When the internet started to gain widespread commercial use in the early 1990s, few could have predicted the massive shift that it would have on our lives. Its power has been harnessed in just about every corner of industry and commerce, significantly improving the flow of information in many respects, while at the same time, creating a host of security and privacy issues. Now, a new technology, which sits atop the internet, has the ability to cause a seismic shift in how we interact with data, and will most likely meaningfully impact virtually every person and industry. Blockchain has been called, “transformative” “and “revolutionary” for good reason. And perhaps no industry will be better able to leverage its benefits more than the data driven insurance industry.
In its simplest terms, Blockchain is a way for people to immediately share trusted information over a peer-to-peer network without a central administrator. If and when this technology is implemented effectively in the insurance industry, many manual tasks, such as claims processing, will become instantaneous. The time needed for the underwriting of everything from auto insurance to life insurance to property insurance could be reduced to virtually real-time. Immense volumes of data will be shared amongst insurers in a way which did not seem possible just a few years ago. For many, understanding the technology behind Blockchain is daunting. But just as most people who use the internet do not fully understand the technology behind it, one need not fully understand the technology behind Blockchain to realize the significant impact it can have. However, let’s try to understand what Blockchain is, and its potential impact, in a way that most of us can relate to.
Let’s say that five companies wish to share information, on an ongoing basis, of all transactions that they enter into with the same third-party. What would that process look like today? Well, an employee of company one might enter their company’s transaction information onto an Excel spreadsheet (a ledger of transactions) and send it along to company number two, who would do the same thing, and pass it along to company three, and so on. Every time one of the five companies had a new transaction to enter, it would have to request that the master spreadsheet be sent back to it from whomever had it so that data could be inputted. That process would quickly become slow and inefficient. Now, imagine that instead of five companies, 50, 500, or 5,000 wished to track such information, and that the information consisted of millions of transactions. The process has now gone from inefficient to virtually impossible, and the problems are obvious. First, only one user could control the spreadsheet at any one time. Second, a rogue employee or other nefarious actor might change data on the spreadsheet without the other parties knowing. And finally, the spreadsheet would always have a single point of failure, meaning that if the computer of the company that had the latest version of the spreadsheet were destroyed, so too would be the spreadsheet.
In essence, a Blockchain is just like our spreadsheet – it is a digital ledger of transactions or records. Except unlike our Excel spreadsheet, this ledger exists in real-time, and synched in duplicate, on every participating user’s computer, whether it be five computers, 500 or 5,000. To create the ledger, our employees would use an App or web interface to set up a private Blockchain (otherwise known as a permissioned network), meaning that an invitation is needed to join. Once joined, each member of this private Blockchain would have a private encryption key (think password but stronger) that they would input on the App or web interface in order to gain access and enter their transaction information. The network of other computers in this Blockchain would verify the information came from a valid user (using a public encryption key which is associated with the employee’s company), and once verified, the transaction information (called a block) would be added to the ledger (called the chain) which exists on every user’s computer. All new entries on our employees’ Blockchain would be timestamped and electronically linked to prior transactions using sophisticated cryptographic algorithms, ensuring that the data could not be tampered with, and that the record is absolute and irreversible.
Importantly, since this chain of information exists in duplicate on every computer in the network, it has no single point of failure, unlike the Excel spreadsheet noted above. If a hacker tried to alter any information on a single copy of the Blockchain ledger, the network of other computers will reject the alteration as inconsistent. Thus, in order to tamper with this Blockchain, a hacker would have to hack every encrypted transaction in the chain on every disconnected computer on the network at the same time. Doing so would be impossible. Our employees now have an incontrovertible, irrefutable and real-time record of all transactions which they can view at any time. No central authority is needed to input, verify or maintain the information.
