Article Synopsis :
Blockchain is a distributed ledger technology with huge innovation potential in all areas of financial services. Most blockchain use cases have been identified in banking, but insurance use cases are emerging in product innovation, fraud detection, pricing, and administrative cost reduction.
In “Blockchain in Insurance – Opportunity or Threat?“, McKinsey explores blockchain concepts, use cases, threats, and actual implementations in insurance.
With blockchain-related startups growing to more than $800m last year, the McKinsey Panorama FinTech database currently registers over 200 blockchain-related solutions, of which about 20 provide use cases for insurers that go beyond payment transactions – either as specific applications or as base platforms. AXA, Generali, and Allianz are among those actively investing in the technology.
How Blockchain works:
Blockchain technology offers the following benefits:
- Decentralized validation.
- Zero redundancy in transaction updates.
- Immutable storage with full transparency.
Potential blockchain use cases in insurance include:
1. Growth through innovation:
- Increased customer engagement: Allowing customers to handle their own data removes the problem of data privacy and protection. Startups like Tradle are working on blockchain solutions to help simplify and accelerate the customer onboarding processes. Startups like InsureETH offer a platform for P2P flight insurance. Dynamis is developing a P2P supplemental unemployment insurance platform utilizing social media profile data for verification of employment status.
- Emerging Markets: Blockchain-enabled smart contracts in micro-insurance help cut handling costs through automation.
- Internet of Things: Blockchain-enabled connected device platforms automate accident detection, repair progress and related payments.
2. Fraud dectection. Blockchain can be used as a cross-industry, distributed registry with internal and external customer data to:
- Validate authenticity, ownership, and provenance of goods as well as the authenticity of documents (e.g., medical reports).
- Check police theft reports/claims history as well as a person’s verified identity and detect patterns of fraudulent behavior related to a specific identity.
- Prove date and time of policy issuance or purchase of a product/asset.
- Confirm subsequent ownership and location changes.
3. Cost reduction through the automation of standard processes such as verification of policyholder identity, contract validity, and auditable registration of claims data from third parties as well as claim pay-outs.
The limitations of blockchain technology include:
- Scalability: The large amount of data generated during transactions can make scalability a challenge.
- Security: New technology will result in new types of attacks which may not be mitigated with traditional database architectures and methods.
- Standardization: Blockchain technology is still developing and standardization of protocols will take time, which makes it important to think before investing.
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Digital Insurer's CommentsIn 2009 Bitcoin’s obscure implementation of blockchain as the backbone for digital currency transactions was considered experimental. Five years later financial institutions and central banks (along with VCs) are showing serious interest in applying blockchain beyond Bitcoin, and consortia such as R3 have been established. Some industry observers are calling blockchain the greatest revolution since the advent of the Internet.
Implementation of blockchain has a long-term horizon that depends on network effects and regulatory conditions. Also, the benefits and limitations of the technology need to be fully understood. Considering all of this, now is the best time for insurance thought-leaders to fully investigate blockchain technology and its potential. A little R&D now can go a long, long way later in a disruptive technology with potentially massive upside.
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