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Arthur D. Little

Arthur D. Little has been at the forefront of innovation since 1886. We are an acknowledged thought leader in linking strategy, innovation and transformation in technology-intensive and converging industries. We enable our clients to build innovation capabilities and transform their organizations. ADL is present in the most important business centers around the world. We are proud to serve most of the Fortune 1000 companies, in addition to other leading firms and public sector organizations. For further information, please visit www.adlittle.com

Blockchain and Smart Contracts for Insurance: Is the Technology Mature Enough?

Article Synopsis :

Is blockchain technology—specifically smart contracts—mature enough for the insurance industry?  This white paper from MDPI is an objective, scholarly attempt to support actors involved in this decision process by illustrating what a blockchain is, analyzing its advantages and disadvantages, as well as discussing several use cases in the insurance sector, which could easily be extended to other domains.

 The Digital Insurer reviews MDPI’s Report on Blockchain and Smart Contracts for Insurance: Is the Technology Mature Enough?

The blockchain community is a hot bed of innovation. Are you engaged?

According to Gartner’s hype cycle, blockchain is at the peak of inflated expectations, where enthusiasm is at the highest level possible. Wide scale adoption is blocked by concern over the immaturity of the technology itself and the fact that blockchain often produces outcomes that could be achieved using well-mastered alternatives.

The insurance sector, as with many others, started to investigate the application of blockchain technology through considerable investments from both big and small companies, investigations from consultancy firms, and the creation, in 2016, of the B3i, the first blockchain-centered insurance consortium. Return horizons on blockchain investments typically range from 3-5 years.

Blockchain made its first appearance in 2008 with the Bitcoin initiative, with the objective of transferring online payments from one party to another without relying on intermediaries. Even though Bitcoin is by far the most famous cryptocurrency, more than 1300 cryptocurrencies have been created since, which are used as exchange tokens in many different blockchain-based applications. Whereas cryptocurrencies have become mediums of speculation, blockchain itself is about the underlying ability to transfer and guarantee, by means of cryptographic operations, the authentication and non-repudiation of information.

Five distinct characteristics mark blockchain as a potentially disruptive technology:

  1. Decentralized validation: the validation of transactions is performed by network nodes without the need of intermediaries
  2. Data redundancy: each network node has a local copy of the blockchain, which prevents data loss
  3. Data immutability: data stored in the blockchain cannot be modified or deleted
  4. Trust: cryptography ensures trust between parties; a transaction that has been validated via user credentials cannot be repudiated
  5. Transparency: every authorized user can read the blockchain and the transactions stored therein

The idea of a ‘smart contract’ has been known since the 90s. But it was only with blockchain technology—the Ethereum blockchain in particular—that smart contracts began moving from concept to potential reality. The report goes into considerable detail on the mechanics of smart contracts, based on your interest.

Insurance-specific blockchain use cases explored in-depth in the report include:

  • Improvement of Customer Experience and Reduction of Operating Costs
  • Data Entry/Identity Verification
  • Premium Computation/Risk Assessment/Frauds Prevention
  • Pay-Per-Use/Micro-Insurance
  • Peer-to-Peer Insurance

With so many obviously compelling strengths, the most relevant weaknesses of blockchain are related to scalability, energy consumption and performance. Today, the number of blockchain transactions that can be handled per second is extremely low compared to traditional systems (mainly because of the computational power required to validate new blocks). The immutability and self-execution of code may be considered another weakness; hackers could exploit bugs in smart contracts to steal money, as happened on the Ethereum network in 2016 when $60 million was ‘stolen’.

So, bottom line, is blockchain technology mature enough for insurance? The report’s authors conclude that while blockchain is indeed a tremendous invention that could have an impact similar to the World Wide Web in the 90s, the technology needs several improvements before going mainstream. It must become more user friendly, and resources and best practices must materialize. There’s also the question of energy and compute resources.

Insurance companies are strongly advised to start investigating blockchain, acquiring attendant competencies and creating prototype solutions. Such activities will prove useful in evaluating how existing processes will be influenced and to what extent the technology will be accepted by internal and external stakeholders.

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Digital Insurer's Comments

There’s massive energy in the blockchain community right now. The Lightning (Bitcoin) and Raiden (Ethereum) networks are investigating how to mix online and offline transactions to reduce mining costs and time. Several startups are developing applications that let users easily interact with blockchain-based applications via browsers or mobile phones. ‘Bug bounty’ programs and communities of ‘white hat’ hackers are proliferating to beef up the security of smart contracts.

Where this goes is anyone’s guess. Blockchain has no doubt changed the way we think about storing and moving information and the branches of blockchain-related discovery in themselves bear potential seeds of disruption. The blockchain ecosystem is a hot bed of innovation. Are you engaged?

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