Abstract

Blockchain is an emerging technology which seeks to champion a culture of transparency in the insurance industry. Although it is commonly known as the underlying technology behind Bitcoin, it has various implications in other areas including the financial sector.

The aim of this study is to describe what Blockchain is, analyse how it will impact the insurance (and microinsurance) industry and outline the difficulties insurance companies may face in implementing the technology. It is important to note that the technology is still at its initial stage of development, therefore, it is difficult to assess whether these implications will hold. There are several challenges associated with the successful implementation of Blockchain and insurance companies need to carefully assess whether the benefits of the technology outweigh the drawbacks.

Table of Contents

Acknowledgements 2

Abstract 3

List of figures/tables 5

1. Introduction 6
2. Blockchain in insurance 9

2.1 Implications of Blockchain in the insurance industry  9

2.1.1 Improved claims processing  9

2.1.2 Fraud detection  9

2.1.3 Know Your Customer  10

2.1.4 Tracking insurance policies  11

2.1.5 Asymmetric information due to retrocession  11

2.1.6 Cyber security  12

2.1.7 Improved customer experience  12

3. Applications of Blockchain in microinsurance 13

3.1 What is microinsurance?  13

3.2 Why is microinsurance not readily available? 14

3.2.1 Methods for paying premiums  14

3.2.2 Limited knowledge  14

3.3 Core features needed for microinsurance  14

3.3.1 Flexibility  14

3.3.2 Affordability  14

3.3.3 Simplicity  15

3.4 What can Blockchain do for microinsurance  15

4. Difficulties in implementing Blockchain  17
   1. Key challenges 17

4.1.1 Lack of understanding  17

4.1.2 Consistency  17

4.1.3 Cultural changes  18

4.1.4 Cost and efficiency  18

4.1.5 Scalability  18

4.1.6 Regulation  19

4.1.7 Security/Privacy  19

4.1.8 Priorities  19

5. Concluding reflections  21

Appendices X

References 22

Bibliography 25

 

List of figures

Figure 1:  2

List of tables

Table 1:  

Chapter 1

Introduction

Insurance companies tend to be slow in utilising new technology. “The entire industry is focused on how life was lived five or ten years ago” (Brem, 2017). Due to the lack of preparation and the ever-changing regulatory environment, most insurance companies have not taken immediate advantage of innovative ideas. However, insurance companies have recently been looking elsewhere for resources. For example, some insurance companies have acquired firms that specialise in technologies such as blockchain, as a way of finding suitable use cases and allowing them to redefine their business model (Hay, 2017).

Blockchain is an emerging technology which offers an innovative way to store and record transactions. Currently, many organisations use a centralised ledger to carry out these tasks which means transactions are only authorised by one entity. This makes the transactions vulnerable to misconduct. For example, a bank could have control over a centralised ledger involving monetary transactions. Assuming that some of their employees have intentions of forgery, they could take away their clients’ money which will cause financial disruption to the customers involved. Due to the banking sector being heavily regulated, this is not common in developed countries. Nevertheless, a lot of time is spent by banks to ensure validity and integrity in their activities(Nair, 2017).

Blockchain technology solves the problem of transactions being controlled by one single entity as it has a decentralised ledger which allows a shared form of record keeping. The ledger is owned equally by all the members in the chain and no specific individual holds ownership of the system. Each participant in the ‘chain’ has a copy of all the transactions that are stored in ‘nodes’, enabling information to be shared without the need for intermediaries. The ‘blocks’ in the technology are linked together cryptographically and any modifications made by participants in the chain are permanently recorded using an algorithm. This is the reason why the technology is currently viewed as tamper resistant (Yli-Huumo, 2016).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1: Stages of a transaction in a Blockchain network

Source: Blockgeeks, 2017

Moreover, in comparison to many other technologies, Blockchain is less vulnerable to cyber-attacks because generally more than 51% of the users will need to agree that a transaction is valid before it is updated on the Blockchain (Piscini, 2017). However, it is difficult to say that the technology is 100% secure given the lucrative nature of cybercrime as criminals have an ongoing interest to seek new ways in order to carry out a successful cyber-attack.

