Blockchain in insurance, is China leading the way?

Blockchain has been touted as being the next big thing, the potential saviour of the insurance industry – and the portal to unimagined wealth through early investment in cryptocurrencies.

As a technology, it has certainly been doing the heavy lifting behind cryptocurrency, but in China, these digital means of exchange have had a hard time recently.

China’s government has been on a crusade against crypto, banning Bitcoin and retail consumption of cryptocurrencies.

Until recently, Bitcoin mining was heavily concentrated in China but in the past year, this was also targeted and the mining has had to move outside China.

So, while the Chinese government has been reinforcing the message that its citizens should not be involved with cryptocurrency, at the same time, the Chinese are filing more patents for the use of the technology that underpins it than any other country.

China wants to be leading the charge in blockchain, not only at home, but in the global market, with the development of its own fiat digital currency, the digital yuan.

Software for hard currency

China isn’t alone, in seeking to build a digital currency. Many other countries are looking to use blockchain technology to build their central bank digital currencies (CBDCs).

Blockchain purists would argue that CBDCs are anathema to the original design ethos of blockchain, which is focused on decentralisation. However, central banks are using the technology to gain better control over their currency, because there will always be a record of a transaction in such an environment.

So, CBDCs increase control opportunities for governments, but also present excellent opportunities for greater efficiency, because payments become more seamless and efficient.

China already leads the world on cashless payments, but most of those systems still use old technology and are reliant on the physical currency.

Once you go beyond the mobile interface of an Alipay transaction, you enter the bank system and CBDCs would significantly enhance the efficiency to make a transaction more immediate, cheaper and with better governance.

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A question of trust

Better governance will prove invaluable to the insurance industry. One of the greatest challenges that insurers have struggled with in more mature markets, is a lack of trust.

While insurance and financial advice are the two least trusted components of the financial services sector, technology is at the top of the table, scoring almost twice that of insurance (see image 1).

This is a particular obstacle to growing the industry globally, especially in markets like China, where consumers do need more insurance.

If insurers are to capitalise on the growth opportunities, the issue of trust needs to be addressed – quickly and comprehensively.

Another area that insurance tends to lag behind many other industries – consumer satisfaction, digital services, and products. However, if insurers begin to deploy blockchain within their processes, they will likely deliver a step change in trust levels, service and product configurations.

It is early days, but blockchain provides exciting opportunities to assist insurance in its digital transformation. Even though most of the money being sunk into the crypto markets is speculative rather than based on substantial – and proven – use cases.

The Digital Insurer TechMap21 plots the different technologies’ current levels of adoption and future potential. We had blockchain in the top right quadrant (see image 2) as having the potential for high impact. We believe this will begin to start moving left towards the ‘moving to mainstream’ sector as pace appears to be picking up it has a high potential technology for the industry.

A powerful role to play

Blockchain must not be seen simply as a solution trying to find a problem. It has little application between just insurer and customer – you may as well operate a database. However, where there are multiple parties interested in a single version of the truth who need to verify data, traditional processes introduce delays and inefficiency. Blockchain enables those processes to be compressed into a near instantaneous activity.

In addition to flight delays, blockchain could be applied to claims on the death of a policyholder. Instead of delays due to a lack of the right documentation or legal challenges over the estate, everything cold be sorted in advance so it is automatically paid more quickly.

This is a good way of building trust in the market, because customers do not need to rely on the insurer to do something, because the payment is generated automatically and almost instantly, greatly improving service times.

Removing error and opening access

In addition to event triggered smart contracts, blockchain could be used to increase back end efficiency, removing human interactions with routine tasks, which will reduce errors, improve service and slash reduce costs.

Disintermediation is another exciting development, by blockchain removing third parties that create blockages between one person and another, creating a seamless and virtual experience.

This may allow insurers to re-energise new versions of old models such as mutual or peer to peer insurance.

In an age of more regular – and sophisticated – scams, the application of blockchain for identity will prove useful for agents starting a relationship with new clients. The typical know your customer process will be performed automatically using blockchain technology.

Perhaps the most exciting opportunity for the use of application is to open up new markets to the under and unserved. Billions of people around the world have no insurance because they have little money and no access to a bank account.

Blockchain will enable insurance to offer cover at levels previously impossible, because the amounts involved were too small to be profitable.

Digital payments will allow those in developing economies to purchase insurance on their phone. In some emerging markets, consumers already pay for insurance by SMS and the SMS fees are taken as the insurance premium.

The future is already with us – VeChain and beyond

Blockchain is not only the future of insurance, but of lots of industries. And it’s not far off, as it is already being used in China.

VeChain is a Chinese blockchain company that focuses on the supply chain. It uses barcodes to effectively track anything from source of origin to its point of consumption. Though it has partnered on projects in the food safety sector, it has also worked with the People’s Insurance Company of China on insurance solutions.

Bank of China has launched an insurance blockchain, Ping An has completed trials with digital yuan blockchain for business payments. Meanwhile, Alipay is using blockchain to process health insurance claims in seconds.

Blockchain will develop quickly in the insurance industry. But the aggressive adoptions and deployment at corporate and government levels suggests that China will continue to be the force pushing back the digital frontiers.

For more on blockchain from TDI read TDI’s Simon Phipps Point of View: Insurance Blockchain & Web3, Ten reasons why the time for boards to get involved is NOW here