Blockchain CIO Perspective
By Mary Kotch, EVP and Global CIO And Marie-Christine Razaire, Underwriter Validus Reinsurance
Just as the internet revolutionized how businesses communicate, Blockchain will revolutionize how businesses transfer data. Traditional insurance companies are ripe for disruption—they’ve held onto legacy technologies such as VSAM and COBOL from the 1950s and 1970s.
Until recently, questioning the antiquated internal processes of the Insurance Industry bordered on sacrilege. However, increasing pressure from tech upstarts has revealed that old processes must give way to new efficiencies.
Blockchain can create data efficiency where it has never before existed. What’s more, the ‘logic’ of contract creation and execution can be largely automated through the magic of Blockchain. Derivative contracts, once a black hole of information, can be assessed for risk and impact at the press of a button.
" The ‘logic’ of contract creation and execution can be largely automated through the magic of Blockchain "
Let’s use a real-life example of how Blockchain can change the Insurance business.
Consider a home owner applying for insurance. To price the risk correctly, the underwriter would like to know:
• Is it really a wood frame?
• When was it built?
• Was the roof updated?
• Does it have an alarm system?
The insurer spends an exorbitant amount of time, money, and resources trying to verify these answers. This process is repeated year, after year, after year. The insurer then passes this information along to their broker, agents etc. where they repeat the process and pass to the reinsurer, and so on.
What they need is a distributed, encrypted, immutable, trustless ledger.
What they need is Blockchain.
Opportunity: Eliminate the Redundancy
For simplicity’s sake, think of Blockchain as having two components, Claims and Attestations.
A Claim is a fact that an individual or organization puts on the immutable Blockchain. For instance, when my house was built, what my income is, or when I last checked my fire alarm batteries.
An Attestation is when a 3rd party certifies that the claim is true. For instance, when my town verifies my property title, the IRS verifies my income, or my web-enabled fire alarms verify a test.
A simple example could start off with Alice, the property owner, having Blockchain and making claims about herself and the property that she claims to own. The town (who have their own Blockchain for each property) is a 3rd party that can Attest that her claims are true. Alice can reference their Attestation in her own Blockchain thus creating an immutable and inter-dependent system of Claims and Attestations.
Given certain assumptions, once these entries are logged onto the Blockchain, it can never be edited nor can it ever be reversed. Alice will always be able to prove that she both made the claim and that the proper 3rd party Attested for its validity at a given point in time. Given the magic of encryption and digital signatures, any party that subsequently reviews the record can have confidence that it is indeed true.
Now Alice wishes to sell the property to Bob. We are now introducing Bob’s Blockchain that is intertwined with the other two in an encrypted and immutable way. Any future party can now check all of the intertwined Blockchains and have confidence that any fraudulent entry would “break the chain”.
Let’s say the new owner Bob wants to buy insurance for his new property. The public Blockchain can store more than just ownership info. If the asset is a building, then all the details of the building such as, type, age, title, photos, etc. can and should be stored on the asset’s Blockchain.
Bob can also share his Blockchain with the insurer. The insurer can then verify ownership by examining the intertwined Blockchain history of Bob and every other Blockchain he has ever interacted with. The insurer’s ledger will have its own Blockchain and add one additional ledger point verifying ownership and custody of the asset.
If coverage is bound, the insurer will add to the Blockchain of the asset, the block chain of Bob (and the Blockchain of any other stakeholder) the details of the insurance transaction. If any claims occur, those claims would also be added as new links in the chain, so that any future transaction involving the asset will properly document the claims history. Over time, the legitimacy of the asset and the owner of the asset gets stronger, more robust.
So what does this mean for the insurance industry? There are several profound changes that come to mind.
First, Blockchain will eliminate many aspects of the insurance application process. Since the customer can share history without requiring trust between parties, one can envision insurers just analyzing the Blockchain and submitting competitive bids for business.
Second, technology may completely change or eliminate the need for inspections. In a world where Internet of Things (IoT) devices at a home can report smoke, moisture, damage, wind speed, etc. inspections seem superfluous. All this data would be entered into Blockchain so that insurers could preclude tampering.
Property damage claim from a faulty new roof? With Blockchain, the identity of the contractor, materials used and the contractor’s insurance provider are all seconds away from being retrieved—and smart contracts could be used to trigger automatic payments.
Certificates of Insurance will also be a thing of the past. The Certificate of Insurance is an expensive and time intensive process that, like Title Insurance, may be completely eliminated by Blockchain.
Lastly, use of an encrypted, immutable, trustless ledger makes insurance audits mostly unnecessary. Payroll, sales, and inventory records can all be linked between the insurer and insured via the Blockchain ledger.
Industry is just beginning to understand how to use and apply the revolutionary idea of Blockchain technology. But be forewarned: you ignore this new disruptive technology at your peril.
To paraphrase the old saying, an opportunity to use Blockchain to transform your business is never lost - a competitor is always there to find it for you.