The rise of blockchain promises to bring disruption to commercial insurance by fundamentally reshaping principles and processes that have governed the industry since the 17th century. As such, brokers must assess the use of blockchain technology as a foundation to embrace the next big thing – and get ahead of the game.
Blockchain is a secure transaction-ledger database built on contemporary cryptographic tools, creating a secure yet open means of conducting business transactions. When combined with smart contracts, the result is a solution which can securely compute and record transactions in a distributed ledger, allowing automatic verification and collective agreement between parties.
Blockchain offers a more efficient alternative processes the insurance industry
developed as answer to the absence of mutual trust between affected parties and the lack of end-to-end transaction transparency.
These processes serve as a proxy for trust. At the heart of this proxy is the broker, whose fundamental role is to create trust, and bridge the gap between insurers, re-insurers and consumers.
Thus, blockchain has the potential to provide a secure, transparent and verifiable mechanism to execute transactions in a manner that replaces the traditional notion of utmost good faith with provable trust.
Embedding trust in the verification process
Blockchain technology works on a consensus-driven approach that requires more than one party in a chain to verify the authenticity of a set of transactions (a block) before a new block can be added to the existing chain. This approach essentially removes the need for two participants in a transaction to have history, or even to have known one another, as trust is embedded through the verification process.
Blockchain provides the means for transaction participants continuously to store, amend and share verified data in a transparent and immutable manner. Parties in a transaction work with, and have real-time visibility of, a “golden source”.
This single set of data negates the need for parties to manually manage and synchronize multiple ledgers in order to obtain an end-to-end view of a transaction. Without blockchain, this process can be costly and subject to human error which can result in further loss of trust between entities.
Unlike legacy systems and paper-based alternatives, blockchain is immutable, secure and considered un-hackable and tamper-proof. It reduces concerns around identification and fraud as it provides a “digital fingerprint” which creates confidence that all parties are indeed who they say they are.
Also unlike traditional ledgers, blockchain technology does not require centralized infrastructure or governing third parties such as a central bureau which, in themselves, can present resilience-related challenges around single-service providers and points of failure.
Driving new efficiencies
Blockchain-enabled smart contracts can play a pivotal role in enhancing and streamlining back-office processes. Blockchain paves the way for a cost efficient, streamlined back office that transforms a cumbersome multiple-touch entity into a low-touch seamless-transaction processor. But blockchain-enabled smart contracts are more than an automation technology.
They also bridge the disconnect between organizations, removing the need to synchronize systems used to manage the lifecycle of an insurance transaction. Specifically, they can reduce or even eliminate the need for reconciliation, as parties to a transaction work from a golden source of data. This in turn increases the speed of settlement.
In the same way, renewals can evolve from an expensive convoluted process into an automated one. From a regulatory perspective, blockchain-enabled smart contracts are able to significantly reduce compliance complexity across the lifecycle of a contract through the automated, immutable traceability of data.
Foundation for emerging technologies
The fundamentals of blockchain – trust, transparency and immutability, together with automation enabled by smart contracts – create a unique foundation for utilizing emerging technologies. The Internet of Things (IoT), new productivity platforms, application programming interfaces (APIs), smart advisors and advanced analytics are all contributing to the creation of digital ecosystems in which insurance players can interact and operate virtually.
For instance, configured on blockchain, an exchange could be created that provides a digital platform for brokers to submit risks for quote by insurers with whom they have no previous arrangement. The exchange would have secure encrypted user identifications acting as a decryption key, while smart contracts would orchestrate the quote-to-bind process.