People in the financial industry are becoming more aware of Blockchain due to numerous reasons, with the main one being Bitcoin; the first application of Blockchain. Bitcoin is a digital currency that was developed using a distributed ledger to solve the problem of double-spending for digital currencies. There are many other cryptocurrencies such as Litecoin and Dogecoin, but Bitcoin was the first decentralised cryptocurrency. The Blockchain network behind Bitcoin is an operating system developed specifically to make the Bitcoin transactions possible (Verduyn, 2017).

Despite the fact that Bitcoin has previously dominated the cryptocurrency market, many institutions from various industries are developing an ongoing interest in Blockchain for other reasons. For example, Russian leader Vladimir Putin has initiated work on launching a state-issued cryptocurrency referred to as the ‘Cryptorouble’. An economic adviser discussed how this cryptocurrency has the potential to settle accounts with counterparties all over the world whilst avoiding international sanctions (Seddon, 2018). In addition, experts are starting to agree that emerging technologies have the potential to add value in the insurance sector. Investments are rising year on year and a total of $3.4b has been raised since 2010 towards ‘InsurTech’ which shows the ongoing interest in the technological field (PwC, 2016).

Ethereum is another application of Blockchain which has made numerous people in the financial industry interested in the technology. It is a decentralised, public, Blockchain-based platform which is built for coding and processing smart contracts. Therefore, it is driven by a different purpose to Bitcoin as it is developed to facilitate peer-to-peer contracts whereas Bitcoin is seen as more of an alternative to regular money. They also differ in many technical ways, for example, an Ethereum transaction is confirmed within seconds in comparison to a Bitcoin transaction which is confirmed within minutes (Bajpai, 2018). Due to faster transactions and the purpose behind why Ethereum was built, it is seen as a more relevant application of Blockchain for the insurance industry.

An additional reason as to why people are becoming more aware of Blockchain is due to Initial Coin Offerings (ICOs). It is used by start-ups to raise capital for a project in an unregulated manner. The start-up usually creates a ‘whitepaper’ which includes information about what the project is about, duration of the project, total amount of money needed and so on. Subsequently, a percentage of the cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin. Investors that take part in ICOs hope that the project will become successful in the future. In the event that the project becomes successful, it is likely that the value of the cryptocurrency will rise. Therefore, it will be profitable for the investors that took part in the ICO (Das, 2017).

Bitcoin is an example of something that is based on a public Blockchain. In a public Blockchain, there is no restriction on who can join the network so anyone can read the chain and make legitimate changes (Bauerle, 2017). Currently, the average time to confirm a bitcoin transaction is 78 minutes.  However, it can take up to a few days at times as it has to be confirmed by a large number of users (Browne, 2017). The transaction time for a public Blockchain would be a major issue for some financial institutions. For instance, it is crucial for banks to settle payments within a short time frame in order to maintain a good reputation.

It is possible to build a Blockchain where permission is required to read the chain. In this type of Blockchain, there is control over the number of parties that can join the network and write new blocks onto the chain. This is known as a private Blockchain. As there are fewer users that have to confirm transactions, they can be settled quicker relative to a public Blockchain; hence private Blockchains are more suitable for financial institutions (Bauerle, 2017).

Table 1: Differences between a public Blockchain and a private Blockchain

 

Public Blockchain                     vs                    Private Blockchain
Slower transactions	Faster transactions
Open to anyone	Requires permission/invitation
Substantial computer power required	Less computer power required
Little to no privacy	Privacy controlled

Source: IBM, 2017

After the development of Bitcoin, Ethereum and many other successful applications of Blockchain, it is strongly believed that if a robust Blockchain system can be developed, it will shape the future of the insurance industry.

 

 

Chapter 2

Blockchain in insurance

Blockchain technology has huge potential for making the insurance industry more efficient and transparent. It has the ability to execute digital contracts and transactions in a safe and secure manner whilst keeping a full record of all the past transactions involved. Insurance companies can only reach the technology’s maximum potential if it is implemented in a consistent way. If the technology proves to be successful, it will reduce the need of intermediaries in a transaction and hence decrease administrative costs by a significant amount. Furthermore, it could simplify the amount of paperwork that needs to be done, improve claim settlement times and construct a clear audit trail of previous transactions.

