The State of Blockchain in the Insurance Industry
Define disruption
Blockchain will cause disruption in the insurance industry. This was the initial point emphasized by a panel discussion at “A Blockchain Reality” an event organized by Marketminds in London on 7 February 2018. The panel was moderated by Lee Bacon of Clyde & Co. Peter Temperley of Blocksure noted that in the insurance supply chain, the “administrative burden” is a prime area for disruption.
As Peter explained, at each point in the supply chain, invoices are raised, bordereaux are produced, statements are given, and payments are made. In each of these steps, companies are re-inputting data and struggling to understand what information they’ve been given by their counterparties. “They also have to reconcile,” he noted. “Until reconciliation gets completed, settlements get held up.”
Peter also hinted that the “ripest areas for disruption” are where it’s traditionally expensive to launch, for instance, short-term variable insurance.
Stephan Karpischek of Etherisc highlighted blockchain’s potential in parametric insurance due to the “high level of automation” that’s necessary.
“The nice thing about blockchain is that we can realign incentives,” said Stephan. “We can create and play around with these new incentive schemes that so far work mostly on the basis of salaries and bonuses and the kind of compensations that we all know.”
“On blockchain, we can do different things — we can incentivize people to participate and create insurance products and create customer experiences in a different way.” — Stephan Karpischek, Etherisc
Ingemar Svensson of iXledger pointed out how blockchain can improve the way participants interact within the market. “There seem to be inefficiencies between different participants in the market in terms of exchanging data,” observed Ingemar. “Blockchain works in a way, where you don’t need a trusted party in the middle, which can mediate that connection.”
An opportunity or a threat?
As more startups come up with blockchain-based solutions, Lee asked whether or not the technology should be seen as an opportunity or a threat to existing markets. “It’s both,” answered Stephan. “If you want to understand what the consequences of the blockchain technology are for your business, you need to start using that technology.”
To anyone looking to learn about blockchain, Stephan suggested the most straightforward method — start using it. “You need to use it to be able to understand the consequence to your business.”
According to Peter, blockchain becomes a threat, when companies try out the technology in isolation. “If you try to do something on your own, then you’re not playing with blockchain, you’re playing with a database, and you’re missing the whole point,” asserted Peter. “This is a solution for the end-to-end ecosystem, so you need to be working with your business parties and counterparties.”
“The threat is not trying to work it into your business ecosystem. Do it fast, don’t hang around, and don’t be too slow.” — Peter Temperley, Blocksure
Adding to Peter’s point, Ingemar emphasized the opportunity in working with blockchain. “The blockchain community loves engagement. It’s not a commercial environment,” said Ingemar. “You can interact with the CEOs and founders directly. It’s not like working with traditional software providers. It’s much more collaborative.”
Beyond cost savings
As interest in blockchain grows, more organizations have begun adopting the technology. One of the primary reasons for this growth is blockchain’s ability to cut down on overhead and reduce costs.
According to the panel, this is a very limited scope to what the technology entails — a systemic change in how the insurance industry works.
“With blockchain, we can change how the whole insurance system works, how the whole value chain of insurance gets disrupted at once, not just one tiny part,” said Stephan. “This is not your digital broker that helps you reach customers more quickly, but with the same boring old product.”
Data in a blockchain is modified in real time. In insurance, this is a significant change explained Peter. “Using the blockchain, underwriters can know in real time what kind of quotes are coming through. Cashiers can reconcile their ledgers with a single click of a button,” he remarked. “The whole ecosystem changes. As a managing general agent (MGA), you can focus on the value chain.”
“As an MGA, you can create your own product. That’s where the blockchain can really help. You can create new models that rely on a more direct real-time interaction with your end customer.” –Ingemar Svensson, iXledger
Overcoming resistance with collaboration
Blockchain has gone past the point of being just another buzzword and is already seeing adoption across the insurance industry. Still, there are few hurdles that have yet to be dealt with.
Regulators will need to be onboard before mass adoption takes effect. “There’s a big dialogue that needs to happen with the regulators to ensure that they are comfortable with the level of transparency, auditability, and removal of unnecessary controls in the existing compliance regime,” said Peter. “It will take a while for the regulators to get there, but eventually it will happen, because they see that they get clean answers throughout and have full transparency.”
Without regulator support, blockchain startups are not on equal footing with traditional insurance companies, added Stephan. “We see a lot of insurtechs that are getting pulled by the incumbents and are being forced into contracts that just don’t work out for the startups. They are not very sustainable or fair,” criticized Stephan. “There’s a huge asymmetry in the relations between the traditional insurance companies and the startups. We would like to see some change in that.”
With the increasing number of blockchain solutions, there will also be the eventual need for standards. At present, the competition and collaboration among blockchain developers are healthy, explained Ingemar. “There’s a way for different blockchain implementations to co-exist and interact with each other,” he proposed. “No single blockchain provider is going to come in and do everything. It’s a matter of how you interact with each other, and that’s what it’s really all about anyway.”
Despite the existing challenges, the panel made it clear that blockchain-based insurance can provide coverage to markets, which traditional insurance companies cannot address due to commercial reasons. This can be a life changer for anyone currently unable to afford insurance.
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