Blockchain and the Insurance Industry

The insurance industry’s interest in blockchain has grown significantly in recent years. A 2018 report from Accenture projected that the global market for the use of blockchain in insurance could grow to $1.39 billion by 2023 — up from just $64.5 million in 2018. But how do distributed ledgers and decentralized structures provide value in insurance? Here we examine the aspects of the insurance industry that blockchain could disrupt and which companies are leading the way.

Insurance companies are unlikely to use the blockchain networks you may be most familiar with, like Bitcoin or Ethereum. These blockchains are public and permissionless, which means anyone can access and participate in the network or view the data recorded on the blockchain. As a result, Bitcoin and Ethereum are not likely suitable for a company that is required to keep sensitive information private.

Insurance companies are investigating the use of blockchain technology focused on private and consortium blockchains. A private blockchain is controlled by a centralized entity that determines who can transact on the network, how transactions are verified, and who can view the information recorded on the blockchain. Likewise, a consortium blockchain is controlled by several companies or entities, and has exclusive access to the blockchain’s essential functions. Each entity participates in the consensus process as a transaction validator and has permissions to view certain types of data.

Public, private, and consortium distributed ledgers each have their own benefits and disadvantages. Public distributed ledgers are censorship-resistant, for example, while private and consortium blockchains may offer faster transaction processing times and are easier to modify.

Blockchain Insurance Use Cases 

Blockchain technology can be employed to combat financial crimes by streamlining a variety of processes, including Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, fraud mitigation, claims procedures, and related financial transactions.

Insurance regulations typically require that insurance companies carry out KYC checks on every customer — a particularly time-consuming process. If insurance institutions were able to access a single, shared blockchain database for customer KYC/AML information, this could save significant costs, while limiting the risk of financial crime. In this scenario, one institution would carry out KYC/AML procedures, then place the results of their audits on the blockchain, and other institutions within the consortium could request access to that data instead of each insurance company running the entire process themselves for every application.

A shared blockchain insurance database would be a boon to fraud prevention efforts. A common method of insurance fraud is when one entity makes claims for the same loss with multiple insurers. By maintaining a shared database of claims, malicious activity could be detected and stopped. Additionally, insurers could use smart contracts to simplify claims processes and related financial transactions. For example, if one company is required to pay another company for a claim, the process is currently carried out manually by writing a check or initiating an electronic transaction, which then goes through an involved clearing process. Instead, smart contracts could enable insurers to automate this process by writing the terms under which the claim would be paid into the smart contract code, meaning that when the terms are met, the smart contract would automatically trigger a payment.

Companies Already Using Blockchain Insurance 

Insurance companies interested in pursuing blockchain technology have already begun to organize themselves into consortia. B3i, which utilizes R3’s Corda technology, was an early consortium of insurance companies that was later converted into one company. Presently, B3i is owned by 20 insurance companies including Allianz, Liberty Mutual, Munich Re, and XL Catlin. The company released its first blockchain insurance application on Corda in 2019, a Property Catastrophe Excess of Loss Reinsurance product. The platform protects insurance companies from the financial risks involved in large-scale, catastrophic events, establishing a limit on the amount an insurance company must pay.

RiskStream Collaborative is another consortium of insurance companies exploring blockchain applications that includes State Farm, Chubb, Aon, and Nationwide among others. In 2020, RiskStream successfully tested a contact-free proof of insurance application. The Corda-based product allows policyholders to share proof of insurance through an access key or QR code instead of a physical insurance card.

Additionally, the American Association of Insurance Services, a not-for-profit insurance advisory organization that partners with 13 reinsurance companies including Swiss Re, Guy Carpenter, and Travelers Boiler Re, developed openIDL in 2018  —  a product that automates regulatory reporting processes and is built on Hyperledger Fabric.

Some blockchain-native companies have also sought to enter the insurance market. Etherisc is an Ethereum-based protocol for blockchain insurance products that offer flight delay insurance, hurricane protection, and crypto wallet insurance, a novel blockchain insurance product that provides protection against theft and hacks. Likewise, Nexus Mutual is an Ethereum-based blockchain insurance alternative that provides coverage for smart contract losses in the event of a hack or security breach that results in loss of user funds.

With growing interest from the world’s leading insurance providers and products already going to market, blockchain technology has the potential to disrupt the insurance industry. Consortium blockchains could pave the way for industry collaboration and automation of processes ranging from fraud detection to the payment of claims. Blockchain-native companies are also seeking to leverage the blockchain to create decentralized alternatives to insurance and disintermediate current industry giants.