Meeusen (2017) confirms that Swiss Re alongside a group of Europe’s biggest insurers are taking part in a project called the Blockchain Insurance Industry Initiative, also known as B3i, which aims to investigate whether the technology is a viable tool for the insurance industry. Their aim is to better understand the implications of Blockchain in the insurance industry and to explore if and how Blockchain can make the insurance industry more efficient and transparent.

1.         Implications of Blockchain in the insurance industry
   1.     Improved claims processing

The United Kingdom has an extremely competitive insurance market so providing exceptional customer service is vital. There is usually a delay between the moment a claim is reported and the moment a claim is settled. This is because insurance companies need to assess whether the claim is eligible and if so, they often need to evaluate the size of the claim. The longer the delay, the more frustrated policyholders can get which could lead to a decrease in the policy renewal rate.

For insurance contracts that have elementary predefined conditions with little or no risk of manipulation, smart contracts can be used to pay out claims. A smart contract is a digitally signed agreement between two or more parties which performs certain actions after a predefined condition is triggered (Lorenz, 2016).

AXA is one of the first insurance firms that aim to provide enhanced insurance services using parametric insurance. For instance, when a flight-delay insurance contract is bought, they can code it such that the purchase is recorded on an Ethereum Blockchain automatically. Therefore, if the flight is delayed over a specific number of hours, it will be registered on the Blockchain and the claim pay-out will be initiated automatically; hence providing a fast, transparent customer experience (Shabrawishi, 2017).

2.     Fraud detection

It is essential for an insurer to have effective claims management as it accounts for a large proportion of their outgoings. One way a company aims to minimise the risk of fraud is by only paying out claims that are genuinely liable. However, sometimes it can be difficult to assess whether a claim is eligible; thus, an insurance company may come to an incorrect conclusion as to whether the claim should be paid.

For example, there is an ongoing number of cases where multiple claims have been made for the same event (Shelkovnikov, 2016). Due to the fact that most of the current systems have centralised ledgers, insurance companies do not share their claims data because they fear that their competitors may use it to price insurance products more effectively. However, with the use of permissioned Blockchain networks, companies can store specific details of their claims on a shared database which can help verify whether or not a claim has previously been paid by another insurance company.

This technology would mean that as soon as a valid claim is paid out, the network will securely store the transaction on a tamper-proof system. Therefore, any multiple claims for the same event will automatically be rejected by the system; thus reducing, if not fully preventing, the risk of multiple claims fraud. Furthermore, past historical claims will be stored on a distributed ledger which would help identify different types of frauds that occur in the insurance industry. This will make it easier for insurance companies to identify suspicious behaviour and hence further improve their fraud assessment process (Gregorio, 2017).

3.     Know Your Customer

‘Know Your Customer’ is a process which involves certain institutions to thoroughly check some of their clients before a service can be provided to them. There are two main reasons for this process to be carried out.

Firstly, it is to ensure that clients are restricted from taking part in any money laundering activities. There is strict regulation in place for this process in the United Kingdom. For example, the most recent regulation known as the ‘Money Laundering Regulations 2017’ is an improvement to the previous one. This change hinders the practical implementation of innovative money laundering methods, as well as triggering an increase in the level of due diligence (Tullo, 2017).

Secondly, the process encourages clients to only take part in activities which align with their risk appetite. Assessing the company’s risk appetite is mainly a self-assessment process which aids firms to satisfy any regulatory scrutiny.

The aim of this process is to reduce money laundering activities. Currently, this is a major problem as the amount of money laundered globally each year is estimated to be around U.S. $1-2 trillion which equates to around 2% to 5% of the world’s GDP (Lavion, 2016).

The ‘Know Your Customer’ process is expensive and requires a lot of time due to its increasing complexity (Dunkley, 2016). Insurance, reinsurance and broking companies are required to perform this process on some of their clients (Mainelli, 2016). The inefficiency of the process rises from the fact that it may have to be carried out on institutions that have previously undertaken this process elsewhere. (Shelkovnikov, 2016).

