Insurers must look past the gloss and hype from other areas of finance adopting blockchain technology, and consider the real benefits and drawbacks of implementing these systems.
Blockchain technology has the potential to deliver huge efficiencies to financial services. Banks that have faced significant disruption, namely in their transaction facilities and payment processes, are beginning to develop their own blockchain systems in order to combat the issue. However, in an industry that is far more intermediated and trust-based than banking, how would insurers benefit?
Simply put, blockchain allows consumers to effectively “sign” contracts electronically – without the need for a trusted third party (such as a government, lawyer, or in finance, a bank) to verify the contract or transaction as valid and legal. For instance, this could be buying and trading shares, making a credit/debit card purchase, or transferring funds between accounts.
Blockchain creates a decentralized digital public record of transactions that is secure, anonymous, and unchangeable. Instead of a bank or other intermediary maintaining a private database of records, blockchain technology makes all records public by logging each transaction with a unique code and attaching this data to a “chain,” which is stored in a network that is accessible to all other participants which are part of the network. This means that if someone attempts to steal or cheat the system, they can be easily identified.
It’s important that insurers in the modern world focus on developing their digital practices, especially as most other areas of finance are digitizing their operations, and blockchain is quickly becoming a key factor in the financial sector. However, for insurers the question is do they really want it and will it provide the best solution for all insurance processes?
According to a report published by PwC on how blockchain technology would impact the industry, insurers are enthusiastic to see how the technology would improve placement procedures, the management of claims, and contract processes. The technology could also help minimize the number of fraudulent cases reported each year, especially in regard to the claims environment.
However, one of the biggest challenges is the very nature of blockchain – the fact that the system does not promote exclusivity, and the chains are shared and not stored by any single party or intermediary. The problem is that the industry is already data-heavy and the actions of brokers, insurers, and reinsurers are all interlinked; the introduction of blockchain may jeopardize these processes.
Secondly, re-architecting legacy systems would also prove difficult. Many insurers have become entrenched in tradition and their current business practices, and may have a reluctant approach to new information technology. As a result, a large cultural transformation will be needed in order to utilize any new capability.
Nevertheless, blockchain is a technology that is yet to be fully understood by those that currently use it, and insurers should remain cautious in their approach. Blockchain does have potential, and in the distant future, may serve more of a purpose within insurance. But the real costs and benefits are yet to be identified, meaning there is no reason for insurers to hurry into adopting the technology.
By Thomas McCourtie, General Insurance Analyst