Still on the starting block? Implications of blockchain for the Insurance Industry

Blockchain is a digital ledger technology that allows for secure and transparent record-keeping of transactions without the need for a centralised intermediary. It is a distributed database that is used to maintain a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data, and is open to inspection by all participants to the ledger. Once a block is added to the chain, it cannot be altered or deleted, making the blockchain tamper-resistant and immutable.

Blockchain technology is best known for its use in cryptocurrencies, such as Bitcoin, where it is used to securely record and verify transactions. However, the nascent technology has potential to enhance the business model of insurers, brokers and policyholders.

Potential benefits of blockchain

1. Transparency

One of the primary benefits of blockchain for the insurance industry is increased transparency. Policies can be complex and confusing for consumer policyholders and blockchain can be used to expediate and simplify claims handling. For example, the UK start-up InsurETH is developing a flight insurance policy that utilises blockchain and smart contracts. When a verified flight data source signals that a flight has been delayed or cancelled, the smart contract pays out automatically. This type of policy can improve trust between the insurer and customer, as the policies exist on a shared ledger that is accessible to both and there is little or no scope for dispute as to  when an indemnity should  be provided.

2. Fraud Prevention

Another issue within insurance, especially consumer insurance, is fraudulent claims. The ABI detected over 95,000 dishonest insurance claims in 2020 alone with an estimated combined value of £1.1 billion. Blockchain could significantly assist with preventing fraud by providing a secure and transparent way to record and verify claims made. While the process would require extensive cooperation between parties, it is perfectly plausible (and indeed likely in the future) that blockchain could substantially reduce fraud by cross-referencing police reports in theft claims, verifying documents such as medical reports in healthcare claims, and authenticating individual identities across all claims.

3. Efficiency

Underpinning the above two points is blockchain’s clear potential to reduce operational costs. The technology’s automated nature can cut out middle men and streamline the insurance process. Another UK start-up, Tradle, has developed a blockchain solution that expediates ‘Know your customer’ checks – a time-consuming process for companies and a source of annoyance for clients. Tradle’s technology verifies the information once, and then the customer can pass a secure ‘key’ to whoever else may have a regulatory requirement to verify identity and source of funds. This simple utilisation of blockchain saves time and money in what is usually a tedious process.

Possible issues

1. Participants (standardisation)

Blockchain’s potential impact may be impeded, however, by various issues preventing a revolutionary deployment of the technology. As pointed out above, there needs be a wide level of consensus for blockchain to work properly. There is currently no standardisation in the Market in relation to how and when the technology should be implemented, and participants are understandably cautious about making investment into blockchain when there is no guarantee that it will initiate efficient solutions (due to the current ‘state of play’). Consensus among competitors will take time to evolve. It is telling that the two companies mentioned above as ones who use blockchain are start-ups – the traditional Market is somewhat glacial.

2. Scalability

And even if the London Market effected a wholesale adoption of blockchain tomorrow, there could be issues of scalability. Blockchain relies on an ever-increasing storage of data, meaning that the longer the blockchain becomes the more demanding the need for bandwidth, storage and computer power. The data firm iDiscovery Solutions found that 90% of the world’s data was created in the last two years, and there will be 10 times the amount of data created this year compared to last. Some firms may be faced with the reality that they do not have the computational hardware and capacity to provide for the technology, especially when the blockchains will be fed by data that is ever-increasing in terms of quantity and complexity.

3. London Market use?

Finally, questions arise about exactly which insurance contracts stand the most to gain from blockchain. Consumers would certainly benefit from smart contracts with their home/health/travel insurance policies. But within sophisticated non-consumer insurance, where the figures are large but the number of parties involved is limited, it is questionable whether current transaction models need blockchain. Where there is trust between a policyholder and broker, and a personal relationship between the broker and the underwriter (as is often the case at Lloyd’s), it is unclear what blockchain would really add to the process. It is worth mentioning that in late 2016 Aegon, Allianz, Munich Re and Swiss Re formed a joint venture known as B3i to explore the potential use of Distributed Ledger Technologies within the industry. B3i filed for insolvency in July 2022 after failing to raise new capital in recent funding rounds. It seems, at least in relation to the London Market, blockchain will have a slower, organic impact as opposed to revolutionising the industry.

Dru Corfield is an Associate at Fenchurch Law