The keys to Blockchain are that it is peer-to-peer, encrypted and eliminates the need for a middleman to verify transactions. So, musicians can share (sell) music on the Blockchain without the need for music companies; passengers can connect with a driver on the Blockchain without the need for Uber; contracts can automatically execute without the need for lawyers; and as we have seen, individuals are able to share digital currency on the Blockchain (Bitcoin) without the need for banks. The implications for the use of this “middleman-less” technology in the insurance industry are huge. While we will explore these implications in-depth in future newsletters, here is a brief summary of some of them:
Smart Insurance Contracts
Smart contracts have the potential to be more game-changing than perhaps any other use of Blockchain technology. A Smart Contract is a self-executing piece of computer code containing contract terms that is stored in a Blockchain, protected from alteration or deletion and automatically executed once certain contract conditions are met. These contracts have a wide range of uses in the insurance industry. For example, AXA Insurance recently introduced a flight delay insurance product, called Fizzy, that uses the Ethereum Blockchain to store insurance information and process claims. Customers can use Fizzy to insure their trips if their flight is delayed by two hours or more. The Blockchain stores a record of the insurance contract itself within a smart contract, and also serves as a vehicle for triggering the payment to the customer once the two-hour mark is passed. The entire process is done electronically and automatically, with no wait, no documents and no human participation. This type of parametric insurance can be especially useful in insuring against natural disasters, with payments being automatically made in the event of triggers such as earthquakes of a certain magnitude.
Fighting Insurance Fraud
One of the key ways to fight insurance fraud is through the sharing of information amongst insurers. It is in this area where the Blockchain can prove invaluable. While there are currently centralized (and vital) organizations in which insurers participate in order to share information, the Blockchain can significantly improve the volume of, and speed at which data can be shared. In a paper entitled “Fight insurance fraud: data sharing with Blockchain technology,” IBM set forth rather succinctly how the power of the Blockchain can be employed to fight fraud. While the entire paper is worth a read, the following excerpt is squarely on point: “By using Blockchain, insurers can create receipts at different points in the claims process, resulting in an immutable, auditable record of all claims activities, which can be revisited by all parties including the regulators. This could lead to lower transactional cost, lower transaction risk and trustless computation. These new technologies make it possible for a group of independent parties to work with universal data sources, automatically reconciling between all participants—customer, broker, insurer, co-insurer and reinsurer. All users could have a distributed, single view of the entire exposure data chain.” As further noted by IBM, Blockchain may be useful in reducing fraud related to the integrity of a policy or claim or vehicle (or any asset). By maintaining the integrity of the asset through various owners, Blockchain technology can minimize counterfeiting, double booking, document or contract alterations.
Property, Automobile and Personal Articles Insurance
From everything from cars to homes to jewelry, the process of tracking and verifying changes in ownership can be time consuming and document intensive (think title searches for homes). Yet, such verification is vital for insurance. Enter Blockchain; with this technology, every piece of information relating to an item, including ownership, can be kept in an incorruptible and permanent ledger. In fact, a company named Everledger has already implemented this technology by placing 1.6 million diamonds on a Blockchain. Entries on this digital ledger include dozens of characteristics for each diamond, including, certificate number, weight and color. Everledger is using Blockchain to create a permanent, digital ledger of not only diamonds, but art and other valuable items, and is able to use the technology to provide insurance companies, claimants, consumers and other stakeholders with a verified and immutable record of an item’s authenticity and ownership. This use of Blockchain can easily be applied to other types of items that insurance companies provide coverage for.
Life Insurance and Health Care
With Blockchain technology, the entirety of a person’s lifetime medical information and records can exist in one place. An insurance applicant would merely provide their private key to an insurer, who could then immediately verify the authenticity of information. Insurance applications would be approved virtually instantaneously, a far cry from the 30 days or more it now takes with documents having to be assembled and medical providers having to be contacted. In addition, healthcare organizations can use Blockchain to securely create, and share, a comprehensive electronic healthcare record for all of their patients. Patients and other authorized users would merely have to provide their private key to give access to physicians and insurers in order to view the entirety of their health records.
It is clear that Blockchain has the potential to automate and streamline insurance methods which are currently being performed with old and outdated systems and, in the process, upend the entire industry. What isn’t as clear is how long it will take for the technology to gain widespread adoption, though it is likely at least 10 or 15 years away. Nevertheless, those insurers and other stakeholders who begin thinking about some of these issues now will be ahead of the curve, and be able to help evolve and guide use of the technology, much as early adopters of the internet did.
