Best's Review

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Insight: The Blockchain Opportunity

Distributed ledger technology can help life insurers improve their relationships with customers and improve security.
  • TBA - Writer
  • September 2017
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Blockchain is currently one of the hottest topics in financial services. First introduced as the technology behind the currency bitcoin, its value and potential are now recognized much more broadly.

Blockchain is a distributed ledger or database of transactions. "Distributed" means that identical copies of transactions are kept on multiple computers. Owned by public entities or between participants in a transaction, blockchains are not centralized or controlled by any one participant. They require no intermediary for validation or approval and are designed to be an indisputable record of transactions.

While it is widely acknowledged that blockchain has tremendous potential, we have a long way to go before its full capacity is realized. An article in Harvard Business Review likened blockchain technology development to that of email and the internet. It took almost 30 years before the technology revolutionized the way businesses and people communicate. Blockchain is arguably starting in a similar place.

Many are exploring the potential use of blockchain technology in the financial services industry. Researchers predict it has the capacity to solve many of the challenges the industry faces--from lowering administrative and claims processing costs, to expanding access to underserved markets and enabling immediate-issue products. As a result, more than $1 billion has been invested and more than 2,500 patents have been filed in the past three years, according to a World Economic Forum/Deloitte report.

The biggest effort to date is B3i, a group of 15 reinsurance and insurance companies looking to improve the efficiency of data shared between companies. A few insurance companies are also exploring the technology with low risk, internal use cases.

Using blockchain technology, "smart contracts" could eliminate much of the back and forth characteristic of contract development. Clients and insurers could submit information and track transactions on a distributed ledger before a contract goes in force. The contracts could still be negotiated and revised, but information would move more quickly. It would also have an auditable trail.

Another benefit smart contracts offer is that they can be self-executing and self-enforcing, eliminating the need for intermediaries in a transaction. Companies could program triggers to start automatic, agreed-upon processes like payouts. Not all insurance contracts may be amenable to this treatment, but it is worth consideration.

Annuity carriers and life insurers may also reap benefits. The potential to improve operational efficiency, improve security, and deliver a better customer experience are compelling reasons to look at use cases.

It's hard to know when the best time is to adopt a new technology. Start too soon and the time and effort could be wasted in learning. On the other hand, early adopters have the ability to help determine industry standards, but ultimately all carriers could benefit from the gains.

(Best's Review columnist Alison Salka, PhD, is senior vice president and research director, at LIMRA. She can be reached at bestreviewcomment@ambest.com.)



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