Blockchain technologies could revolutionize the global economy. As a fast paced emerging technology, there is little doubt that it offers enormous potential, however hurdles remain before that potential can be realized. That is not stopping companies from spinning up pilots or positioning learnings in patent applications.
At this point, it is more a question of when than if.
This blockchain primer aims to inform and inspire the reader to consider the art of the possible. What could blockchain technologies mean for our industry?
In recent decades, society has become accustomed to frequent technology innovations. Insurance has benefited from these breakthroughs, but the industry’s basic business model hasn’t changed. How long will this hold true? Our customers and workforce increasingly demand a user-friendly, fast, transparent, and digital experience. Where does this lead? What can we learn from other industries like banking?
This is an opportunity for insurers and others to think about alternative business models and consider how technologies like blockchain could enable our industry. Blockchain technologies are expected to improve the customer journey, drive new innovation, and create new efficiencies.
What are Blockchains?
A blockchain is a public ledger of all transactions that enable parties to safely trade and transact without going through a trusted third party. This approach is revolutionary in that 1) the ledger is maintained in a distributed fashion providing greater transparency and 2) the approval of transactions is crowd-sourced to the blockchain network as a consensus-building process.
The primary advantage of a blockchain is that by using advanced cryptography, the transactions are many orders of magnitude more secure compared to legacy database transactions. Furthermore given the distributed nature of ledger, all authorized participants on the blockchain network can easily verify the authenticity of previous transactions, making it much more transparent.
For example, assume that funds are to be transferred between two banks. A traditional approach would leverage a third party to oversee the settlement process. Assuming the settlement oversight comes from a clearing house, the funds would flow from the originating bank through the clearing house and on to the receiving bank. Along the way, several ledgers would be updated and reconciliations performed.
In contrast, what if there had been only one communal ledger (i.e. blockchain)? The same oversight could have been provided by the consensus of the network. Through an established consensus, the transaction could have been approved without the need for the clearing house. The benefits of this blockchain use case primarily comes from the potential savings in settlement time and fees.
Blockchain transactions are settled by the network, eliminating the need for trusted third parties.
The world has become more connected as our customers and workforce embraced internet, mobile, and social media. This trend of digitizing the world around us has changed how we work and consume. Blockchain technologies promise to take this one step further by changing how we trust.
In time and with continued investment, blockchain technologies could become the foundational technology of the digital world. Banking is paving the way. Insurers should consider strategies that balance the newness of the technology with its possible product, distribution channels, and back-office implications.
Consortiums, first banking, now insurance
In 2015, venture capitalists invested $500 million in blockchain startups. Blockchain will fundamentally recreate the financial services industry within 10 years. The established financial services industry is taking note and making big moves.
According to industry source Coindesk, in the first quarter of 2017 Venture Capitalists invested $107M in blockchain startups, while public Initial Coin Offerings (akin to crowdfunding) raised $36M for blockchain projects. Jalak Jobanputra, founding partner of Future Perfect Ventures, adds “The low-hanging fruit for blockchain startups are industries that are predominantly paper-based and time-intensive. For instance, mortgage origination or insurance could be a good play, and the latter is becoming the new industry buzzword.”
New York based R3 CEV, a private blockchain consortium of 42 of the world’s largest banking institutions, has announced the addition of two insurers MetLife and AIA. A group of 15 insurance and reinsurance firms recently set up their own private blockchain consortium; B3i – in which RGA is a member. B3i’s purpose is to decrease the cost of reinsurance treaty administration, and have spent the early part of 2017 working on building a minimum viable product. Private networks, such as B3i and R3 can protect competitive value and create significant value. What additional value will the first movers capture?
Despite great investment and strong momentum, the financial services industry has yet to see meaningful rollout of blockchain based products or services. Banks are pivoting from innovation in the blockchain technology to innovation in business models. Relatively few leaders are announcing or beginning small-scale customer-facing pilots. This is expected to accelerate over the next 12-18 months, but the number of remaining adoption hurdles (ROI, governance, process re-engineering, standards, regulatory, security, etc.) hint that the adoption will likely be much slower than some initially expected.
The Modern Consumer
Knowing what customers want and putting their needs at the center of the customer journey improves more than just the customer experience. Blockchain can be a strong enabler when meeting expectations of the modern customer including privacy, transparency, ease of use, and personalization.
- Privacy – The policy holder’s identity is managed outside of the blockchain in an identity management service. This helps ensure compliance with privacy laws and regulations, while at the same time providing companies with a single view of the customer when needed.
- Transparency – The rich history of events related to the customer and the authenticity of their goods are registered on the blockchain, providing context. This additional context benefits both the policy-holder and the agent in addressing the customer’s needs.
- Ease of Use – For extremely simple products, the blockchain technology will reduce transaction friction through automation. These simple products will need to be easy to understand, record, and programmatically execute. Claims could be automatically paid based on data from third-party sources rather than statements by the customer, thus reducing ambiguity, fraud, and administrative overhead.
- Personalization – Identity/blockchain analytics combined with new digital distribution channels allow increased personalization/localization of products and the customer experience.
How do these statements align with existing industry modernization efforts? What new business models might emerge?
Thoughts from RGA
RGAX (RGA’s dedicated innovation incubator and business accelerator) has recently sponsored two hackathons in St. Louis. Given that at the core of blockchain technology is a distributed ledger, RGAX believes that similar to existing databases, every industry vertical will require defining and customizing applications and infrastructure to suit their needs.
By giving an intentionally broad topic “Insurance and Blockchain” the next generation of blockchain developers identified problems and coded over twenty different prototype ranging from:
- Decentralized identify management – enabling users to monitor the accuracy to their digital identify across a blockchain, and control which intermediaries have access to which specific elements of their identify.
- Provenance in blood supply – creating an immutable audit log that can allow others to easily detect counterfeit blood, a particularly big problem in emerging markets.
- Crop insurance and frost protection – a smart contract that enables insurance consumers to automatically receive protection on a marketplace of potential investors.
- Facultative reinsurance markets – a decentralized blockchain workflow that enables ceding underwriters to request facultative reinsurance, and jointly analyze risk and enable a transparent transfer of the risk.
- Policy tracking and customer fraud warning – leveraging cryptographic security to create an immutable and transparent smart contract that can notify consumers of potential fraud and records the transaction onto the blockchain.
- Decentralized advisor recruitment –leverages a decentralized smart contract to allow potential advisors to individually design an incentive plan (e.g. paying off student loans) attractive to them, and administer it on a decentralized network.
These proof of concept businesses are just some of the potential areas beyond back-office efficiencies or payments that distributed ledger technology can underpin in the coming years.
The insurance industry has benefited from continued technological innovation, yet the basic business model has not changed. How long will this remain the case? A complacent industry is one ripe for innovation. The blockchain revolution is about so much more than the blockchain technology itself. Through decentralized transparency and automation, the speed of trust can be accelerated improving the quality of our relationships and transforming the way business is done.
“I believe that the next generation of insurance products and services will be built using blockchain protocols,” notes Tim Rozar, SVP, RGAX. “Blockchains enable all parties to improve trust and transparency, whether that is between consumers and their advisors, or policy beneficiaries and insurance carriers.”
There is a window of opportunity to shape this revolution. Do you know your capabilities? Do you know your weaknesses? Is this the time to disrupt before being disrupted? How will policy and regulation shape your approach? It’s up to each of us to decide how much of a role we want to play in defining the vision for our industry. Let’s make the most of this opportunity.