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The Promise and Perils of Insurance Blockchains

10 October 2017

After years of hype and investment by major tech, insurance and regulator stakeholders, tangible blockchain systems for the insurance industry are finally beginning to emerge. At the annual Monte Carlo Rendez-Vous de Septembre (RVS) conference, the Blockchain Insurance Industry Initiative (B3I) unveiled a beta version of its blockchain system for handling reinsurance contracts, dubbed Codex 1. Meanwhile, Deloitte and PricewaterhouseCoopers launched their own working prototypes earlier this year, and similar consortiums have emerged in sectors ranging from law to marine trade. Despite recent advances, however, the transition from experimentation to commercial implementation in insurance remains daunting.

Blockchains are distributed ledgers of transaction data, which can record, verify and transfer information across many parties. Ranvir Saggu, CEO of the insurance start-up Blocksure, has described the technology as digital carbon paper, instantaneously sharing and verifying information and enforcing trust among participants. While cryptocurrencies powered by blockchains attract the most media attention, the insurance industry has focused on using similar protocols to transform processes and accelerate digitalisation. A private blockchain could provide a medium for third parties to share data selectively and securely, making them ideal for managing smart contracts and collaborative processes. Financial services companies have recognised their potential as a platform for secure automation, investing over USD 1bn into the nascent technology in recent years.

The technology could offer an integrated and paperless system for automating smart contracts. B3I's Codex 1 could provide this for reinsurance contracts, and eventually for other lines of business. Analysts have predicted that widespread blockchain adoption could result in improved efficiency and productivity of up to 30% throughout the insurance value chain. These savings provide a powerful incentive for actors across the sector to collaborate. For now, this is limited to small-scale partnerships and joint efforts to develop the technology and standards. The B3I consortium, which is a little over a year old, has fifteen members comprising some of the world's largest insurers, while constellations of sector-focused start-ups are also competing for attention and funding. In the long term, however, participants see these projects as a first step towards building blockchains into the future infrastructure of the industry.

Blockchain is a collaborative technology, which is reliant on implementation by many actors. For an instinctively risk adverse industry which retains some antiquated processes, this presents a collective action problem. No one wants to cede an advantage to a competitor by sharing processes and data, so incumbents must weigh the risks of collaboration against the threat of emerging disruptors leveraging the same technology. Furthermore, without integrated implementation, there is the risk of duplicating existing systems and processes, squandering the efficiencies realised by the technology. Despite the adoption of online systems and the use of internet platforms, data sharing is limited and many insurance processes remain reliant on paperwork. In contrast, Paul Meeusen, of B3I and Swiss Re, has championed common blockchain platforms to enable reinsurance companies to compete to provide better products instead of rival platforms.

Blockchain adoption, like any disruptive technology, carries risks, and there are still technical hurdles to overcome with performance and scalability. Consortiums like B3I seek to establish standards on the insurance industry's terms, although competing projects both within and beyond the sector could create fragmented regimes. Numerous speakers at the recent Blockchain Live conference in London claimed that the systems are nearly ready, but expressed concern that questions of governing these distributed systems remain unsolved.

The first commercial platforms are set to roll out before the end of the decade, however, so the next few years will test both the technology and the industry's response. Blockchains have already incentivised a new level of industry collaboration among competitors, but uprooting long-established processes will require a deeper commitment.