The modern insurance industry owes much of its development to the famous Lloyd's Coffee House of London. Here, merchants and ship-owners seeking protection would obtain a signature under the name of their ship or cargo from someone willing to take on the risk of loss.
This signature provided a physical record to all parties that the individual, literally the under - writer, would guarantee restitution in the event of loss. Whilst providing peace of mind to the insured, it implicitly required a great degree of trust that the signature would be honoured.
In the 300 years since its inception the insurance industry has had to evolve many times to respond to the changing world. Sometimes the driver has been consumer and business requirements, at other times, new laws and regulations, and often this evolution has occurred in response to the latest and greatest technological developments. Nevertheless, whilst the industry would be unrecognisable to a 17th century underwriter, the requirement to provide certainty of coverage and to record all transactions still underpins insurance.
Today the insurance industry is once again facing a changing situation which will undoubtedly impact on how it looks to transact business. The driver? A technology called blockchain. For many, this is a term which may ring bells from overheard conversations in the workplace or the odd article in the mainstream media. The headlines seem to claim that blockchain could revolutionise the way we do business and that it can be bigger than the internet. This is still tempered, however, with some words of caution - that implementation is too expensive, that it sounds like a great idea but simply is not practical.
What is blockchain?
At its core, blockchain is the latest technological advancement which enables the insurance industry to do what it has always done: record transactions and in doing so provide certainty. The potential economic value of blockchain is that it could dramatically improve the ease of transacting whilst at the same time increasing the level of visibility and trust for all parties involved.
On a more technical level, blockchain is a mutual distributable ledger which facilitates the process of chronologically recording transactions and tracking assets between parties in a business network. Each new transaction, or block, is validated by every party in the network to ensure there is consensus about what is being recorded. Once validation has been given, no Block can be tampered with or changed; even if a mistake is made, it can only be rectified with a new block, meaning both the mistake and its correction are recorded in blockchain for all parties to see. Transactions are facilitated by smart contracts; digitalised legally binding documents coded onto blockchain.
The potential to dramatically reduce transaction costs and operational friction, whilst simultaneously increasing the level of trust and transparency, means there is no shortage of real world examples to illustrate the possible uses and benefits of blockchain across a multitude of settings.
For example, the recording and tracking of the origin of a diamond, via blockchain, from the moment it is uncovered through to the final consumer, could increase trust and confidence in the quality and source. This in turn would help to combat synthetic diamonds and those taken from war zones, giving peace of mind to the consumer. Similarly, the registering of all property ownership on blockchain could remove the need for significant amounts of legal intermediaries during a sale process, if all parties had trust in the information validated on blockchain.
Greater contract certainty
For the insurance industry specifically, the opportunities that exist for blockchain are exciting and have the potential to revolutionise the way we work. It is no secret that the process of writing insurance contracts across multiple countries and regulatory jurisdictions is laborious, leading to significant operational friction and cost. A blockchain-enabled single source of information available to, and verified by, all parties would both speed up the transaction process and give greater contract certainty to our clients at a lower cost. In addition, the complex world of premiums and claims would clearly benefit from a blockchain solution which gives more visibility to the tracking and processing of payments.
Alongside this blockchain can store and execute smart contracts which self-execute when predefined conditions are met. This can be hugely useful for the insurance industry with its reliance on large amounts of documentation between multiple parties, and its quest to reduce fraud. One example is a life insurance smart contract that pays out upon the death of the policyholder. The contract performs real-time checks against online death registers so it knows when the payment should be made. Another is a flight insurance policy whose smart contract initiates pay-outs when cancellations or delays are reported from verified flight data sources.
Future applications of blockchain could see telematics data being stored and analysed to monitor driving habits and offer cheaper insurance to safe drivers. Eventually, devices connected to the Internet of Things, such as cars, electronic devices and home appliances, could have their own insurance policies registered and administered by smart contracts in a blockchain.
The first multinational blockchain insurance programme
As with all significant technological advancements, with so many potential opportunities it is difficult for companies to know where to direct investment. Do you lead and gain first mover advantage or do you wait and follow as the possibilities emerge?
At AIG we recently announced our first successful blockchain pilot in collaboration with our customer Standard Chartered Bank and our tech partner IBM. We recognise the potential for a blockchain solution to our multinational insurance process, and so our pilot focused on whether a multinational insurance policy covering four countries could be digitally coded onto blockchain as a smart contract. In successfully proving that this was possible, we now have a foundation from which we can work to realise what we believe is the true potential of blockchain enhancing trust and contract certainty for our clients.
A note of caution
Whilst the potential of blockchain is clear, the technology is not without its sceptics. As with any new technology, the level of initial capital investment could be high and many question whether the reduction in transaction costs will outweigh this. The need to integrate blockchain into multiple existing systems across all participants in the business network adds further complexities and cost and requires a wide uptake to achieve scale. Finally as with any new technology, cyber security remains a concern to consumers and regulators, particularly as personal data could be shared across multiple parties. All of these concerns are legitimate and must be addressed to ensure the benefits of blockchain can be realised.
The coffee house of Lombard Street may be long gone, but the desire of the insurance industry to provide clients with greater confidence and certainty over their transaction still exists. Whilst significant work and investment remains to realise its potential, the feeling of many in the insurance industry is that the blockchain revolution is coming soon.
Ariel Berman is vice president, financial lines at AIG
Tim Brown is executive manager, liability and financial lines, commercial Europe, also at AIG.