Innovation in insurance: Unlocking the benefits of blockchain
The insurance sector is one which is on the brink of transformation, with many traditional insurers needing to look to technology to ensure they stay ahead of the curve and maintain their competitive edge. In the first of our ‘Technology in insurance’ series, we investigate the potential impact that blockchain could have on the sector and its key leaders.
We recently spoke with Ken Marke, Chief Marketing Officer for B3i, the leading global insurance industry blockchain consortium, to get his views on how blockchain can be used to address customer pain points, whether the partnership nature of the insurance sector is ripe for deploying it and the potential impact on the sector. We also discussed whether a courageous approach is needed by executive leaders to balance the contrary dynamic of customer and shareholder return.
What is blockchain technology and what does it do?
In the insurance sector, the term blockchain refers to distributed ledger technology. In very basic terms it’s a central database which is shared (rather than owned) by a network of connected parties who share and use the same data and assets. For example, home owner, insurer, reinsurer, repairer, loss adjustor, claims handler, risk management, underwriting and accounts. Information can also be integrated from ‘Oracles’ such as the Met Office, Air Traffic Control or Emergency Services. Each record or log added to the chain is immutable, meaning it cannot be changed, and as each party in the chain has access to the same version of the truth, transparency and trust becomes immediate. The benefits arise from the provision of information in real-time. Presently, several business days can be attributed to checking and referencing documents, but the immediacy of information will mean that completing processes will be shortened if not eradicated.
The benefits of blockchain are considerable but are most likely to apply to reducing fraud, shortening the claims process and speeding up cash flow, right through to allowing insurers to potentially use less capital. The overarching benefit is it should get help to those who need it quicker.
Google ranks 851 million articles on blockchain, yet it has an uptake of only 0.5% globally. If you consider that 50% of the world uses the internet, even the smallest uptake of blockchain could have a significant impact on how the insurance sector does business.
How is Blockchain used in practice?
A prime example of how blockchain is being applied is through Axa’s ‘Fizzy’ product. This will offer immediate pay-outs for travellers experiencing flight delays. It works by importing real-time air traffic data into the blockchain so the second a flight is delayed beyond the agreed contractual terms of the policy, the pay-out is triggered and the customer receives an immediate payment to their bank account. The benefit is the insurer reduces the time and resources required to verify the claim (which may typically take around 6-10 weeks) and the customer is reimbursed and able to rebook without being penalised financially. Now imagine this applies to car, home and healthcare policies; with the implied cost savings, you can see why insurers are looking for their slice of a market estimated to be in the region of $20bn by 2024.
Investing in blockchain is expensive, with the average project costing £1 million. How can insurers rationalise the investment for exploratory technology when the current technology infrastructure is outdated?
Firstly, you don’t always need blockchain to solve your problems. It can be transformative, but you don’t need blockchain to be transformative. Simply put, many businesses would gain competitive advantage by being more customer-centric but are hampered by a traditional silo mentality. For many, it can be easier to do something revolutionary rather than change many years of tradition, yet it is these traditional ways of working which frustrate customers, increase the cost base and, subsequently, premiums. It takes a courageous leader to make these bold decisions, especially as, in the short term, they can go against the necessity of delivering returns to shareholders.
It would be foolish not to invest now for the future as change within the sector will speed up significantly. For example, many insurers are exploring IoT as automotive manufacturers invest in connected cars. In real terms, connected cars improve safety and should decrease premiums. However, when society moves towards self-driving cars, software will be in control and that could mean that B2C motor insurance is eradicated. The customer will become a handful of global software providers which power all vehicles on the road and will change how sales and marketing operate exponentially. This radical change means that insurers have to be prepared for changing their business model to achieve growth.
Surely, the premise of blockchain is growth by efficiency?
Absolutely. Efficiency of data will lead to growth. For example, you’ll lower expense thresholds, potentially by 30%. This means propositions which were uneconomical are now economical. This can allow segments who previously couldn’t afford insurance to take out policies and, in doing so, create security and opportunity for themselves. Examples are as simple as home owners priced out of home insurance due to repeated flooding, or farmers in Nigeria who can be assured of cover if their crop fails.
It sounds like transparency can address the mistrust some customer groups have in insurers?
Definitely. Although customers won’t have access to every block in the ledger, they will have access to real time information of where the claims process is, and potentially a choice of suppliers to use to fix the problem. This single process could radically change consumers’ perception of the sector and create a secondary benefit of making it easier to retain and acquire new customers. Brands like Lemonade are already leading the way here and, as they acquire and retain more satisfied customers, others will certainly follow.
What does this mean for leadership? Do you anticipate this will require different behaviours and characteristics?
Of course! Essentially blockchain won’t help the bottom line for UK CEOs this year and therefore it can be easy to leave it off the agenda. The CEO needs to take a holistic view on how it can help the group longer term and start addressing the legacy systems, products and mind-sets that prohibit change, now. This is new technology which will take a long time to make an impact. It will have a meaningful impact within five years but a material impact within 10. A material impact could mean that 50% of current applications of an insurer will reside on a blockchain-styled platform. The reality is that many large insurers are actively looking at blockchain, sometimes in partnership with others, for good business solutions. B3i is a good example of how several insurers and reinsurers have actually set up and invested in a specialist blockchain entity.
This means that more leadership teams need to look at addressing the way things have always been done and recognise that, whilst they may not see radical change during their tenure, they do need to be making the decisions which can impact their business and customers longer term.
Talking of longer term, blockchain is likely to create jobs which presently don’t exist. Do you have an opinion on what the future for careers looks like?
As the uses of blockchain are being explored, businesses need to hire individuals who are quite different to the risk-averse nature of insurance. Leaders should look to select those who are intellectually curious and have an appetite for new things – they’ll be more eager to explore the potential uses for it. Similarly, one of the largest obstacles for success in this area is the willingness for the business to embrace it. Individuals who will spend more time with underwriters and commercial teams in helping them understand it will benefit from their input in solving problems and creating solutions.
With many insurers observing and happy to be fast followers, in all likelihood, many will fail to capitalise on new trends unless they address the traditional and change-averse mind-sets. The challenge for leadership is to bring together legacy and innovation effectively and be prepared to make significant changes which benefit the customer now.