By Imran Gulamhuseinwala, Partner, Ernst & Young LLP.
Disruptive technologies such as blockchain are evolving rapidly. The blockchain was initially created as the pragmatic solution to the inherent problems of anonymity and double spend in the distributed Bitcoin ecosystem. Nowadays, these distributed ledger systems cover the entire value chain from customer wallets and client-driven applications to transaction and money exchanges.
So, what exactly is blockchain? Unlike a traditional database where data entries are changed directly, the blockchain acts as a transaction history where new transactions are added to prior records without erasing any past transactions. With the appropriate encryption rights, anyone can access the ledger and verify past transactions with confidence which negates the need to trust the participants in the original transaction. In addition, the blockchain is “distributed”, which means there is only one version of it, albeit multiple copies are accessible in real time.
In short, the advantages of blockchain are:
- Access to a golden source of transactions providing a basis for non-repudiation, governance, fraud prevention, financial data and reporting.
- Accurate and timely notification of changes driving improvements in aggregated risk and capital opportunities, as well as big data strategies.
- Ability to integrate an ecosystem of third parties to reduce the costs of their global platforms, improve customer and market reach and develop new propositions.
For example, imagine an insurance policy between two parties where the transaction (or collection of identities, confidential data and contract) is entered into the blockchain ledger. When a future payment is made, contract amended or claim submitted, the integrity of that transaction can be verified independently from the transaction participants, because every party has a copy of the shared ledger. In the case of complex multi-party reinsurance contracts (where data is aggregated, reused and risks passed from participant to participant in a complex negotiation), there is only a single “view” of the source risk data.
A world of opportunities
Insurance in today’s society is based on a chain of trust between clients and insurers. This bond of trust is founded upon an intangible “promise to pay,” and a unique combination of expertise, service quality, capital and security. However, a “trustless” system that reduces the need for identity management, ownership and management of data can provide long-term strategic benefits to insurers and customers, such as:
- Fraud detection and risk prevention: Blockchains can help eliminate error, negligence and fraud by providing a decentralized digital repository to independently authenticate customers, policies and claims. This displaces the roles of third parties, prevents duplication and provides a verifiable record of all transactions. Based on a blockchain’s ability to provide a ledger and encrypted personal data, insurers can reduce fraud and liability associated with immediate payments across borders and multiple currencies.
- Innovation via disruption: There are several ways in which blockchains can help innovate the insurance business model. For example, a number of leading global insurers are developing alliances with payment business models (and Bitcoin technologies) to achieve capital efficiencies with single global ledgers and to expand their networks. Driving automation to capture risk data in facilities and contracts also offers new opportunities to build market knowledge, automate payments and attract financing risk. In addition, blockchain technology will likely power innovations in micro-insurance and micro-finance. These peer-to-peer networks for mobile payments of premiums, claims, loans and other transactions will pass from mobile phone to mobile phone in a smart contract-based cloud environment and require authentication of contracts and customers in new markets to operate distributed authenticated corporations.
- Cyber liability: Blockchain adds a new real-time surveillance capability for security professionals enabling digital assets to be verified independently and in real time.
All that glitters is not gold
But despite all the opportunities there are at this stage, ongoing concerns around blockchain over scalability, implementation capability, practical integration with established businesses and governance structures exist. Regulators are concerned that the core infrastructure is unstable, the protection against data theft are unproven and the legal enforceability of smart contracts is untested.
In a nutshell, blockchain has the potential to transform the way the insurance industry functions, creating a level of transparency and accountability not previously possible. Insurers have to face the reality of the disruptive forces in their market and make sure they initiate the necessary steps to adapt, using this new technology to its fullest.