By now most insurers are aware of blockchain technology and how it might impact the industry. Indeed, some insurers are already taking tentative first steps to apply it or engage in shared pilot projects. But if you’re still working out how it fits in with your technology development plans, you’re not alone, and there’s still time.
Blockchain’s impact on the wider InsurTech movement is likely long term compared with such technologies as artificial intelligence (AI) and the Internet of Things (IoT) (Figure 1). Nonetheless, the growing number of blockchain industry and InsurTech start-up ecosystem initiatives cannot be ignored.
Figure 1. InsurTech technologies and when they’ll have an impact
Source: Willis Towers Watson analysis
What blockchain shares with more immediately anticipated technology developments, and what makes it relevant to insurers, is its link to three key global trends affecting the nature and business of risk (see “How blockchain works — in simple terms”).
- New social interaction paradigm: New types of activism and social interaction (e.g., sharing economies, peer-to-peer [P2P] transactions and crowdfunding), the growth of individualism (e.g., personalization over mutualization and data self-sovereignty), and quicker adaptive behaviors to economic stimuli and to the perceptions of others are challenging established business methods and call for a different interaction with customers.
- Transformation of risk: The social trends described in trend one and new technologies have generated new sources of risk, increased the interconnectedness of different risks and increased the speed at which risks transfer from local to global spheres (and vice versa). Still, they have also enabled greater risk transparency; improved our ability to assess, forecast and measure risks; and allowed for near-real-time risk monitoring and risk mitigation services.
- Tech acceleration: From FinTech to InsurTech, RegTech to WealthTech, the clamor and investment momentum to monetize new technology assets and ideas are applying pressures to the value chain in all kinds of areas, including insurance.
How blockchain works — in simple terms
Blockchain is a data protocol that allows non-trusted partners, with potential conflicts of interest, to collaborate and agree on the validity of transactions without anyone overseeing that process. This is a transparent process based on predefined, consistent, impartial and systematic “consensus mechanisms” generating a distributed, digital, chronological ledger, which is immutable, shared in near real time and fully auditable. Initially, blockchain was just a protocol that supported recording transactions in which the cryptocurrency bitcoin was being transferred between two individuals. It was needed to make sure that bitcoin provenance could be validated and double spending avoided in the absence of a central authority overseeing the bitcoin market. Today blockchain technology has evolved to become a protocol that allows us to record any type of transactions transferring value.
Two other advances have significantly increased the ability of blockchain to become a truly disrupting technology. First, there is the ability of blockchain to be used as a ledger that registers transactions and the provenance of physical assets, as opposed to assets like cryptocurrencies that are born and transacted only online, leaving a digital footprint. Second, blockchain not only registers transactions but also houses programmable code — smart contracts — so that those contracts and their evolution/transition into different states are immutable and fully transparent, while any changes to the code are subject to consensus rules and the agreement of the contracting parts.
As with any aspect of InsurTech, insurers’ key concern is very practical: blockchain’s impact on existing business models and practices. In particular, they are concerned over what specific operational, analytic and, ultimately, business-defining opportunities and threats it might bring.