direction of the journey is set.But rather than resist change, the industry could look to it as an opportunity to adapt the way it does business and reengineer its processes around data.

Data is the new oil and for the insurance sector. It is the fuel that can transform the industry. Insurance is currently priced to adjust for the known and to some extent unknown errors, working on the premise that information is not accurate and the true state is only uncovered at the pointa claim is made. What if that practice could be reengineered?

Faced with data protection issues and increasing levels of fraud, a wave of insurance companies turned to Blockchain for a solution. These early adopters also realised the technology’s potential to spot gaps in insurance history, duplicationand mispricing.

Blockchain is the technology behind a distributed network of computers that can be used to store data securely but which, uniquely, has a single memory – a single source of truth. That means data cannot be freely copied and edited to create an alternative version of the truth, which is why Blockchain technologists refer to it as the “trust platform”.

In the first instance, the Blockchain can act as a database, storing records immutably and securely. As the technology has evolved, the Blockchain can also be used to automate transactions, using automated smart contracts which in essence are lines of computer code that can be programmed to execute a task if certain parameters are met. For example, to pay a claim or renew a policy.

By storing data on the blockchain, insurance companies can reduce the risk of human error when completing tasks like processing claims or updating records. For example, someone could forget to switch out a name on an insurance policy. When trying to find the original policy, they might accidentally process it with someone else’s information, creating a dispute down the line. Human error makes paying out  forclaims very difficult – and claims are often processed manually rather than by machine , increasing the room for error.

Consider a world where each asset has its digital twin, otherwise known as its digital passport. The passport provides the information required to more accuratelyassess the condition of the asset and therefore its insurance value. The passport can incorporate this value and any live updates and existin an ecosystem separateto the owner.

The passport with the history of the asset can move between owners while the details of the asset such as its history including claims, values, etc. stay intact, secure and immutable.The digital passport can then be accessed by underwritersto support their assessments and also enables the insurance to be embedded within the asset, see Tesla, GM, etc.

This may sound futuristic but thanks to Blockchain, the technology to do it exists today.

Digital Passports can also be customer facing, whereby a passport can be used to store the history of insurance policies that a customer has bought and accrued over time. The customer could then add their personal details, known by financial services providers as KYC (Know Your Customer) information,to be saved withinthe passport and give permission to the appropriate insurer to access the details required when applying for an insurance policy. Customers are always looking for ways to make their lives easier and faster particularly as we now juggle more than ever, and the boundaries between home and work life are blurring.Also, digital passports could store medical data for use by Health Insurance products. Using technology, theinsurance industry can better streamline processes and reduce time, hassle and error for both provider and customer.

To achieve this vision, we need to build a set of interconnected networks where data can be shared to those with the right permissions in a compliant, safe and secure manner. In essence, a network of network’s where each party can finally trust what they are being told because the history is stored and is immutable. Discrepancies can be flagged, and cover can be priced or refused immediately, all without needing to share the personal details of the customer.

Blockchain can also be the fabric on which innovations such as real time analytics and Artificial Intelligence(AI) and Machine Learning are built. Each AI system relies on trustworthy data to access. Enter Blockchain.

Blockchain is reengineering business processes and systems to enable a secure, trusted environment of data management and sharing between parties in a trusted way. This will allow organisations to exist beyond their current boundaries.

Automated insurance can power the gig economy which has been defined by the pay-per-use model. Whether it’s cars, bikes, homes, travel, etc. why pay for a year when you only need a week. Technology has the potential to revolutionise and modernise the insurance industry and how we need, use and pay for insurance. It makes pay per use insurance possible and blockchain has the secure, accurate data along with the ability to issue policies automatically (smart contracts) without human intervention. This will drive down costs and make small, specific use and short duration policies practical.

The reengineering of the industry is overdue. Customers are demanding more value for less with insurance in the same way they are shopping for clothes or household goods. Given retailers are also selling insurance, the customer approach is no surprise. Insurance is about data, and Blockchain can deliver data you can trust.

While I hope that the famous Loss Book, introduced in 1774 torecord the details of every ship lost, will remain in situ in the Lloyds of London Underwriting Room… I wonder if it’s just a matter of time before we see aversion digitised on a Blockchain for safe keeping.

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