Insurance & Blockchain – Signal vs. Noise

The insurance industry is actively evaluating Blockchain and looking closely at its potential. Along the way, each company will have unique reasons for adopting Blockchain, and Red Chalk Group can assist those looking to navigate the Blockchain enabled future for insurance.

Blockchain’s Wake Up Call

“If the Blockchain has not shocked you yet, I guarantee it will shake you soon,”1 writes William Mougayar in the opening chapter of his book, The Business  blockchain which provides an insightful and provocative view into a Blockchain enabled future. And the insurance industry, make no doubt, is starting to shake.

One need only look at recent announcements this year of two insurance  industry consortiums being setup to start addressing the challenges and opportunities presented by Blockchain and Distributed Ledger to see the movement that is taking place. When you realize that one of the consortiums involves the world’s biggest reinsurers and that most of larger players in the insurance industry are actively evaluating Blockchain, you realize these are not just slight trembles, but more like plate tectonics-scale movement for an industry not always seen by its customers as technology forward.

1 Mougayar, William. The Business Blockchain: Promise, Practice, and Application of the next Internet Technology. Hoboken, NJ: John Wiley & Sons, 2016, page xxi.

The Reality Gap

Blockchain is a nascent technology with all the pitfalls that a nascent technology brings – most notably a massive reality gap between future promise and today’s reality. As we work with insurance clients to help identify where Blockchain has the most potential in their organizations, the most important tools we bring to the table are tools to help identify, evaluate, and prioritize Blockchain opportunities. The simple reality is that 90% of opportunities identified do not have a compelling business case or internal value proposition. The 10% that do, however, have the potential to drive operational improvement, improved pricing, new products, and much more.
The ultimate challenge lies in identifying where best to start and to focus limited resources.

At Red Chalk Group, we engage every Blockchain discussion with a simple fundamental question for potential use case, “Why Blockchain, and why uniquely only Blockchain”. It’s amazing how much effort can be saved by focusing conversations on what the unique characteristics of Blockchain are for the specific product (or capability) and if they can be employed in concert with other technologies such as Big Data, Artificial Intelligence, Machine learning, and Analytics – these combinations are where the real power of Blockchain identified by William Mougayar begins to take hold.

Knowing Where to Start

The first question many ask when beginning to explore Blockchain is, “How is this different from what I already do with my existing infrastructure and relational databases?” It’s a healthy, skeptical question. After all, Blockchain can be viewed as a database using encryption and smart contracts are simply routines of software code. The truth of the matter is that not all situations are best served by using Blockchain and in certain cases, a centralized database with encryption may be best. In fact, many of the use cases that we have seen are not uniquely suited for Blockchain. As already stated, the challenge is to identify unique business and technical requirements that point uniquely and only to Blockchain.

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Red Chalk Group has developed the VAULT™ framework as a purpose-built set of tools to assess Blockchain opportunities. The framework is derived from core Blockchain capabilities and frames the assessment from a business perspective. As use cases are evaluated using this framework, it becomes clear that stronger Blockchain use cases tap into many of Blockchain’s capabilities. Some stronger example use cases are provided to the right. Please contact Red Chalk Group if you would like a more detailed discussion of these or other insurance use cases.

Parametric
Risk

Involved parties agree that the source for event details will be from a predetermined “oracle”. When an event occurs and the “oracle” provides event details (e.g., cancelled flight) self-executing smart contracts are triggered and claims resolution occurs.

Reinsurance

Provides certainty to all involved parties that contract terms are executed as originally agreed upon. Increases confidence that any potential claim information is accurate, true, and has a lower likelihood of fraud.

Peer to
Peer

Enables secure insurance transactions between unknown counterparties. Parties can be confident that contract terms will be executed, as the possibilities for fraud and deception are greatly minimized.

Claims

Enables claims to be processed with greater accuracy and less labor intensity. Allows secure sharing of confidential customer information among competitors to reduce the potential for fraud.

On
Boarding

Securely share information with the appropriate business lines and other functions to reduce the redundancy of information requests and shorten the time frame between contract signing and conducting business with new clients – all while maintaining strict regulatory compliance.

vault framework

Evaluation framework for Blockchain insurance use cases

VALIDITY

Impact of errors and cost to mitigate (e.g., incorrect capture of information presented)

AUTHENTICITY

Impact of misrepresentation

UNIQUENESS

Potential for underlying asset to be fraudulently involved in multiple claims

LONGEVITY

Role of data integrity – degree that changes to historical data can materially impact product economics

TRUSTLESS

Level of counterparty interaction and extent and impact of information asymmetry

Next Steps

The insurance industry is actively evaluating Blockchain and looking closely at its potential. Along the way, each company will have unique reasons for adopting Blockchain, and Red Chalk Group can assist those looking to navigate the Blockchain enabled future for insurance.