Last Updated 2/27/2020
Issue: Blockchain is a ledger technology allowing the making and editing of transactional records certifiable and permanent. It uses a decentralized database to maintain a continuously growing list of data records secured from tampering and revision. Blockchain consists of data structure blocks that may contain data or programs—with each block holding batches of individual transactions. Each block contains a timestamp and a link to a previous block.
Insurers are eager to invest in the technology; a 2019 survey found more than 80% of insurance companies have plans to adopt blockchain applications. Blockchain applications in insurance are in the early stages of development, but potential use cases continue to emerge. Records written to a blockchain are permanent and can't be deleted. As a result, blockchain-based solutions provide a reliable audit trail and could potentially reduce fraud risk, streamline policy administration and manage claims in a transparent and irrefutable manner.
Background: Blockchain technology is software architecture, developed in 2008 as part of the conception of the cryptocurrency bitcoin. It provides shared, immutable records, making processing transactions less error-prone and enables process and organizational efficiencies. The most well-known blockchain application is the Bitcoin Network, a peer-to-peer network allowing for the proof and transfer of ownership without the need for a trusted third party.
Bitcoin transactions are one example of smart contracts which are any decision executed by a computer algorithm on a blockchain. Smart contracts can be more complex than a bitcoin transaction, although the concept of data encryption and decentralization still apply. For example, a buyer of a product sold on the internet might require the seller use a smart contract in the transaction of the product. The smart contract might be programmed to pay the seller only when the postal service tracking webpage says the package was delivered. Once the contract is in effect, it cannot be changed by either counterparty. Any changes to the terms of the contract must be renegotiated as a new "block". Smart contracts have an added degree of trustworthiness because they cannot be edited, and they are not enforced by any organization that may have a possible conflict of interest.
Blockchain's potential use cases in insurance:
- Claims management – a smart contract in combination with IoT devices could be used to automatically trigger a claim under certain, predetermined circumstances. This concept can applied to products like crop insurance where a parametric smart contract would be triggered when drought conditions are reported by a verified weather/climate database.
- Fraud prevention – a shared, decentralized ledger helps parties share data and verify authenticity to help spot potential signs of fraud.
- Proof of insurance – a ledger containing certificates of insurance could automate an historically paper process.
- Consumer privacy - A blockchain for identity verification would allow health or other personal data to remain stored on a user's personal device; the blockchain would show at what time and by whom the data was accessed by. This could be applied to credit scores and insurance credit scores, thereby reducing the risk a person's information is accessed by a malicious party while in the control of a third party.
- Travel insurance - a smart contract that could collect premiums only when the smart contract is notified by the policyholder's smartphone the person is traveling.
Status: The global blockchain in insurance market valued an estimated $62.53 million in 2018 and is estimated to top $1 billion in the next four years. Given the vast possibilities, it seems blockchain technology is here to stay and will likely appear in many forms and adaptations in the future. In the near future, we may see more insurance processes operate on a blockchain, especially given the insurance industry itself is an administration-laden database. For now blockchain technology implementation in insurance is limited, but growing quickly especially among industry alliances like RiskStream Collaborative and B3i.
The NAIC Innovation and Technology (EX) Task Force, created in 2017, is charged with monitoring emerging technologies like blockchain. The Task Force provides a forum for discussion of innovation and technology developments in the insurance sector in order to educate state insurance regulators on how these developments impact consumer protection, insurer and producer oversight. CIPR hosted an event at the NAIC’s 2019 Spring National Meeting on the Future of Blockchain in Insurance featuring a panel discussion with industry experts and regulators.
Committees Active on This Topic
CIPR Event: The Future of Blockchain in Insurance
Blockchain: Implications for the Banking and Insurance Industries
January 2019, Vermont Department of Financial Regulation
CIPR Webinar: Understanding Blockchain Technology and Its Insurance Implications
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