It’s no surprise that insurance carriers, brokers and reinsurers are inspecting a variety of digital technologies, including blockchain and distributed ledger technology. A sizable portion of the insurance process involves transferring data across businesses. With distributed ledger technology, competitors within the industry can securely share data or information with one another on a permissioned basis, abating duplicative efforts, minimizing reconciliation issues and reducing costs. In addition, insurance-related organizations can leverage the shared ledger to avoid costly data intermediaries and enact smart contracts in order to automate various procedures.
Existing research has found that this technology will be particularly impactful to the insurance space.
- A McKinsey & Company report found that the insurance industry accounts for the most blockchain uses (22 percent of the total), distantly followed by the payments industry (13 percent).
- Capgemini research indicates that personal auto insurers could save $21 billion a year through lower costs, which can be realized through the application of blockchain-enabled smart contracts.
- Recent research from Boston Consulting Group goes further, suggesting how important this could be organizations operating within the P&C insurance sector. In personal lines, for example, the report suggests an all blockchain-insurer could have a combined operating ratio 10-13 percentage points lower than a traditional insurer. This same research suggests similar declines in combined operating ratios for blockchain utilization in commercial insurance (10-13 points) and significant improvements in reinsurance as well (4-5 points). All told, blockchain implementation could lead to a $200 billion in technical margin for the P&C insurance sector alone.
While the technology seems to have a bright future, it is not a cure-all. Like most technologies, blockchain and distributed ledger technology should only be applied for appropriate and fitting cases. Blockchain technology is unique in that it is network-based. Although blockchain and distributed ledger technology could be leveraged within a single organization to bring various departments together, it is unlikely that operating a company-specific blockchain will be as productive as operating a blockchain that involves a larger network of competitors or participants. In order to get the most out of blockchain or distributed ledger technology and leverage network effects, the industry must join together, working collaboratively and collectively to design and build holistic blockchain solutions. The Institutes RBA Alliance is bringing brokers, insurers and reinsurers together to do that.
The Institutes RBA Alliance members are involved in leading all areas of the alliance governance and activity. For example, members work with RBA products staff to design use cases on behalf of the industry and then work with other RBA departments and service providers to build out the use cases. The Institutes RBA Alliance has a program for solution providers, which currently consists of organizations like Accenture, EY and Deloitte. These solution providers have helped by building out the RBA distributed ledger framework (Canopy), developing the apps for member requested use cases and ensuring the underlying distributed ledger is completely secure.
While The Institutes RBA Alliance has inspected a variety of use cases, from a build-perspective the Alliance is currently focusing on bringing two personal lines auto use cases to production: proof of insurance verification and first notice of loss data sharing. At this point, member cohorts have been formalized to test the applications and the underlying Canopy distributed ledger framework. The hope is that firms will begin production implementation by late summer. A fairly detailed report was recently published demonstrating some of the benefits associated with these two use cases.Some of the key findings are also summarized below.
Policies: Proof of Insurance Verification
Proof of insurance is required in a number of circumstances and often leads to costs for insurers as they field calls, exchange information, verify coverage and provide record-keeping services. In the United States alone, approximately 26.4 million people are involved in an auto traffic stop annually, and police report over 6.3 million auto crashes in a given year. Each of these instances, totaling 32.7 million occurrences, involves auto proof of insurance validation — and likely represents a small portion of total auto-related proof of insurance verifications, which also include multiple vehicle crashes, registration checks, etc.
Distributed ledger technology, like blockchain, can help ease this process on consumers, agents/brokers, carriers and other interested parties by providing a single source of truth and a permissioned means to transfer insurance information across various parties. If a company is involved in a consortia network, like The Institutes RBA Alliance, a DLT-based application helps the companies involved in the consortium to share data, cutting down on paper-related costs or data storage and the costs incurred by complying with state-based insurance verification systems as many of these systems mandate submission of complex data feeds, each of which is state-specific. Longer term, if adopted by a large network, the proof of insurance use case could cut down on uninsured motorists, which represent about 13% of drivers. The costs of these motorists are generally passed onto insureds through their own UM coverage.The proof of insurance application may also have impacts on the customer experience by streamlining activities and easing the data sharing for the consumer.
Claims – First Notice of Loss Data Sharing
According to recent auto claims statistics in the U.S., the number of auto bodily injury claims in a given year is 1.7 million, and the number of auto property damage claims is roughly 6.8 million, if you assumed they weren’t part of the same claim, the total is 8.5 million auto claims. This number is much, much larger if aggregating claims across lines of business and totaling them globally. Regardless of the line of business, the first notice of loss experience doesn’t meet expectations for consumers: it should be more streamlined, personalized, seamless and fast. For businesses (insurers, brokers, etc.), the current inefficient, manual process involves a large amount of iterative information exchange, wasted time and resources, irreconcilable recording keeping and redundant completion of various forms.
A decentralized ledger provides the means to share data from insureds and insurers to the various involved parties (such as other insurers and collision centers) in a trusted manner without an intermediary while maintaining security through permissions. This can greatly improve the process, cutting costs for insurance-related businesses, which could be passed on to consumers. Perhaps the greatest benefit, however, is the insurer-to-insurer exchange that can occur. According to RBA members, each insurer to insurer call related to a first notice of loss claims takes 15 minutes of time, and there are several of these calls. With blockchain or distributed ledger technology, a single source of truth could be referenced, cutting down or eliminating these calls.
Recent research analyzed the effects of instituting two of RBA’s personal lines auto insurance distributed ledger applications (Proof of Insurance and First Notice of Loss) within the U.S. market. The findings suggests that RBA membership could save between $19 million- $68 million in year 1, between $60 million-$190 million in year 2 and $99 million-$277 million in year 3 by instituting the applications. When production-grade blockchain or DLT use cases, like these, proliferate across the industry, savings/benefits will mount and the first entrants will be best positioned to understand the associated efficiency gains and reap the competitive rewards. Therefore, industry participants are best served engaging early in blockchain efforts, rather than waiting on the sidelines.
Patrick G. Schmid, PhD is the Vice President of The Institutes’ RBA Alliance —a risk management and insurance blockchain consortium. He oversees RBA’s products, operations and technology departments. Dr. Schmid also offers blockchain thought leadership for The Institutes and coordinates the RBA Alliance consortium of insurers, brokers and reinsurers. He collaborates with industry participants and technical partners in developing production-ready applications that can lower costs, improve the customer experience and drive efficiency across the insurance industry. Patrick was the 2018 recipient of the International Insurance Society’s Leaders of Tomorrow award.
Dr. Schmid formerly served as the head of The Institutes' Enterprise Research department, where he led a teams of data scientists and researchers in developing analytical solutions and market insights. He has also served as the Director of Research for the Insurance Research Council (IRC), a division of The Institutes. In this role, he led efforts to study public policy-related insurance issues. He has a MA and a PhD in economics from Temple University. He has taught economics and finance at a number of Philadelphia-area colleges and universities. Prior to working in the insurance industry, he worked as an economist for Moody's Analytics.