The Present Use and Promise of Blockchain in Insurance

Twenty years ago, people who thought that the Internet would completely transform business processes would have been right, but they could also have lost a lot of money investing in “dot com” enterprises that failed.

Organizations today find themselves in much the same position in regards to the potential for “distributed ledger technology” (DLT), commonly but imprecisely referred to as “the blockchain.”

Distributed ledgers are synchronized, shared databases spread geographically across countries and organizations. “Blockchain” is one of the original distributed ledgers and the one that supports the “bitcoin” digital currency.

According to panelists at the Global Insurance Symposium, April 25-26 in Des Moines, Iowa, distributed ledgers preserve data in encrypted format that complies with privacy regulations while allowing permitted access to data. Using a shared ledger eliminates the need for multiple data bases and the errors that arise from maintaining and transferring data among them.

As a result, “the centralized database model of insurance companies and other organizations is becoming redundant,” said Caitlyn Long, chairman and president of Symbiont, a firm that uses DLT to develop “smart contracts” that can execute payments with little or no human involvement.

“Reporting [information] through de-centralized data standards doesn’t require each organization to maintain its own data and verify it against other database records,” she said.

According to Long, DLT is already helping insurers and other financial institutions “clean up the fluff in securities settlements” by identifying and resolving the multiple and sometimes conflicting ownership interests in securities.

On the liability side, Long said DLT facilitates automatic execution of parametric insurance contracts. As soon as a ledger indicates that a contractual parameter has been reached (say, a hurricane landfall of a certain intensity), a “smart contract” will automatically authorize and execute the required payments.

“Once the data comes in, it triggers the [coverage] and the payment goes out immediately,” she said.

As for data security, Long said that DLT is “in general, safer than current database technology, which has multiple attack vectors (vulnerabilities) and firewalls that have all too often proven to be insufficient.

“Because [DLT] data is encrypted,” she added, “DLT is safer when a bad actor gets in” the data can’t be stolen or corrupted. Even if that could happen, there would be multiple records of the correct data on the various “nodes” with access to the ledger.

One of the defining features of DLT is that it allows an individual to establish a global identity that is protected by encryption, but can be made immediately available to individuals and organizations authorized to access the information.

This capability is helping to drive the development of “microinsurance” in developing countries, said Magda Ramada Sarasola, a senior economist with Willis Towers Watson.

Very poor people often do not have the personal and property attributes traditionally emphasized in a market economy (homeownership, car ownership, financial accounts, etc.). Shared ledgers can collect data from smartphones and other devices to help such people establish a stable, verifiable identity for employment purposes and to help them gain access to the financial system.

As one example, Ramada Sarasola cited that of a Mexican life insurance company that provides policies that automatically pay benefits to beneficiaries in Mexico if the policyholder dies outside the country.

That said, Ramada Sarasola added that “the hype (about Blockchain and DLT) is not helping because people are trying to tweak [DLT] and use it in areas it’s not intended for.”

Along that line, another panelist, Angus Champion de Crespigny, blockchain strategy leader for EY (formerly Ernst & Young), said that DLT is mature enough to be used to optimize existing operations, such as customer acquisition, transaction management, and process re-engineering.

Still to come, he said, are new and innovative applications being developed to provide value and services not envisioned before DLT was developed. That will necessarily involve a learning curve, he said.

“A lot of the concerns we hear now are what we heard about the Internet in the 1990s,” he said. “That didn’t mean the Internet was worthless, it just wasn’t ready for certain functions.

“The really big bang comes later.”