When Insurance gets its hands on Blockchain: Insurtech?

Blockchain! ‘The most important IT invention of our age?’ (J.Naughton)

When someone says Blockchain most people will automatically link it to “Bitcoin”, however only a handful will understand and see the full potential of this technology. Indeed up until now Blockchain has been mainly used in the finance industry, making it one of the main technologies in the FinTech space, but can it be used somewhere else? Can it even revolutionise another industry and change the rules?

The insurance industry is one of the sectors which has had its eye on the technology for a good moment. But how can Blockchain be useful in the insurance industry?

It really is this year only that the industry made a move. The likes of Axa has invested US$55 million in the start-up Blockstream (main contributor in the Bitcoin Blockchain) and Allianz France has recently shared to the press its desire to invest in the technology next year, making it a key point of their new strategy.


Smart contract and Oracles revolution!

But what is a Blockchain? The simple answer would be to describe it as a database or distributed ledger recording that a transaction happened and when. That means, a transaction needs to be done correctly and controlled, in order to do so the Blockchain has several programs such as the “smart contract” with the concept “oracles”.

The term “smart contracts” raises in mind the idea of a virtual contract between the insurance company and the customer versus the current hard copy. But you could not be more wrong about it (do not worry though as I fell into this play on words as well).

Smart contracts are standalone programs that, once started, automatically execute pre-defined conditions. They function like any conditional statement “if – then” (if such a condition is satisfied, then such a consequence is running). The main advantages are to reduce audit costs, enforcement, arbitration and fraud; not to mention the ability to overcome the problems of moral hazard.

Oracles are entities inside a smart contract that will receive the message and run the codes and if the code execution leads to a withdrawal from the contract to some particular address then the oracles circulate a transaction sending the funds and sign it. In other words, let’s think here about a car, where this one will be the Blockchain, the motor the smart contracts and the components of the motor the oracles. So when you turn the key, a message will be sent to all parts and the engine will start, if all conditions are fulfilled (e.g. if no fuel the motor won’t start).


But in practice how can this really be applied and work for insurance?

Back in 2015 at the Hackathon conference in London, participants witnessed a speaker presenting a program created for travel insurance. When the observation was that 60% of the people having a flight delay/cancellation policy do not claim a refund back from their insurance, this program was able to instantly transfer money into the customer account when such flight delays or cancellations occur. All of this thanks to the smart contracts and Oracles that allow an automated process, sparing the customer to fill out a form to start the long and expensive process of claim.


But do insurance companies really want to make it that easy for customers?

Hang on! I am sure here, that we are all thrilled about this application and thinking this will make our life easier and we get our money back without even asking for it. But when thinking about it what does the Insurance company gain out of this; apart from enhancing the customer experience?

Well such details are obviously not shared but what we know is that their costs will be reduced since the main purpose of the Blockchain is to remove the middlemen from the equation, guaranteeing cost effectiveness (no third party) and speed of the process. Not to mention their customers will be more than satisfied (which is their main concern after all!)


Opportunities for Blockchain: a bright future ahead?

Despite the barrier of adoption and probably a slow adoption speed due to increasing reclaims, we expect Blockchain to become a key technology within the insurance industry as we had a quick view of how this can change the rules.

Blockchain here proves not to be only a technology for the finance industry but also for other like the energy sector, as seen in Australia recently with the introduction of peer to peer solar energy, or the record industry, as discussed in the UK. We will take a closer look on the Blockchain technology in these industries in the next couple of weeks – so watch this space!