The insurance sector looks set to follow the finance industry and benefit from distributed ledger technology, such as blockchain. Insurance industry experts believe that this new technology will drive down costs even further than it has done in banking.
The adoption of new technology is being driven by B3i, a collaboration of 15 leading insurance and reinsurance companies who first began investigating how it could be used to enhance efficiency in October 2016. Now, other companies have been invited to become involved in a testing programme.
Predictions vary but efficiency savings of up to 30% have been mooted with the adoption of blockchain technology, which would come from administrative savings and consequent lower fees and rates. Industry insiders are unsure as to how quickly the software could be widely adopted, with some suggesting that larger companies will still not be on board in five years’ time. However, this seems to be a minority view, as blockchain is already being used in several niche areas, and most commentators believe that a full industry-wide roll-out will be underway by later this year.
Blockchain experts believe that there are many areas of insurance and reinsurance that could benefit from the use of the verified ledger process in addition to those being investigated by B3i.
There is renewed excitement in the reinsurance sector, which is traditionally data and paper heavy. In particular, blockchain could heavily reduce costs in large claims and help to smooth disputes between insurance and reinsurance companies by consolidating and verifying data crucial to a settlement.
The latest report from B3i suggests that they are comfortable with the technology after assessing a number of different platforms. What has become apparent, however, is that the existence and success of a distributed ledger will require inter-company collaboration.
As well as decreasing costs, the B3i project is also looking to increase customers by targeting the estimated 3.5bn people who have limited access to insurance or cannot afford it. This represents an untapped premium potential of $800bn, according to some estimates.
The introduction of distributed ledger technology is key to leveraging the potential of these new insurance contracts.
By reducing information asymmetries, companies could free up a larger share of the insurance premium for use in direct loss payments. This should encourage the take up of insurance across the board and also widen access, thus making the business case for the B3i experiment, and make insurance more attractive, particularly to digital-savvy customers and potential employees.
In its first year, B3i has produced results that have genuinely excited the industry. The intention is to deliver a self-sustaining entity that is applicable to legally binding contracts, in order to develop and run a platform applicable to all companies. This has involved the use of open-source collaboration tools, encouraging peer-to-peer exchange, alongside blockchain development work.
There are challenges ahead, including capitalization to support development and, of course, regulatory approval. Technical innovation, such as SWIFT in banking, may also be required.
This article was written by Nick Hoadley, Managing Director, Insurance Search.
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