It is unlikely that purchasing personal lines insurance would require individuals to go through a ‘Know Your Customer’ process. It is more popular for insurance policies that require the use of a broker. Therefore, in the insurance industry, the ‘Know Your Customer’ process is commonly used in the London Market where policies tend to be large and complex.

For example, if an insurance company is purchasing marine reinsurance from a Lloyd’s syndicate, there may be several brokers and underwriters involved throughout the process. Each of these individuals need to go through the ‘Know Your Customer’ process which may result in expenses and delays.

Blockchain can make the process efficient as it can store information in a shared database so the documents required for the ‘Know Your Customer’ process are permanently stored on a distributed ledger. This can save time and reduce expenses as it is likely that some clients, if not most, have been through this process previously so data involved in the process can be shared across financial institutions; thus, verification can take place without the need of carrying out the process again.

4.     Tracking insurance policies

Tracking insurance policies is important to limit the amount of risk insurance companies take on. It is difficult to monitor some insurance policies that have specific perils attached to them, for example, insuring a ship with navigational restrictions or calculating the value of stock for a contents insurance policy.

Both types of policies described are vulnerable to fraud as policyholders know they are difficult to track. Therefore, insurance companies that provide policies such as ship insurance or contents insurance are likely to charge high premiums because they have to take into account the likelihood of fraud.

With regards to insuring a ship with navigational restrictions, Blockchain technology can be used for ‘geo-stamping’ events in a specific location. This will register the location of the event onto the Blockchain and enable insurance companies to see exactly where the insured ships have travelled.

For the contents insurance policy, Blockchain technology can create a ‘super audit trail’ in a distributed ledger by keeping track of all the stock movements made. This will allow insurance companies to prove the correct value of the contents on a specific day (Mainelli, 2016).

These features show how Blockchain can be used to lower the risk of fraud. Due to the lower risk involved, companies can use a smaller contingency factor in their premium formula and hence charge lower premiums to their policyholders. Lower premiums are likely to increase the number of sales which will be beneficial for insurance companies as it can increase both diversification and total expected profit.

5.     Asymmetric information due to retrocession

A retrocession contract is where a reinsurer transfers part of the risk they have insured onto another reinsurer. In general, the further the reinsurer is from the risk, the greater the level of asymmetric information.

Due to this problem, the reinsurer has to base its calculations on data which is less detailed in comparison to the reinsured; hence larger and larger margins are used which may defeat the purpose of reinsurance after a certain point due to the high premiums charged (Banks, 2004).

This problem can be minimised, if not eliminated, by Blockchain technology. The primary insurer can store the data it obtains from its policyholder on to a Blockchain network. Assuming that the network is accessible by all the reinsurers involved in the contract, they will have the same level of detail about the risk insured; thus, allowing more accurate pricing. This would increase the number of policies reinsured as fairer premiums will be charged which will enable (re)insurance companies to further diversify their portfolio.

6.     Cyber security

Cybercrime is a major issue for the insurance industry as hackers have an ongoing interest to steal customer data. This is mainly due to potential financial gain as customer data can be used to commit insurance fraud but it can also be due to other reasons such as intention of damaging a company’s reputation.

As the system behind Blockchain technology is based on a decentralised ledger, it is known to be less vulnerable to cyber-attacks in comparison to many other technologies. It is essential for the technology to be as ‘tamper-resistant’ as possible since insurance companies hold a substantial amount of personal data. The data held on the Blockchain needs to be secure as any breach of the personal data can cause a significant amount of financial and reputational damage to the insurance company.

7.     Improved customer experience

As mentioned in 2.1.1, an improved claims settlement process will allow some legitimate claims to be paid out faster, contributing towards providing an enhanced customer service.

Additionally, it has been discussed that if Blockchain technology is implemented successfully it will reduce the need for intermediaries. In the insurance industry, intermediaries are used for a wide range of tasks, for example, carrying out the ‘Know Your Customer’ process. If the policyholders do not need to go through the process numerous times, it will save them time which would further improve customer experience.

