Industry Perspective

How blockchains could revolutionize the insurance industry (and why they should)

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Industry Perspective

About a year ago, I was involved in a minor car accident in which my car was rear-ended while I was in traffic. Then a few months later, the same car was sideswiped by another car in a parking garage. In both cases, the damage was covered by the other party’s insurance policy, but it took a while before my car was back to normal. Between insurance companies, adjusters, witnesses, repair shops and car rental agencies, it took dozens of phone calls, hours of effort and weeks before the claims process was completed.

This is the kind of process challenge that many believe can benefit from the use of blockchain technology. While the technology is still largely unproven in the insurance industry, blockchain platforms could help streamline and potentially automate insurance claims by reducing reliance on all the intermediaries involved in a claim.

The role of insurers as intermediaries

Processing a claim requires complex coordination among the participants based on well-defined business workflows. Since these participants may not trust or even know one another, we think of them as “counterparties” with possibly opposing financial incentives. Insurers offer valuable services as trusted intermediaries who can coordinate among these counterparties (Figure 1) — such as getting my car repaired and making sure everyone’s accounts are settled.

The insurance claim story

Figure 1. Insurers as trusted intermediaries among parties

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Industry Perspective

Unfortunately, intermediaries can also add friction and bottlenecks. The insurance claim on my car took long to process partly because of the inefficient use of intermediaries in insurance processing. Rather than scheduling the repair and rental car myself, I had to get multiple, possibly redundant, authorizations first. Most of the time I had to call or email someone who acted as an intermediary. Although helpful, these types of intermediaries introduce inefficiencies and costs that bog down claims and other workflows.

Decentralized workflows using blockchain applications may just be the solution.

Blockchain applications

Blockchain as an alternative to intermediaries

Blockchain technology uses cryptographically secure protocols that let counterparties safely transact with one another without relying on trusted intermediaries. All required authorizations and instructions can, or could, be securely shared among counterparties in the claims process once they had access to a copy of the blockchain ledger. Relieved of redundant responsibilities, insurers could offer valued services as participants (Figure 2), rather than as bottlenecks in the workflow.

In practical terms, this means the body shop could start my repair earlier, and I could go pick up my rental car without first calling for approvals.

Figure 2. Insurers as participants, rather than as intermediaries

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Industry Perspective

Can a blockchain really simplify trust? And how would that actually work? Let’s take a look.

• Decentralized trust. Bitcoin, the cryptocurrency that popularized the use of blockchain technology, has been in operation for 9 years, is used by millions of consumers and is worth, all told, hundreds of billions of dollars.

The parties involved in Bitcoin use secure blockchain applications to trust data and transactions recorded in an electronic ledger, which is then distributed so each person has access to a copy. Baked-in cryptographic techniques ensure that all copies of the blockchain ledger are in agreement and have never been tampered with, in a process called “consensus.”

• Asset tracking. The success of Bitcoin and other cryptocurrencies has popularized and validated blockchain technology, paving the way for broader use in the transaction of all kinds of assets, nearly all of which today require centralized authorities to act as intermediaries.

Real estate assets, for example, require involvement of local governments; stocks require brokerages; and health records require hospitals. These types of assets — and potentially anything of value — can be recorded, tracked and transacted in a blockchain ledger throughout the asset’s lifecycle.

Instead of employing a central authority, the consensus process ensures that every transaction remains valid and tamper-free. This is particularly useful in complex workflows typical of insurance.

• Identity management. In the past, identity has been managed by centralized authorities such as governments and influential online service providers. This results in a fragmented representation of identity that does not interoperate between issuers.

Blockchain platforms offer the option for individuals and organizations to retain control of their own identities and associated profile data. This form of “self-sovereign identity” (SSI) management has been developed by blockchain projects such as uPort and Sovrin. SSI promises to reduce liability for insurers, while also mitigating the risk of identity theft and fraudulent claims.

Blockchain insurance applications

Armed with a sense of how blockchain technology works, let’s consider some possible applications in the insurance industry.

Asset tracking and proof of ownership

Insurance companies must first establish ownership of the insured property and also be able to track transfer of ownership.

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Industry Perspective

Ownership records of property for, say, homes and automobiles, can be recorded in blockchain distributed ledgers. In fact, UK-based Everledger tracks gemstones on a blockchain by recording unique laser-read identifiers and tracking proof of ownership.

In this way, insurers can reliably and inexpensively track details and the transaction history of just about any asset of value. These are often digital assets or, using a process called “tokenization,” digital representations of physical things.

Reinsurance and shared risk

Once physical assets are tracked as digital tokens, insurance companies can pool or distribute the risk much like securities are managed in financial applications. The Blockchain Insurance Industry Initiative (B3i) uses blockchain technology for streamlining reinsurance among participating companies.

Title insurance

Property ownership records tracked on blockchain ledgers are made trustworthy and virtually tamperproof. That reduces the need to replicate research efforts associated with title insurance and substantially reduces the likelihood of errors or fraud.

Smart contracts for insurance processing

Self-executing blockchain programs called “smart contracts” are being used for autonomous execution of underwriting, issuance, claims, verification and settlement processes. Smart contracts have the potential to dramatically increase efficiencies and reduce clerical errors.

