Blockchain – What is it and What Does it Mean for Insurance?

Blockchain has become one of the most talked about technologies of this decade.

Originally known as the technology underpinning the Bitcoin cryptocurrency, it has been nominated as a potential solution for numerous business problems, especially where there is a need to ensure trust in a complicated or multi-party transaction environment.

What is Blockchain?

Blockchain works by creating a secure and synchronised record or ledger of transactions and distributes this to be held by various parties. Each transaction is put into a block that is connected into the one before and after, groups of transactions are blocked together and a digital ‘fingerprint’ applied. Because the ledger is distributed, it is difficult (if not impossible) to tamper with without other parties noting the changes.

A further extension of blockchain functionality also comes about in the form of smart contracts, which can execute automatically once a transaction has taken place, such as transferring ownership of an item from one party to another.

Consequently, blockchain may prove ideal for numerous applications relating to risk management and insurance, such as cross-border transactions, or in high-integrity supply chains such as those used in shipping of food.

Speaking in a panel session at Aon’s Advanced Risk Conference 2018 in Melbourne, IBM ANZ’s head of blockchain and practice leader Rupert Colchester described how there has been a huge amount of activity happening around blockchain in the past three years, particularly amongst financial services companies.

Colchester said that as trust in the technology grows, the complexity and the value that is being driven out of early engagements will grow as well.

“For me the important thing now is how quickly and capably do consortiums and groups of companies move from early experiments through to production implementation,” Colchester said.

Boston Consulting Group associate director Grantly Mailes agreed the technology was gaining greater acceptance, with his firm involved in numerous pilot projects that had now moved into production. He said interest was expanding beyond financial services organisation, including into government organisations, with the technology now being used for managing land titles in Honduras, while IP Australia was now examining its usefulness for managing patents.

Mailes said the smart contracts are proving attractive particularly in convoluted systems with long value chains like edible commodities. Smart contracts are a piece of computer code which sits on the blockchain and executes when an event occurs, such as when an item crosses a barcode scanner, or a weather event occurs. The technology can be effective for managing handoffs of goods, which can be automated when physical assets are represented as digital tokens, with the smart contract allowing the title to transfer.

“What that does is dramatically automate value chains and we are seeing now a lot of blockchain use-cases seeking to reduce the friction time and payment pressure in long and complicated value chains,” Mailes said.

Implications to Insurance

Aon’s New York-based global chief commercial officer and CEO for Global Specialties (and former CEO of Aon Australia) Lambros Lambrou said the potential for blockchain to bring greater integrity to transactions made it something Aon was watching carefully, particularly regarding its potential to reduce fraud in claims processes.

Lambrou said Aon was actively investigating whether blockchain could be used to solve problems that had previously been unsolvable, such as attacking the problem of underinsurance, or in providing solutions to customers who under existing circumstances would not be able to access products. As an example, he said Aon is currently working with a global charity group and small farmers in South Asia using parametric weather solutions, with blockchain able to facilitate the settlement of funds immediately.

He suggested that blockchain could also have a significant impact on intermediaries.

“If you see your role in life as one of matching a buyer with a seller, or a client with an insurer, then blockchain provides some very important risks for your business going forward,” Lambrou said.

Lambrou also urged attendees to start thinking about the possible impact of blockchain on their risk registers, and particularly the insurance policies that it might impact. These included D&O, crime, errors and emission, cyber liability, and investment advisory policies.

“You need to be on top of how these policies are responding, or more importantly, not responding,” Lambrou said.

However, Mailes said there were still numerous issues to be overcome before blockchain could be fully-adopted, such as the need to provide greater governance over the various parties driving its development, along with standardisation of the technology itself.

“We won’t be talking about blockchain in five years,” he said. “It will either be a ‘thing’, or it will be gone.”

With the excitement and opportunity surrounding these evolving technologies, there is also potential for volatility and uninsured risk. Aon has been working to understanding these emerging risks and actively collaborates with the insurance marketplace to develop innovative risk transfer solutions for blockchain, cryptocurrencies and initial coin offerings.