Overall, embracing new technology such as Blockchain can often lead to an improvement in efficiency and delivery which is vital for providing good customer service.

Chapter 3

Applications of Blockchain in microinsurance

This chapter is heavily influenced by the work of Corneliu (2011).

1.        What is microinsurance?

Microinsurance is a type of insurance service that is designed to target people or businesses with a low-income. The service is not provided by typical insurance companies and it usually consists of charging a fairly low premium to insure against specific peril(s). It is required by households with a low income as they do not face the same risks as a ‘typical’ household.

A typical insurance company usually offers protection against a number of risks, most of which may not be faced by people with a low-income. However, as these risks need to be reflected in the premium charged by the insurer, the premium may be unaffordable for a low-income policyholder.

For policyholders that do not need protection against these risks, microinsurance allows them to purchase insurance where a lower premium can be charged to more accurately reflect the risks they are taking on.

Most developing countries are located in Africa and Asia, but some are also located in South and Central America. Developing countries have a significant demand for insurance services as the economy is generally based on farming and agriculture, and these jobs do not tend to generate sufficient income in order to cover all the needs of a growing population.

The types of insurance policies that are generally demanded in these countries can range from health and life insurance to property and catastrophic cover. It is estimated that the potential market for insurance in these countries is estimated to be between 1.5 and 3 billion policies (Silvello, 2017).

Assuming the right products are offered to this population, insurance companies can potentially increase profits and achieve higher diversification benefits by offering insurance services in various new sectors. However, this can only be done if expenses are reduced to a level where these small policies are worth insuring.

Furthermore, it can enhance the reputation of an insurance company as providing these services can have a positive impact on the economy. This is because it reduces cash flow problems for people as they can release some savings meant for unexpected events; this can then contribute towards economic growth and improving living standards via more consumer expenditure and investment.

2.        Why is microinsurance not readily available?

Biener (2013) argues two main reasons as to why microinsurance is not readily available at the moment.

1.     Methods for paying premiums

Firstly, most of the consumers that demand microinsurance services do not have access to a portable method of paying their premium to the insurer. This means that the policyholder will have to physically travel to the insurer to pay the premium which may be inconvenient after comparing the risk insured to the time and costs associated with travelling. Moreover, even if the policyholder has access to portable methods such as bank and mobile transfers, the sum of both the premium and the fees for sending money is usually too high so the costs do not outweigh the benefits of a potential pay-out. Thus, most insurance companies do not find it worthwhile to provide microinsurance services at the moment.

2.     Limited knowledge

Secondly, people in these countries do not understand the insurance concept well. This lack of knowledge puts a constrain on the demand for microinsurance services as policyholders are unlikely to give insurance companies a premium for an agreement they do not understand, for example, policy conditions may be unclear to them so they may be unsure about what makes a claim eligible.

3.        Core features needed for microinsurance
   1.     Flexibility

As the low-income population does not tend to face a homogenous set of risks, it is useful to have a customised insurance policy that would satisfy their specific needs. This type of contract will protect the policyholders against certain risks that are faced by the targeted population. In comparison to insurance contracts made for the general population, these contracts cover less risks which allows lower premiums to be charged. Therefore, it allows insurance to be more accessible as a larger set of the population can purchase insurance contracts tailored to their needs at a reasonable price.

In addition, the income earned by these types of policyholders is often irregular. For example, some people in the agricultural industry may not have enough money to pay the premium at the start of a growing season (where it is usually demanded). Therefore, even if these households wanted to purchase insurance, they may not be able to as the timing of cash flows will not suit them (Martin, 2014). To overcome this, adjustments can be made such that the premiums are collected to suit the irregular income streams of the policyholders.

2.     Affordability

As insurance companies charge a premium that is proportionate to the risk involved, it is considerably lower for these customised products as they are less risky in comparison to conventional insurance products. In addition, due to lower operational costs, even smaller premiums can be charged which makes it more affordable for individuals in developing countries.

It also gives the government an incentive to work on Blockchain-based projects in order to protect citizens on a low income by funding or subsidising insurance contracts.