Peer-to-peer insurance

Groups of participants not individually eligible for suitable insurance coverage might use the decentralized trust and autonomous processing smart contract capability of blockchains to self-insure the group by sharing risk at a reduced cost.

Microinsurance

Certain low-value or exotic products are often just too expensive for coverage by traditional insurance policy processing. Blockchain automation has emerged as a way to reach untapped markets and insure assets that would otherwise not be worth insuring.

Internet of things (IoT) self-insurance

Smart devices and property aware of their own state can interact with smart contracts to buy their own insurance or file claims as established by their sensors. Just like a modern refrigerator informs a homeowner when the water filter needs changing, smart devices and property may also issue alerts when their warranties expire and require renewal, or even renew them automatically.

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Industry Perspective

What the future holds

In a compelling near-future scenario, purchasing a car could automatically trigger an insurance quote smart contract on a blockchain. If purchasers accept an offered quote, they could immediately deposit monetary assets into a new insurance policy smart contract. Another transaction might add documentation proving ownership and value of the insured property.

Subsequently, a collision detected by sensors in a connected car might trigger a first notice of loss (FNOL) transaction, initiating autonomous workflows for verification, repair and rental authorizations, and payment via a smart contract. The policyholder would not need to file a claim, and the insurer would not have to manually administer it. This can reduce the potential for fraud, decrease administrative costs for the insurer and simplify the claims process for the customer.

It’s these kinds of automated blockchain processes that offer the most promise to insurers. While both blockchain and connected cars are evolving, look for more integration of these new technologies as test pilots are deployed in the next 12 to 24 months.

Questions and answers

Promising though it is, blockchain technology raises many good questions that insurers must address before moving forward.

Does blockchain technology replace current insurance applications?

Blockchain technology can certainly disrupt IT processes, but they are unlikely to replace traditional legacy applications. A much more likely and valuable scenario: Traditional insurance systems are extended and enriched with innovative decentralized blockchain applications.

How do users interact with blockchains?

From the end user’s perspective, blockchain applications are potentially indistinguishable from traditional centralized apps. The decentralized architecture, strong encryption and distributed ledger would likely remain hidden behind the user interface of a mobile app or a website. Instead of logging in with an ID and password, users would use cryptographic keys to identify themselves.

Industry Perspective

Questions and answers (Cont’d)

What are the risks associated with blockchain technology?

Blockchain protocols and platforms are designed with strong cryptographic foundations, so they are highly secure and nearly impossible to hack. There are, however, other types of risks that insurers must consider:

• Private key security. As private keys are the only proof of the user’s identity for accessing the chain, it’s crucial to control these keys. Stolen private keys may mean losing control of the asset tracked in the blockchain. Possible solutions include the use of multiparty signatures for transactions and the ability to blacklist stolen private keys.

• Smart contract robustness. Smart contracts contain code that has sometimes been found susceptible to flaws. Code audits and formal verification solutions are now used to address this issue.

• Data storage and confidentiality in a public structure. While assets and transactions stored in blockchains are secure, they may link to off-chain data that’s secured using conventional methods.

What is the current legal and regulatory framework?

Blockchain technology — and especially cryptocurrencies — is a thorny topic for lawmakers. On the one hand, it’s a rapidly evolving innovation not well suited for regulation; on the other hand, the technology promises to shake up the balance of power in particularly sensitive industries such as banking, health, insurance, legal and intellectual property, and therefore requires the highest level of vigilance.

The current law reflects this in-between state, with blockchain technology already recognized by the European Union, but with cautious vagueness. In the United States, although the federal government has not passed any legislation, in 2017 at least eight states were working on legislation that accepted or promoted the use of blockchain technology.

In 2015, New York State passed the BitLicense bill that authorized regulation of companies actively working with cryptocurrencies. In 2017, Arizona passed a law legalizing smart contracts for blockchains. Early in 2018, Illinois released a comprehensive task force report on the economic opportunities of blockchain technology.

Ultimately, the decentralized nature of blockchain architectures may require approaches to governance substantially different from those traditionally imposed by centralized government agencies. More than likely, a mix of participating constituents, including corporations, universities, individuals and governments will manage blockchain networks as they evolve.

Industry Perspective

About the author

Faisal Siddiqi, Enterprise Architect, Distinguished Engineer, DXC Technology

Faisal is an expert in blockchain technologies, mobile, visual and conversational user experience (UX) design, application programming interface (API) design, and open source technologies. As an enterprise architect and distinguished engineer with DXC Technology’s digital insurance area, he directs design, training and development activities, and helps to set technology direction. Faisal also participates in research on and implementation of emerging technologies.

Learn more at www.dxc.technology/insurance

About DXC Technology

DXC Technology (DXC: NYSE) is the world’s leading independent, end-to-end IT services company, serving nearly 6,000 private and public-sector clients from a diverse array of industries across 70 countries. The company’s technology independence, global talent and extensive partner network deliver transformative digital offerings and solutions that help clients harness the power of innovation to thrive on change. DXC Technology is recognized among the best corporate citizens globally. For more information, visit www.dxc.technology.

© 2018 DXC Technology Company. All rights reserved. MD_8118a-19. May 2018www.dxc.technology