There's plenty of blockchain pilots vying to be the first to show the technology's viability at scale. Out of all of them, it's possibly the insurance industry that has shown the most promise in 2018. Sarat Pediredla, Chief Executive Officer at hedgehog lab and all-round blockchain stalwart, explores why insurance companies should stand up and take note.
From a raucous 17th-century coffee house to an imposing modernist masterpiece in the City of London, Lloyd’s of London has always had a currency in reinvention.
The insurance institution began life at Edward Lloyd’s coffee house in 1686 trading in maritime insurance but has since grown into an insurance market behemoth which wrote over £33bn-worth of premiums in 2017.
To survive 332 years through innumerable financial crises, wars, periods of unrest and technological change has required a tremendous ability to adapt and a willingness for reinvention.
When an institution which predates the French Revolution advocates for the use of a technology you know it’s time to sit up and take notice.
And so it is with blockchain.
Former Lloyd’s Chairman John Nelson signalled the insurance marketplace’s interest in blockchain technology back in late 2015 in a speech outlining the potential of distributed ledgers for driving down costs and battling insurance fraud.
There have been some promising early implementations of the technology in the industry since then, but it’s not been until this year that things have really kicked into gear.
Some of the use-cases that we’ve seen on the market in 2018 are already pioneering the commercial use of end-to-end blockchain networks and highlight the tremendous benefits that the technology presents for insurers.
Clear and transparent danger.
A consortium of industry heavyweights from across the insurance, technology and shipping industries launched Insurwave in May 2018, making it the first major commercial implementation of blockchain in the maritime insurance space.
The EY, Microsoft, Guardtime and A.P. Møller-Maersk-backed platform will support risk management for over 1,000 commercial vessels in its first year, providing an excellent testbed for the tech’s roll-out across other insurance markets including marine cargo, global logistics, aviation and the energy sector.
Covering insurance underwriting for damage to vessel hulls, equipment and machinery, the platform is set to not only reduce costs but also significantly boost transparency for all parties.
By giving vessel owners, insurers, brokers and other parties a tamper-proof audit trail, participants can be given reliable, up to date information on a vessel no matter where it is in the world.
Where previously insurers would rely on yearly surveys from classification societies to gauge the condition of a ship, Insurwave opens up the potential for detailed oversight of entire fleets with data updated regularly.
A ship docked in Singapore can have its hull inspected and within hours any damage or wear or tear can be made directly visible to all interested parties, no matter where they are in the world.
The benefits are twofold, allowing more informed judgement on insurance risks and potentially driving premiums down for responsible vessel operators.
Blockchains are forever, fraud isn’t.
According to the Association of British Insurers (ABI), fraud adds an extra £50 to our insurance bills each year. The problem is as old as the insurance industry itself with references to fraudulent behaviour dating all the way back to the Roman Empire.
But while Hegestratos’ ill-fated ship insurance fraud in 300BC resulted in his eventual drowning, he might not have even secured an insurance policy in the first pace had the Roman insurers been backed up by the blockchain.
In fact, battling fraud is one of the most tantalising benefits for insurers looking to adopt blockchain innovations as the industry battles tens of billions of pounds worth of fraudulent claims every year.
An immutable, decentralised record of transactions for collectable items such as diamonds and jewellery or a tamperproof store of a patient’s medical records have obvious potential for combating fraud. But it’s only recently that this potential has begun to be realised.
Earlier this year, UK blockchain leading light Everledger launched its Diamond Time-Lapse Protocol which tracks a diamond across the entire supply chain, creating a record for every step in the journey.
Similar systems have been tested for valuable bottles of wine and luxury watches, providing peace of mind as to the provenance of individual items. For insurers, it could mean the end of expensive payouts for items that are, in reality, worthless counterfeits. Meanwhile, consumers can rest safe in the knowledge that what they’re buying is the genuine article.
Truly peer to peer insurance.
The trend for peer-to-peer (P2P) finance reached a peak a couple of years ago with everything from mortgages to business loans and equity investment benefiting from the P2P treatment. Insurance wasn’t averse to the move to P2P models either, with the likes of Lemonade and Friendsurance building their businesses around the pooling of risk amongst likeminded policyholders.
Blockchain’s potential in this space is only now being realised. Where current approaches still require the insurer to facilitate the connection between peers and act as asset manager, blockchain opens up the potential for truly decentralised P2P insurance with companies fulfilling the role of marketplace or matchmaker for investors and policyholders.
We’re not quite there yet, but we are already seeing businesses that are beginning to adopt intriguing uses of blockchain and ledger technology within the insurance industry.
VouchForMe, formerly known as Insurepal, has developed a decentralised social proofing platform which allows people to personally vouch for friends and family. Marketed as an add-on service for insurance firms, the platform has the potential to drive down the cost of insurance premiums for consumers and provide insurers with more detailed risk profiling.
Policyholders are given the option of signing up for the VouchForMe platform when they take out a new policy which they can then use to canvass for endorsements from friends and family.
Say, for example, you apply for a new car insurance policy. You’re a responsible driver who has never had an accident until a minor accident last year which has caused your premiums to skyrocket. But what about the decade of safe and accident-free driving before that?
With VouchForMe, family and friends can put up financial endorsements vouching for your ability as a driver to bring down the cost of your premium. In return, endorsers are instantly rewarded with tokens for each endorsement which can be exchanged for incentives and cash.
Endorsements are saved within VouchForMe’s ledger, providing each user with their own tamperproof social profile which can then be utilised across different policies.
Rapid-fire claims processing.
Etherisc, a Munich-based company specialising in decentralised insurance applications, has lined up two partnerships this year that utilise smart contracts to trigger immediate claims payouts provided specific conditions are met.
The first is their flight delay insurance product which sees flight departure and landing data fed into the platform and immediate payouts delivered upon landing if a flight has been delayed by more than 45 minutes.
Another application of their Ethereum-powered smart contract is in Puerto Rico where the company is harnessing its decentralised network for claims from residents of the hurricane-prone Central American state.
Again, automated insurance payouts can be triggered for policyholders dependent upon specific criteria being met, in this case, local weather conditions. The network also encourages transparency with all transactions visible for insurers and claimants.
Smart contracts and insurance claims are a match made in Insurtech heaven for both the companies themselves and insurers. As an industry, much of the back office work is still carried out by hand and claims can often bounce between insurers and reinsurers for years at a time, leading to significant frustration for claimants.
With smart contracts, payouts can be almost instant and the added clarity of a distributed ledger means every payout could theoretically be visible for all policyholders, increasing trust through transparency.
Potential use cases for blockchain have been spoken about for years now, but it’s only in 2018 that we have seen real-world adoption significantly ramp up, with insurers increasingly bullish on the potential of the technology.
For some industries, the argument for decentralised networks can be gimmicky at best, but for insurance companies, the three-pronged benefit of greater transparency, greater efficiency and greater fraud prevention are a real no-brainer.
It’s clear that 2018 will be remembered as something of a breakout year for blockchain. If you’re an insurance company, don’t make 2018 the year you’re left behind either.