3.     Simplicity

As discussed above, microinsurance is a type of insurance service that is designed to target people or businesses in developing countries. Most people in these countries have a limited understanding of typical insurance products; thus, it is essential for the insurance contract to be as simple as possible so policyholders can understand what product they are being offered.

In particular, the insurer needs to word the contract in a clear and concise manner such that the policyholder fully understands what risk he/she is covered for. If the policyholder does not understand the terms and conditions of the contract, it is unlikely that he/she would purchase the policy in the first place (Martin, 2014).

4.        What can Blockchain do for microinsurance?

Blockchain has the potential to expand the type of policies written by insurance companies. It can use smart contracts to make automated claims when predefined conditions are met. This allows instant pay-outs for eligible claims with little or no processing costs as the insurer does not need to administrate the claims. This type of insurance is known as parametric insurance. As this technique has minimal costs, it can still be profitable to insurance risk against specific perils for customers with low income. Therefore, if parametric insurance can be implemented successfully on a Blockchain, it may play a valuable part in providing effective microinsurance services.

Let us take an example where a low-income farmer in Kenya wants to buy an insurance policy to protect his/her crops. Assuming crop insurance is only provided by firms in a different country, policyholders will have to pay the premium through a bank transfer. However, banks usually charge high fees to transfer money between different countries. This may cause the policyholder to change his/her mind about purchasing the contract as the premium plus the fees may add up to an amount which is close to the potential claim pay-out.

This is where Blockchain comes in. It removes the role played by the bank as people will be able to purchase the insurance policy using a digital currency such as Bitcoin which requires little or no use of an intermediary (Kshetri, 2017). This is also known as peer-to-peer insurance and it has to potential to solve issues in the microinsurance market by reducing operational expenses by a significant amount. The use of portable sales with lower transaction costs allows the insurance company to access a larger market, making it beneficial for both the insurer and the policyholder.

One incentive for insurance companies to provide microinsurance services is that it will improve their reputation. This is because their service will have a positive impact on developing countries as it will provide low income policyholders with financial support during times of unexpected cash flows. Moreover, it will allow insurance companies to diversify their portfolio as they are insuring a wider range of risks. If insurers can price the policies correctly, it will allow them to make a profit which can contribute towards the growth of the business.

Moreover, Blockchain has the potential to remove some of the issues associated with bureaucracy which is known to be fairly problematic in developing countries.

For example, many developing countries find that it takes a significant amount of time to update or introduce rules and regulation. This can cause processes in all regulated industries, including insurance, to be inefficient as the regulatory environment may have a lag meaning it will not always coincide with the current position of the industry.

Due to the nature of Blockchain technology, it has the potential to decentralise bureaucracy and hence make it more efficient. It is believed that document changes cannot be altered with or deleted from the network so there is an increase in security which decreases the risk of fraud. Moreover, regulatory documents can be stored securely on a private Blockchain which all relevant parties have access to. This enables parties to review documents at their own discretion in comparison to waiting until the relevant parties are available for a meeting. Furthermore, a clear audit trail is provided for every single change so parties can easily identify where a specific problem originated from and then find a solution from there.

These features are likely to improve communication within the government, allowing effective decisions to be made within a smaller time frame. This will increase efficiency in the insurance market as the regulatory environment is more likely to coincide with the current position of the industry, enabling citizens in developing countries to have more trust in the products offered (Palfreyman, 2017).

 

 

 

 

 

 

 

 

 

Chapter 4

Difficulties in implementing Blockchain

A significant part of this chapter has been influenced by Marshall (2016).

Implementing Blockchain technology in firms can bring numerous benefits to the financial industry, but it can also bring some key challenges. It is important to understand that Blockchain may not add significant value to all institutions. Therefore, each institution should carry out an in-depth analysis of how Blockchain would affect their organisation and then make an informed decision about whether it is worthwhile introducing the technology to their firm.

1.         Key challenges
   1.      Lack of understanding

Blockchain has become more common over the last few years. Ongoing research is being conducted about the implications of Blockchain in the financial industry and huge investments are being made to support the initiative; however, most areas including the insurance sector have limited understanding of the technology. Therefore, before a decision can be made about implementing Blockchain into an organisation, thought needs to be given on whether it is worthwhile.

