Blockchain Technology in Insurance – McKinsey Report
Article Synopsis :
Will blockchain revolutize the financial services industry – or is it simply another overhyped and ultimately unnecessary/useless technology? McKinsey’s’ report “Blockchain Technology in the Insurance Sector” attempts to answer the question, exploring the current state of blockchain technology and its likely impact on the industry moving forward.
Per the report, across all industries there exist over 80 nascent but real opportunities to apply blockchain technology, with a quarter of the total in the insurance industry. Capital is definitely flowing into the space, with a 31% per quarter increase in investments in blockchain startups over the period 2013-2016. Enterprise spending is also on the rise, with banking and capital markets firms spending US$400m on blockchain, with 59% growth forecast through 2019.
Blockchain has the potential to impact the insurance value chain in the following areas:
- Pricing and underwriting
- Payments and collections
- Policy administration and back-office
The benefits of blockchain will manifest in terms of cost reduction, increased customer trust, transparency, increased payment speed, reduced claim cost, reduced fraud, and process/task automation.
InsurTechs, carriers, and other companies are working together to build blockchain use cases for insurance. For example, Allianz announced a successful prototype to automate catastrophe swap transactions. AIG and Standard Chartered Bank announced a successful pilot of the first multinational “smart contract” based insurance policy using blockchain. The industry is taking steps to develop mass-market applications via consortia including Ethereum, Hyperledger, and B3i. Proof-of-Concepts to replace traditional infrastructure with blockchain distributed ledgers are at various stages of development.
Collaboration (i.e., agreed-upon technical standards), regulation, agreed-upon use cases, and transition costs are the main barriers to broad blockchain adoption. Per the report, by 2018 the industry will have explored over 100 use cases. By 2019, 20-30 of these use cases will be tested, and by 2021 there will be 10-20 successful business cases in implementation. The consensus time frame for blockchain entering the insurance mainstream is five years.
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Digital Insurer's CommentsWhat are the potential financial benefits of blockchain use cases? Given the severity and pain points facing incumbent insurers, is blockhain the best solution? How many incumbent players will be willing to move to blockchain solutions? These are the initial hurdles that must be overcome. The will must materialize to iron out the daunting technical and regulatory issues related to blockchain.
For all the potential benefits of blockchain, the Mt Gox exchange disaster and DAO hack remind everyone of the risks. We are keenly watching the efforts of the 15-member B3i consortium , exploring blockchain technologies to increase efficiencies in the exchange of data between reinsurance and insurance companies, and targeting the roll-out of a “minimum viable product” by the end of 2017. Early tests indicate blockchain technology is 1) agile and quick to implement, 2) simplifies and accelerates interactions, with real-time status simultaneously shared by the business partners involved, and 3) has the potential to reduce costs, perhaps radically. All good things in the world of digital insurance.
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