It is advised that insurance companies should hire individuals who are experienced with Blockchain to lead the research and train current staff members to increase their understanding of how the technology works. The main objective should be to find out where in the organisation Blockchain can be applied to and who in the organisation would come together to deliver.

2.      Consistency

One of the main features of Blockchain is that it has a decentralised ledger, meaning no specific individual holds ownership of the system. Currently, organisations are starting to develop their own Blockchain in order to run all sorts of applications on them.

With this type of ledger, no one is responsible for setting and maintaining the standards required. This is a major problem when companies from the same industry are using different standards to develop their Blockchain as it does not allow them to share data in an effective manner. The lack of consistency involved leads to inefficiency and prevents Blockchain from reaching its maximum potential.

To overcome this problem, all firms within a specific industry that are looking to develop a Blockchain network can interact with each other and come to a mutual agreement on certain standards to maintain consistency and thus improve efficiency. However, it can be argued that this approach will lead to a certain degree of centralisation which may make people question about the 100% decentralised feature of Blockchain.

3.      Cultural changes

Over the past decade, technological advances have become more popular in the financial industry. As many core functions have been automated, less human labour is needed to carry out these tasks. Therefore, business models have seen a significant change which has led to some cultural changes.

Blockchain is another technology which has the potential to reshape a firms’ business model. For insurance companies, the successful implementation of Blockchain will reduce the need for intermediaries by a significant amount. However, there will always be some sort of demand for intermediaries, for example brokers will always be required to provide professional advice in the London Market as this area consists of unique products with complicated terms and conditions.

Offering insurance products such as motor insurance over the internet has also reduced the need for intermediaries. Blockchain has the potential to further reduce this need due to numerous reasons such as storing ‘Know Your Customer’ data on a shared Blockchain, using cryptocurrency instead of bank transfers to minimise transaction fees and so on. In the short term, productivity will decrease as current staff members will have to be trained and time will be spent on implementing the technology instead of running the usual core functions of the business. This will cause major changes in the current culture of the company as it will require staff to have a different skillset in comparison to their current one.

4.      Cost and efficiency

It is clear that implementing Blockchain would increase the efficiency of certain processes within the firm. However, a Blockchain that executes peer-to-peer transactions can be associated with large transaction costs so in order for the implementation to be worthwhile, the benefits need to outweigh the costs involved.

One way an insurance company can reduce the costs of running a Blockchain is to share them with all parties involved. Therefore, if there is only a few parties involved in the transaction, it may not be worth implementing Blockchain as the proportion of expenses paid by each party will be too large. Furthermore, if a well-established model exists, the long term pay-off may not outweigh the expenses and time involved in implementing and running the Blockchain.

Therefore, the amount of expenses reduced from processes being more efficient should outweigh the costs associated with running and implementing Blockchain if it were to be used within a firm.

5.      Scalability

Currently, Blockchain is known to have limited scalability. As the number of transactions increase, a greater number of nodes are required to process these. To ensure decentralisation, each participating node must process every single transaction in the network. Consequently, as the number of nodes increase, the longer it takes the process transactions as each one has to be verified by a greater number of nodes. Therefore, as the number of nodes are limited, there is a limit on the number of transactions that can be processed at one single time.

A proposed solution to this problem could be to limit the number of participating nodes that need to verify each transaction. This will enable transactions to be processed at a specific speed according to what the limit is. However, as the number of transactions increase, the proportion of participating nodes will decrease and this will lead to centralization (Lorenz, 2016)

6.      Regulation

Technological advances can often be extremely complicated such that regulators do not have a complete understanding of how the technology works. For example, technologies such as the Blockchain network used behind Bitcoin can often bypass regulation to increase efficiency in current processes.

In the financial industry, centralised systems often act as absorbers when a financial crisis hits the economy. This can be seen as an advantage as the network will take a huge hit but the participants involved will not be affected as much. However, in a decentralised system, there is not a single point of failure so a financial crisis may impact all the participants directly which could cause financial problems to many individuals.

The insurance industry is highly regulated in the United Kingdom and it is essential for any technological advances such as Blockchain to align with the current regulations. To ensure whether this is the case, regulators need to have a full picture on how Blockchain will affect both insurance companies and policyholders which can be difficult.

7.      Security/Privacy

Insurance companies store large amounts of sensitive data and hence they are a vulnerable target to many cyber attackers. Implementing Blockchain will bring many challenges in terms of security and privacy such as deciding who will have access to the ledger and how updates will be made. It is also important for policyholders to have trust in the technology as they are providing the insurance company with sensitive information.

Currently, Blockchain is known to be less vulnerable to cyber-crime in comparison to technologies with centralised ledgers. Nevertheless, since the technology is not understood well, it could bring unknown security problems to the financial industry in the near future. For example, even though quantum computers are not readily available at the moment, if cyber attackers can get access to them it will be a serious threat to the financial industry. This makes people wonder whether it is worth investing time and effort into the implementation of Blockchain.

8.      Priorities

There are proposed solutions to nearly all of the challenges listed above. However, many of these solutions require a vast amount of time which insurance companies do not tend to have. In the United Kingdom, they are constantly faced with other challenges created by the ever-changing regulatory environment; for example, they need to keep up with Solvency II requirements, they need to be well prepared for the implementation of IFRS17 by 2021 and so on.

Therefore, if insurance companies can keep up with the competitive market using traditional models, implementing Blockchain to make processes more efficient is unlikely to be one of their top priorities. It is difficult to say whether the current perceived picture of Blockchain is exactly how it will look like in reality. Once the technology is better understood, investors and policyholders will have more confidence in it. After this, insurance companies are more likely to spend time researching whether implementing Blockchain is worthwhile. Moreover, if industries such as the banking industry start to show significant results using Blockchain, it will become more appealing for the insurance industry.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 5

Concluding reflections

It is clear that individuals in the insurance industry are becoming more familiar with Blockchain. The benefits associated with the technology can add significant value to core functions performed by insurance companies such as claims management. As this can reduce the need for intermediaries, it saves both time and money for the company. Moreover, the technology can store a permanent record of each transaction in a secure manner which reduces the risk of fraud and provides transparency to (re)insurers.

The increase in efficiency through the benefits associated with Blockchain enables insurers to provide their policyholders with enhanced customer experience and offer them cheaper premiums due to lower operational costs. In the long term, companies that have successfully implemented Blockchain will not only gain a better reputation due to exceptional customer service, but also a competitive advantage due to lower premiums being charged.

Additionally, companies that have implemented Blockchain will have the chance to access a larger market, and make a positive impact through providing microinsurance services to individuals and families in developing countries. Citizens in these countries tend to be on a low income and have a limited understanding of how insurance products work. With the use of smart contracts, Blockchain can increase the demand for insurance in these countries as contracts can be developed in a way that makes them simple, flexible and affordable.

However, it is important to understand that Blockchain will bring a variety of challenges to the insurance industry. It is difficult to be certain about the implications of Blockchain since the technology is not understood well. Hence, it is possible that the benefits may not hold in the long term and policyholders may lose confidence in the technology if strict regulation is not in place. In addition, it is worth considering whether the big shift in culture would add significant value to a company; particularly when their current models are effective and they have other priorities.

Currently, insurance companies should collaborate and work with experts in the technological field to gain a better understanding of what the technology can do for their firm. Thorough research needs to be carried out in order to assess how regulation may affect insurance companies that make use of Blockchain and insurance companies should work with regulators to find out whether it would be feasible to run their business on Blockchain. It is essential for insurance companies to start this work as soon as possible to ensure their competitors do not gain a potential advantage.

In conclusion, there is not a set answer to whether implementing Blockchain would bring transparency into the insurance industry. The answer would differ for each company and it would depend on numerous factors including, but not limited to, competitor behaviour, business strategy, availability of experts, capital required and regulation. Each company needs to carry out an in-depth analysis on whether the benefits outweigh the challenges for their specific firm.

 

 

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